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.
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.
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.
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.
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
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
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