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LIBOR SCANDAL: FINANCIAL WIZARDRY July 4, 2012

Posted by wmmbb in Social Environment.
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So why arn’t financial markets working?

There was the Global Financial Crisis in which the Federal Reserve discovered enormous sums of the money that could be transferred to save the US financial institutions at no or minimal cost. Then the ongoing sovereign debt crisis in the Euro zone, apparently due to the indolence of Southern Europeans (and perhaps the Irish) which could only be solved by the politics of austerity and privatization. Now in recent days there is the LIBOR scandal.

So what is going on? On one level it seems to be about institutional culture, but I suggest about those organizational cultures as organizational systems because of the the scale of operations and cartel nature have the power to shape the environment in which they operate. Organizations, within capitalist systems or otherwise, seek not only to respond to the environment, but ideally to shape it to suit themselves. Theories of free markets and free societies can ignore the fact that institutions can be powerful market and social players, vested interests. The questions arises can national governments effectively regulate trans-national organizations operating in an electronic environment, given there focused objectives often without the public or ecological good.

Al Jazeera provides a clear description of the Libor rates and has a interview with Bill Black, teacher of law and economics, referring to cartel behavior:

Peter Jukes at The Daily Beast, via War In Context, refers to a “perfect storm of scandal:

As the chairman of Barclays resigns in the wake of an interest-rate fixing scandal, the city of London is in crisis and Prime Minister David Cameron has announced an urgent Parliamentary inquiry.

“It’s a turning point,” said Martin Vander Weyer, a former director of the investment arm of the British bank, now known as Barclays Capital. “Three scandals have come in Britain in a perfect storm last week.” The NatWest online bank didn’t work for 10 days because of a software problem. Meanwhile, Barclays was caught mis-selling complex interest-rate insurance to small companies and, more important, a LIBOR scandal has emerged.

The London Interbank trading system, known as LIBOR, and its smaller counterpart, EURIBOR, between them set the benchmark for interest rates around the world. The self-regulated system relies on banks accurately reporting the costs of their own borrowing, but the Financial Service Authority and the U.K. Department of Justice fined Barclays a combined $450 million last week for fixing the rate from 2005 to 2009. The early misreporting was to the benefit of the company’s derivatives traders. During the credit crunch, when Lehman Brothers collapsed, Barclays systematically underreported its borrowing costs in order to appear healthier—and thus avoid the nationalization that overtook other British banks, such as Royal Bank of Scotland and Lloyds Halifax.

“It’s not a victimless crime,” Labour MP John Mann, a member of House of Commons Treasury select committee, told The Daily Beast. “If there’s fraud and misreporting, other people lose out: mortgage holders, other counterparties,” he said. “It’s like insider dealing”

Internal emails published by the Justice Department reveal a culture of greed and apparent insider trades, with one trader thanking another for rigging the rates: “Dude I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger! Thanks for the libor.” The Serious Fraud Office in the U.K. is now investigating the case, with class-action lawsuits pending in the U.S.

Despite the resignation of chairman Marcus Agius, the CEO of Barclays, American-born Bob Diamond, remains in place. He wrote to his staff today to apologize to the thousands working in the retail branches for the misbehavior of the traders in the investment arm and to announce an internal investigation. However, Diamond is being described as “the most hated man in Britain” and is due to face the new parliamentary inquiry on Wednesday.

. . . Getting rid of Diamond won’t be easy, as he has fashioned Barclays in his own image during his 16-year tenure in charge of the bank and there is no obvious replacement. “He’s the prime example of the greed culture, and the most high performing of all of them,” Vander Weyer said. “He was the highest paid and set the standard for his employees, saying ‘boys, you too can be as rich as me …’ The whole culture was based on the principle of being like Bob.”

It turns out that Diamond has now resigned. And it turns out that other banks are involved. James O’Toole at CNN Money reports:

It’s not just Barclays, however — suspicion has now fallen on all the banks that participate in the Libor process. Deutsche Bank (DB), Royal Bank of Scotland (RBS), Credit Suisse (CS), Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) are among the institutions that have acknowledged they are being investigated by regulators.
UBS (UBS) has revealed that it’s providing information to U.S. and Swiss officials on possible Libor manipulation in exchange for leniency and conditional immunity, depending on the jurisdiction. While Barclay’s is the first institution ensnared by U.S. regulators, it certainly won’t be the last.
How big is the scandal? “This dwarfs by orders of magnitude any financial scams in the history of markets,” said Andrew Lo, a professor of finance at the Massachusetts Institute of Technology.
Given Libor’s vast reach and the number of global firms that may be involved in its manipulation, the scandal is prompting calls for resignations, criminal prosecutions, and stricter regulation of the financial sector.
Barclays CEO Bob Diamond and chief operating officer Jerry del Missier announced their resignations on Tuesday, following chairman Marcus Agius’s announcement a day prior.

Now it seems, from Barclays point of view, according to a report in The Sydney Morning Herald, via Reuters, the scandal is all the fault of the Bank of England. We will see what recommendations will follow from the parliamentary enquiry, and whether effective change can be implemented.

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UPDATE:

Dennis Kuchinich calls into question the “gentleman’s agreement” which is the basis of the LIBOR.

Sinclair Davidson quotes the WSJ that the Libor rate despite its’ imperfections worked well enough most of the time. A strange argument to make, it seems to me.

Ben Protess and Mark Scott in The New York Times report that US regulatory agencies and the Justice Department are investigating the manipulation of the Libor, with the intention of laying charges. The story is an unfolding one, and who knows where it will stop.

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