LIBOR HAS BEGUN TO HIT THE FAN

No doubt, you’ve heard that there is a group of the largest Global Banks who were manipulating the LIBOR Rate (London Interbank Offered Rate) back during the recent Financial Crisis. LIBOR is the Short-Term Interest Rate from which many other rates, on both Commercial and Consumer Loans, are set–Worldwide. So far, only Barclays, PLC has been fined, a total of some $443 Million, by both UK and US Regulators; but, no doubt, other banks will follow.

In the US, the Federal Reserve sets and manages the comparable “Fed Funds” Rate. The day-to-day management of Fed Funds is carried out through the Federal Reserve Bank of New York. Personally, I believe that it is ludicrous to have the Banks setting LIBOR. I believe that that is similar to having the Fox guard the Hen House.

As you can see in the linked Op-Ed, by Robert B. Reich, “Coming Soon to Wall Street, the Biggest Scandal Yet”, in today’s Baltimore Sun, http://www.baltimoresun.com/news/opinion/bal-robert-b-reich-coming-soon-to-wall-street-the-biggest-scandal-yet-20120710,0,2721974,print.story, there truly will be ramifications. Mr. Reich is a Professor of Public Policy at the University of California, Berkeley, and a former US Secretary of Labor (under Bill Clinton).

A related article, from today’s NY Times, by Nathaniel Popper, “Rate Scandal Stirs Scramble for Damages”, http://dealbook.nytimes.com/2012/07/10/libor-rate-rigging-scandal-sets-off-legal-fights-for-restitution/?hp&pagewanted=print, notes that some State and Local Governments are bringing suit for damages caused by the manipulation. Nassau County, NY, the State of Massachusetts, Baltimore, MD, the largest public pension fund, the California Public Employees Retirement System (CALPERS) and several traders and Hedge Funds that entered Futures Contracts at the CME (Chicago Mercantile Exchange) are considering suits. No doubt, other harmed parties will come forward.

As Mr. Reich points out, there are actually two LIBOR Scandals: the Banks’ Manipulation of LIBOR, thus masking their true Financial Condition appear stronger than it was during the recent Recession. That might have delayed Governments from taking corrective action. Second would be the day-to-day LIBOR Manipulation, over a much longer period (perhaps going back to 2005 and it could have been going on until the Crime was recently Detected)–thus enabling the Banks to make advantageous gains on Derivative Transactions.

Many of the Banks were considered “Too Big to Fail” and, thus, the respective Governments pumped Capital into them and made zero percent Liquidity access available. Unfortunately, given those Implicit Government Guarantees, these banks have grown even larger since the World was looking into the hypothetical Abyss.

Since then, however, how have the Banks responded? First, they maintained their exorbitant Salaries and Bonuses–without Claw-Back Provisions. (A Claw-Back is the ability of a Corporation to take part or all of the Bonus back if the profit, on which it was based, erodes in the next year or two.) They haven’t acknowledged Guilt for any crimes–before or after the Financial Melt-Down. And guess who has paid any fines–the same Shareholders who often saw the value of their stock drop when the various Crimes and Misdemeanors became public. The only Financial Executives who have received Jail Time are ones who were convicted of Ponzi Schemes or Insider Trading.

Regulators also have to accept some responsibility, both for the LIBOR Manipulation, of which some on both sides of the Atlantic were aware of, as well as the Revolving Door, where people rotate from Wall Street, to the SEC, to Regulators and also to Congress. Who will sue former colleagues or irk potential employers? We need to close that door.

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