Saturday, 11 July 2015

You're gonna need a bigger planet

According to Wikipedia 'The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that the average leading bank would be charged if borrowing from other banks', which already sounds pretty dull. And as we know, 'Dullness is a huge fitness factor for bad stuff'. Here's Bill Black's creditable attempt to use the sheer mind-boggling scale of the LIBOR-rigging scandal to pull it out from the from the sheltering obscurity of dullness [my bold]:
...the LIBOR bid rigging cartel was the largest cartel in history, manipulating the prices of an estimated $300+ trillion in assets. That is a figure considerably larger than the world’s combined GDP

The world is not enough, apparently.

And thanks to lax regulation, enabled by friends in high places, it looks as if the people who enabled corruption on this almost incomprehensible scale will probably get away with it, maybe at the minor cost of pinning the blame on a few relatively junior employees and throwing them to the wolves (or, since we're in the UK, to a pack of toothless regulatory chihuahuas):
The sad truth is that as pathetic as the DOJ has been in this sphere, UK bankers know that the SFO is even more farcical. Hayes’ “revealed preference” in desperately seeking to avoid prosecution in the U.S. is a powerful demonstration of one of the reasons that the City of London “won” the regulatory and prosecutorial “race to the bottom” in finance and made the City the financial cesspool of the world. The SFO’s refusal to prosecute any of the City’s elite bankers and its creation of the fable of the innocent senior UBS managers deceived by the wily “Rain Man” are further proofs of why an external review of the SFO concluded that it had, de facto, largely decriminalized elite financial crimes. As weak as it already was, one of the Tories early acts was to slash the SFO’s funding to ensure that it would not prosecute the party’s corrupt banking patrons who are the party’s leading contributors.


john b said...

Black is deliberately avoiding the key reason for the lack of senior prosecutions here: there's no evidence that the LIBOR rigging harmed anyone or that it benefited the banks (as opposed to those individual traders who confessed to making personal gains from specific incidences of rigging, which is why it's possible to prosecute the latter).

It's poor practice and nothing for anyone involved to be proud of, but it lacks the essential character of a fraud: anyone who can credibly be called a victim (it was not a factor in the banking collapse, so you can't even drag 'the taxpayer' in).

Andrew King said...

Some, including Fannie Mae, beg to differ about this being a victimless crime - they're alleging that the actions of the LIBOR-rigging banks caused Fannie Mae, .'charged by Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets, to suffer hundreds of millions of dollars in direct,
foreseeable damages.'

Other views are available, but as one commentator, who bought the 'victimless crime' line, admitted 'Of course, something more than money is at stake in this case. The cavalier attitude toward gaming an interest rate which underlies much of the financial system will only confirm the general public’s worst fears about banking - that it’s rotten at the core.' In particular, the perennial assertion that nobody in authority at the time of [insert name of latest scandal] had any idea what their minions were up to is like watching an endless re-run of that scene from Casablanca:

Captain Renault: I'm shocked, shocked to find that gambling is going on in here!

[a croupier hands Renault a pile of money]

Croupier: Your winnings, sir.

Captain Renault: [sotto voce] Oh, thank you very much.


Captain Renault: Everybody out at once!

john b said...

Yes, I agree with Crane.

Of course Fannie May is trying to use the scandal as a way of getting hold of free money it isn't owed: it's a bank, run by bankers.

Anonymous said...

I am astonished that anybody can put forward the argument that the rigging of LIBOR does not matter because it is a victimless crime.The fact that trading rooms of all the major banks blatantly colluded in the gaming of the market,that the management of these banks willfully turned a blind eye,that the FSO has only prosecuted one lowly trader,on the frankly ludicrous basis he was the only rogue trader,that the Government has neither investigated nor regulated it raises concerns which go far beyond the arcane world of the financial markets.The utter corruption of our financial and political institutions ought to be a cause of grave concern to us all

Andrew King said...

As I understand it, LIBOR is one the most significant benchmarks in finance, used by banks, financial institutions and credit agencies to set interest rates across the globe, affecting contracts worth trillions of dollars. Maybe I'm being naive to think that, if you fiddle this rate, somebody somewhere will be worse off than if it had been set as advertised.

There might be unwitting winners as well as losers, but I'd have thought that LIBOR can't simultaneously be a globally important benchmark AND something you can distort and manipulate without affecting anybody else. Jesse Colombo writing for Forbes doesn't seem to think so, either:

...The derivatives market is a zero-sum game in which there is a loser for every winner, so all of the fraudulent profits that banks and traders earned from manipulating the Libor came at the expense of other unwitting parties that were on the other side of their trades. Many of these losing counterparties were not savvy speculators or banks, but parties such as U.S. municipal governments that lost approximately $10 billion on their derivative hedges and U.S. homeowners who paid higher mortgage rates as a result of the manipulations.

He also suggests how the banks themselves may have benefited from the fiddling:
Traders at numerous banks had colluded with each other to submit fraudulent daily Libor rate submissions so that they could boost the profits on their derivatives positions as well as create the illusion that the banks were in a healthier financial condition than they actually were during the Global Financial Crisis...

Maybe he's wrong and any aggregate harm / unwitting windfalls don't sum up to very much in the great scheme of things, but you're still looking at massive, systemic fraud in an industry which we all rely on, which recently suffered a mcatastrophic failure, due in large part to lax oversight and people gaming the system in their own interests and which was supposed to have learned its lessons and cleaned up its act.