Sex, Lies, and Interest Rates: LIBOR Round-Up_Featured_, Economy Saturday, July 7th, 2012
The particulars of financial scandals are, in the main, obscure and snooze-inducing recipes for heavy eyelids. But this time, emboldened by an absence of criminal convictions in the last go-round, the financial industry may have manipulated world markets with a hair too much abandon.
This time, it is outright, wide-scale, and most importantly, identifiable fraud. About $800 trillion (yes trillion with a t) financial instruments worldwide are tied to this rate. It is called the London Interbank Offered Rate, or LIBOR, and anything from student loans to credit cards, simple mortgages to complex interest-rate derivative bets are tied to this rate, the latter half of which you may recognize as the instruments at the heart of the 2008 financial fiasco.
Being a relatively simple average of borrowing costs amongst too-big-to-fail banks, it is improbable (read: impossible) that Barclays and RBS, currently in the hot seat, are the only banks involved. A very accessible conversation on this point took place between Matt Taibbi and Eliot Spitzer on Current TV:
Clear now is that the flesh and blood of capital markets, on both private industry and public regulator sides, are in decay. Narcissistic hubris, inflated selfishness, and a cynical attitude of I’ll get what’s mine and get out in the nick of time leaves only the barest willingness to deal in good faith. Huge bonuses and massive bets have become ethical blinders to all but the bottom line.
Worse, the Bank of England is likely to have nudged Barclays to lie about the borrowing rates it submitted to the LIBOR calculation, since, naturally, everyone else was already doing it.
Everyone else was doing it of course being the magical, These are not the droids you’re looking for wave-off of highbrow crime. Indeed, it is endlessly more effective than a pathetic pleading of the metaphorical fifth for the less economically-endowed, as would describe the 1300 petty looters imprisoned for involvement in the London riots last year.
Of course, “the system” only provides tools to address problems within and not of the system, so the public at large can expect little more than a finger-pointing match to come of these large scale lies. Indeed, some banks are already brokering first-snitch leniency deals with regulatory bodies.
Here is a particularly disheartening quote from the Economist:
“The extent of the banks’ liability may well depend on whether regulators press them to pay compensation or, conversely, offer banks some protection because of worries that the sums involved may be so large as to need yet more bail-outs, according to one senior London lawyer.”
Stunning, truly. The damages levied against massive banks for their market manipulation might be so large that the government would have to save them—again—from themselves.
As with many systems in the world today, patch-up treatments are far more lucrative than a cure. The only counterweight to this is public opinion, and it is deeply concerning when public response is, too, contaminated by cynicism. Judging by the reactions of many, it is as though this is simply how things are, and the notions of trust and reliable financial reporting in the economy are arcane concepts from simpler times.
It is true these are not simple times. The dizzying growth of complexity in financial instruments over the last few decades has built up an air of wizardry about the sector. The attendant conjuring of vast sums of cash and capital has proven itself an all-too intoxicating endeavor, and a wildly seductive one for bright university minds. But underneath obscuring mounds of esoteric acronyms and industry jargon is a simple story: culture crisis.
A fascinating but not altogether surprising culture development is that when a bunch of risk-taking, (sometimes) money-winning men are set around each other, what emerges is a strangely sexualized environment, explored by a compelling Guardian article. As testosterone pools like so many risk profiles, the rush of illicit activity is irresistible: “Done for you, big boy,” emails one Barclays employee to a trader, whose desired LIBOR rates had just been submitted. By a man whose title is, in fact, “submitter.”
The same Economist article quotes a financial industry veteran: “Going back to the late 1980s, when I was a trader, you saw some pretty odd fixings … With traders, if you don’t actually nail it down, they’ll steal it.”
It is also a fact that Barclays’ LIBOR manipulation surfaced four years ago. This CEO of questionable competence is walking away with a massive severance, the apparent last bastion of honesty in finance: always pay the CEO what he’s been promised, no matter what.
The problem becomes, do we, the public, even care about this?
“It’s not the act which matters, it’s the contemporaneous documentation thereof,” writes Felix Salmon, whose article is published by Thomson Reuters, the very organization that publishes LIBOR.
The author of this editorial disagrees. It is a matter of the act; it is a matter of the culture that’s inculcated. Soon the corruption costs of too-big-to-fail banking will outweigh the momentary inconvenience of moving money to more local, transparent, perhaps even mutually owned and operated credit unions whose interests are aligned with the communities they serve. This episode should be considered a crisis of collective conscience.
We do still care about the business cultures we create, and a rotten culture can be discarded and a healthy one can still be grown.