Banks are setting the rules without regard for reality! At least that’s how Neil Barofsky summed it up when talking with Bloomberg news about the recent LIBOR (or, as some are calling it, “Lie-bor”) price-rigging scandal.
I won’t get into the complexities of LIBOR — the London Interbank Offered Rate — but here’s the gist. Each morning, a panel of global banks submits its “estimated” costs for borrowing money to the British Bankers Association in London. The BBA makes a final calculation and sets the day’s LIBOR rate.
This daily rate is then used to set interest rates around the globe. And it affects everything from mortgages … to student loans … to credit cards … commercial loans … municipal bonds … and well … you get the point.
And when someone like Mr. Barofsky — the former Special Inspector General in charge of overseeing the Troubled Asset Relief Program (TARP) – has something to say about banks behaving badly, we should listen!
Mr. Barofsky’s job was to monitor and track where the bank bailout money went — all $700 billion of it. And he was a relentless critic of the Wall Street bailouts — accusing the administration of coddling banks at the expense of taxpayers.
In his 2009 report to Congress, he stated the administration’s lack of transparency in spending TARP funds had created “anger, cynicism and distrust.”
And in his last report, just before he resigned, he wrote: “The prospect of more bailoutswill continue to fuel more bad behavior with potentially disastrous results.”
And boy was he right.
As he said in the Bloomberg segment, the bad behavior behind this new LIBOR scandal is beyond astounding.
Why? Because $800 trillion in global investments are tied to LIBOR. That’s 10 times the size of the real-world economy.
Now here’s where it starts getting ugly. This panel of global banks has been manipulating LIBOR for years.
The rates were rigged in a highly coordinated cartel-like scheme — netting billions of dollars in unwarranted profits for the banks. And it wasn’t just money made directly from lending under these rigged rates.
Manipulating the rates, in favor of the bank, is the equivalent of faking your own credit score. A flattering rate shows the financial world that the banks trust one other with their own money.
The result … banks look better than they really are and continue business as usual whileconsumers, investors and borrowers get taken for a ride.
Matt Taibbi, contributing editor for Rolling Stone, explains the LIBOR scandal like this …
“It’s the mega-scandal of all mega-scandals … LIBOR is the sun at the center of the financial universe … and manipulating LIBOR means the whole Earth is built on quicksand.”
And of course, now that the cat is out of the bag, investigations are starting in earnest.
But there’s a real big problem going forward … regulators have NO leverage to stop the banks from continuing their bad behavior.
Just look at the deal Barclays Bank cut with U.S. regulators as reported by The Telegraph (London).
“The US Commodity Futures Trading Commission (CFTC) handed the bank a $200m penalty for ‘attempted manipulation of and false reporting concerning Libor and Euribor benchmark interest rates’, while Barclays has agreed to pay a $160m penalty as part of an agreement with the US Justice Department.”
But what you don’t see here is the “other part” of the U.S Justice Department’s agreement. It’s a “Non-Prosecutorial Clause”. In essence, the bank has agreed to pay a fine—from money they stole in the first place—and in turn the Justice Department agrees not to prosecute us.
Herein lays the crux of ongoing bad behavior in the banking sector. The banks know that they’re too bit, too powerful, and too politically connected to be prosecuted.
The banks also know that if the government indicts Citibank, Goldman Sachs or JPMorgan, it would bring down the whole financial system.
And this is is exactly what Mr. Barofsky warned of in his report to Congress. The bad behavior of banks is being reinforced over and over again by government regulators bent on “coddling banks at the expense of taxpayers.”
As far as I can tell the collusion here goes much further than just the banks. And if regulators have been complicit in the current scandal, this will not only be bad for the banks but bad for government as well.
But don’t take my word for it.
Take a minute to watch this video of Mr. Barofsky on Bloomberg and let me know what you think.
[Original post at the Campaign for a Sound Dollar.]