Reports from the Economic Front

a blog by Marty Hart-Landsberg

Profits and Crime

The big banks are still committing crimes at our expense.  And they will continue to do so as along as they face no real punishment.

It turns out that a number of major banks successfully conspired to lower the London Interbank Lending Rate (Libor).  Libor is the interest rate banks charge each other for short-term interbank loans. It is important because many interest rates are pegged to it.  

How do we know that banks engaged in such criminal activity?  Well, as Matt Taibbi reports in Rolling Stone,  

On Wednesday, Barclays won the race to reach a deal with U.S. and British regulators, beating UBS, which was reportedly the first bank to begin cooperating with international antitrust authorities. Barclays agreed to pay at least $450 million to resolve government investigations of manipulation of Libor and the Euro interbank offered rate (or Euribor): $200 million to the U.S. Commodity Futures Trading Commission, $160 million to the criminal division of the U.S. Department of Justice and $92.8 million to Britain’s Financial Services Authority.

 Alison Frankel describes the case against Barclays as follows:  

The CFTC’s Order Instituting Proceedings and the Justice Department’s Statement of Factscite truly eye-popping emails, instant messages and other evidence indicating that between 2005 and 2008 Barclays employees agreed to manipulate the rates they submitted to the banking authority that oversees the daily Libor report for seemingly anyone who asked them to monkey with it: senior Barclays officials concerned that the bank would look weak if it reported too high a borrowing rate; interest rate swap traders trying to improve Barclays’ derivatives trading position; even former Barclays traders begging for favors. We’re talking naked, blatant manipulation.

Others banks are clearly involved—The Royal Bank of Scotland soon followed Barclays in admitting guilt and will be fined $233 million.

Jonathan Freedland explains why it is unlikely that the crime involves only one or two banks:

make no mistake, it is the banks plural we are discussing, not just Barclays. Submissions from some 15 banks are used to calculate the benchmark Libor rate, making it all but a technical impossibility that a few rogue traders at Barclays alone could have bent it. On the contrary, the most incriminating email to surface on Wednesday– traders promising to celebrate their fiddling of the figures with a bottle of Bollinger – was from an outside bank to Barclays. The latter is surely only in the frame first because it co-operated early in return for a more lenient penalty, but HSBC, RBS and others are all mentioned in court papers. As the chancellor and others have signalled, this scandal is going to spread much wider. 

How did the banks get away with rigging the Libor and all the other interest rates tied to it?  It was easy because the daily Libor rate is set not by the government or the Financial Services Authority (FSA) but by the banks themselves operating through their own trade group, the British Bankers Association.  

This was far from a victimless crime.  As Taibbi says:

This is unbelievable, shocking stuff. A sizable chunk of the world’s adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions. The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money.

So, will there be jail time, will we stop letting top corporations monitor their own activities, or will we impose relatively small fines on the companies involved, allow top management to set their own penalties and go on singing the virtues of unregulated financial markets?  Given the way our existing political system operates, to ask these questions is to answer them.  

Bob Diamond, the head of Barclays, conceded that his traders’ action had been “wholly inappropriate.”  Not a crime, mind you, just inappropriate.  But to demonstrate his responsibility, he proposed that he and three other top managers “forgo any consideration for bonuses in 2012, recognizing our responsibility as leaders of the organization in which these events occurred.”  Could anyone outside of the top echelons of the business world get away with this kind of response?  

Freedland offers a good illustration of why what we are dealing with in this case is actually an out-of-control system rather than a simple crime of individual greed:

You’d think criminal prosecutions would be the obvious next step, but it’s not so simple: Libor falls outside the FSA’s remit. Yes, there’s that £290m fine – though it’s worth noting only £60m of that was imposed by the UK, the rest demanded by American authorities. What’s more, that £290m is destined not for the public coffers but for the FSA, which will therefore need to levy less from the banks that fund it – including Barclays. So Barclays lose with one hand but are set to gain with the other. Above all, remember that that £290m is about a tenth of the £2.7bn bonus pool top dogs paid themselves in 2011. It’s more than a slap in the wrist, but not much more.

It’s quite a contrast with the severity of punishment meted out to those guilty of more visible crimes, starting with the 1,292 people jailed for their part in last summer’s riots, including the man imprisoned for six months for stealing bottles of water worth £3.50. There was no question of the authorities lacking a proper remit then, nor did any rioter have the chance to tell a parliamentary committee it was time we all moved on.

So it goes . . . .

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