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INTEREST RATE SCANDAL: Banks have once again made a mockery of the role that society entrusts to them, writes Joe Nocera
HERE in the early stages of the Libor scandal -- and yes, this thing is far from over -- there are two big surprises. The first is that the bankers, traders, executives and others would so openly and, in some cases, gleefully collude to manipulate this key interest rate for their own benefit.
With all the seedy bank behaviour that has been exposed since the financial crisis, it's stunning that there's still dirty laundry left to be aired. We've had predatory subprime lending, fraudulent ratings, excessive risk-taking and even clients being taken advantage of in order to unload toxic mortgages.
Yet, even with these precedents, the Libor scandal still manages to shock. Libor -- the London Interbank Offered Rate -- represents a series of interest rates at which banks make unsecured loans to each other. More important, it is a benchmark that many financial instruments are pegged to. The Commodity Futures Trading Commission (CFTC), which doggedly pursued the wrongdoing and brought the scandal to light, estimates that some US$350 trillion (RM1.12 quadrillion) worth of derivatives and US$10 trillion worth of loans are based on Libor.
With so much depending on this one critical interest rate, there shouldn't ever be a question about its reliability. Yet, beginning in 2005, according to the CFTC and the Justice Department, traders at Barclays, the too-big-to-fail British bank, with the active involvement of traders of other banks, persuaded their fellow bank employees to submit Libor numbers that were shaded in ways that would help ensure their trades were profitable.
Even Robert Diamond, the former Barclays chief executive who lost his job over the scandal, said reading the traders' emails made him "physically ill".
In 2007, as the financial crisis was gathering steam, banks also began submitting false Libor rates for a different reason. Libor, you may recall, was a measure that gave the outside world a sense of how much trouble the banks were in; the higher the rate required to borrow, the worse shape they were assumed to be in.
So, Barclays -- with what appears to be the complicity of British bank regulators -- started submitting rates that were lower than the reality. Its executives said the purpose was to keep Barclays from "sticking its head above the parapet".
But the bank is wrong about this. Submitting false data, for whatever reason, is a violation of the law -- not to mention a fundamental abuse of trust.
Which brings me to the second big surprise. Britain and America have reacted to the Libor scandal in completely different ways. Britain is in an utter frenzy over it, with wall-to-wall coverage, and the most respectable, pro-business publications expressing outrage. The Economist ran a headline that read, in its entirety, "Banksters".
Yet, on these shores, the reaction has been mainly a shrug. Perhaps we're suffering from bank-scandal fatigue, having lived through Bank of America's various travails, the Goldman Sachs revelations, and most recently, the big JP Morgan Chase trading loss.
But the British have this one right. They may not understand the intricacies of Libor any better than we do, but they sense, powerfully, that banks have once again made a mockery of the role that society entrusts to them.
Barclays, of course, is hardly the only big bank that manipulated Libor for fun and profit. It is simply the first to admit its wrongdoing and settle with the government.
The word is that just about every big bank in the US is under investigation for playing games with Libor. Which means there is going to be more opportunities for Americans to become outraged, and maybe, the will to change banking once and for all. NYT