There is Nothing New Under the Sun

The LIBOR rate fixing mess snowballs by the day it seems, with the largest banks in the world facing down allegations that the manipulation of LIBOR rates by Barclay’s was not an isolated incident, but a widespread common practice in the international banking community. Unfortunately for them, early readings of data and reports don’t look good. An excellent article in the Economist did a fantastic job of spelling out just how bad it could be, referring to the inevitable slew of lawsuits as the financial world’s “tobacco moment” of the late 90’s.

Realistically, they might deserve everything they have coming to them. While those involved in the scandal initially tried to downplay the significance of such manipulations, at the end of the day, these rates have a much more significant overall impact than inter-bank lending. Matt Taibbi explains:

Again: Libor, the London Interbank Exchange Rate, is the rate at which banks borrow from each other. A huge percentage of the world’s variable-rate investments are pegged to Libor. When Libor rates are high, it suggests that the banks’ confidence in each other is low, and high Libor rates are generally an indicator of shaky financial health among the banks. If the banks manipulated Libor, they did it to make themselves look healthier, but this had the consequence of affecting hundreds of trillions of dollars’ worth of financial products worldwide.

It’s not just the banks under fire, though; central banks and regulatory bodies are taking heat, too. As the Wall Street Journal pointed out (emphasis ours):

The feds, in cooperation with British authorities, have already extracted a settlement of roughly $450 million from Barclays, whose upper management has resigned. Regulators and law enforcement officials have sprung into action after receiving a hot tip in . . . 2007.

And evidence is mounting that they may not have only known about it, but encouraged the unscrupulous practices. Taibbi highlights the bombshell from Barclay execs ahead of fairly tight-lipped testimony, stating:

In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from “a number of senior figures within Whitehall” – that is, the British government – expressing concern about Barclays’ high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were.

Source: Rolling Stone

This raises some pretty significant questions about the role of these parties in the direction of global finance. As the Economist writes:

Another issue is the conflict central banks face, in times of systemic banking crises, between maintaining financial stability and allowing markets to operate transparently. Whether the BoE instructed Barclays to lower its submissions or not, regulators had a pretty clear motive for wanting lower LIBOR: British banks, in effect, were being shut out of the markets. The two hardest-hit banks, RBS and HBOS, were both far too big to fail, and higher LIBOR rates would have made the regulators’ job of supporting them more difficult.

This highlights a deeper question: what is the right level of involvement in influencing or regulating market interest rates, in a crisis, by those responsible for financial stability? Central banks get a slew of sensitive information from banks which they rightly do not want to make public. Data on deposit outflows at banks could trigger unnecessary runs, for example. Yet LIBOR is a measure of market rates, not those picked by policymakers.

Let us really crystallize what all these excerpts mean. If the allegations are accurate, the largest financial institutions in the world collaborated to manipulate a metric that reflected on their overall health with encouragement from their governments, ahead of a financial collapse that was spurred by the revelation that their health was not, in fact, all that great – a financial collapse that the global economy is still reeling from, economic labels be damned.

We wish we could tell you that this isn’t a big deal. Or that, while it is a big deal, it’s just one case, so you shouldn’t worry about it. But you know better- this is the same story you’ve heard a thousand times. Think it through.

Mark-to-market accounting. Robo-signing. Credit agencies stellar ratings of banks pre-collapse. Exorbitant bonuses during taxpayer funded bailouts. Mountains of stories of brokers knowingly pushing bad product. Madoff, Rajaratnam, Sam Israel, Phil Falcone, Rajat Gupta and friends – including those we won’t hear about. Rogue trades and miscalculations for billions in losses at UBS, Societe Generale, Barings Brothers and more. JP Morgan dropping the ball on VAR calculations to the tune of $9 billion. MF Global’s bad Eurocrisis bets.

You want to tell us the system isn’t broken? That regulations are written and enforced in a manner that puts the client – or, hell, ethics – first? Where is the jail time for those who have committed fraud? We imprison the likes of Kweku Adoboli, Jerome Kerviel, and Nick Leeson, but when those unauthorized trades make a profit, you’ll never hear a complaint.

The question is not whether or not the system is broken. The question is simultaneously simple and terrifying:

What is it going to take for us to feel like we should fix it?

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