This article was originally posted on Robert Reich's blog.
Just
when you thought Wall Street couldn’t sink any lower – when its myriad
abuses of public trust have already spread a miasma of cynicism over the
entire economic system, giving birth to Tea Partiers and Occupiers and
all manner of conspiracy theories; when its excesses have already
wrought havoc with the lives of millions of Americans, causing taxpayers
to shell out billions (of which only a portion has been repaid) even as
its top executives are back to making more money than ever; when its
vast political power (via campaign contributions) has already
eviscerated much of the Dodd-Frank law that was supposed to rein it in,
including the so-called “Volker” Rule that was sold as a milder version
of the old Glass-Steagall Act that used to separate investment from
commercial banking – yes, just when you thought the Street had hit
bottom, an even deeper level of public-be-damned greed and corruption is
revealed.
Sad to say, there’s reason to believe this has been going on, or
something very much like it. This is what the emerging scandal over
“Libor” (short for “London interbank offered rate”) is all about.
So far, the scandal has been limited to Barclay’s, a big
London-based bank that just paid $453 million to U.S. and British bank
regulators, whose top executives have been forced to resign, and whose
traders’ emails give a chilling picture of how easily they got their
colleagues to rig interest rates in order to make big bucks. (Robert
Diamond, Jr., the former Barclay CEO who was forced to resign, said the
emails made him “physically ill” – perhaps because they so patently
reveal the corruption.)
Sit down and hold on to your chair.
What’s the most basic service banks provide? Borrow money
and lend it out. You put your savings in a bank to hold in trust, and
the bank agrees to pay you interest on it. Or you borrow money from the
bank and you agree to pay the bank interest.
How is this interest rate determined? We trust that the
banking system is setting today’s rate based on its best guess about the
future worth of the money. And we assume that guess is based, in turn,
on the cumulative market predictions of countless lenders and borrowers
all over the world about the future supply and demand for the dough.
But suppose our assumption is wrong. Suppose the bankers
are manipulating the interest rate so they can place bets with the money
you lend or repay them – bets that will pay off big for them because
they have inside information on what the market is really predicting,
which they’re not sharing with you.
That would be a mammoth violation of public trust. And it
would amount to a rip-off of almost cosmic proportion – trillions of
dollars that you and I and other average people would otherwise have
received or saved on our lending and borrowing that have been going
instead to the bankers. It would make the other abuses of trust we’ve
witnessed look like child’s play by comparison.
Libor is the benchmark for trillions of dollars of loans
worldwide – mortgage loans, small-business loans, personal loans. It’s
compiled by averaging the rates at which the major banks say they
borrow.
But Wall Street has almost surely been involved in the
same practice, including the usual suspects — JPMorgan Chase, Citigroup,
and Bank of America – because every major bank participates in setting
the Libor rate, and Barclay’s couldn’t have rigged it without their
witting involvement.
In fact, Barclay’s defense has been that every major bank
was fixing Libor in the same way, and for the same reason. And Barclays
is “cooperating” (i.e., giving damning evidence about other big banks)
with the Justice Department and other regulators in order to avoid
steeper penalties or criminal prosecutions, so the fireworks have just
begun.
There are really two different Libor scandals. One has to
do with a period just before the financial crisis, around 2007, when
Barclays and other banks submitted fake Libor rates lower than the
banks’ actual borrowing costs in order to disguise how much trouble they
were in. This was bad enough. Had the world known then, action might
have been taken earlier to diminish the impact of the near financial
meltdown of 2008.
But the other scandal is even worse. It involves a more
general practice, starting around 2005 and continuing until – who knows?
it might still be going on — to rig the Libor in whatever way necessary
to assure the banks’ bets on derivatives would be profitable.
This is insider trading on a gigantic scale. It makes the
bankers winners and the rest of us – whose money they’ve used for to
make their bets – losers and chumps.
What to do about it, other than hope the Justice
Department and other regulators impose stiff fines and even criminal
penalties, and hold executives responsible?
When it comes to Wall Street and the financial sector in
general, most of us suffer outrage fatigue combined with an overwhelming
cynicism that nothing will ever be done to stop these abuses because
the Street is too powerful. But that fatigue and cynicism are
self-fulfilling; nothing will be done if we succumb to them.
The alternative is to be unflagging and unflinching in our
demand that Glass-Steagall be reinstituted and the biggest banks be
broken up. The question is whether the unfolding Libor scandal will
provide enough ammunition and energy to finally get the job done.
This article was originally posted on Robert Reich's blog.
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