Bankers Still Unaccountable

Four years after the financial crisis tanked the global economy, bankers still put their interests above those of their customers, even to the extent of skirting the law.

Regular commenter John Personna points me to Simon Johnson‘s “Lie-More as a Business Model.”

The top line takeaway—bankers put their interests above those of their customers, even to the extent of skirting the law—is pretty simple and probably not even surprising given the events of 2008. The buildup is hard to explain, though.

Basically, banking behemoth Barclay’s profited from false reports that cheated not only ordinary customers but even major corporations. This led to the resignation of CEO Bob Diamond but, thus far, no real consequences. Even analysts normally quite sympathetic to the financial industry, including the venerable FT editorial and its senior economics columnist Martin Wolf are furious.

I commend the entire piece but these excerpts give a taste of the argument:

Dennis Kelleher of Better Markets – a financial reform advocacy group – summarized the situation nicely in an interview with the BBC World Service on Tuesday.  The controversy that brought down Mr. Diamond had to do with deliberate and now acknowledged deception by Barclays’ staff with regard to the data they reported for Libor – the London Interbank Offered Rate (with the abbreviation pronounced Lie-Bore).  Mr. Kelleher was blunt: the issue in question is “Lie More” not Libor.  (See also this post on his blog, making the point that this impacts credit transactions with a face value of at least $800 trillion.)

Mr. Kelleher’s words may seem harsh, but they are exactly in line with the recently articulated editorial position of the Financial Times (FT) – not a publication that is generally hostile to the banking sector.  In a scathing editorial last weekend (“Shaming the banks into better ways,” June 28th), the typically nuanced FT editorial writers blasted behavior at Barclays and nailed the broader issue in what it called “a long-running confidence trick”

[…]

In the words of Mervyn King, governor of the Bank of England, “the idea that my word is my Libor is dead.”  Translation: No one will believe large banks again when their executives claim they could have borrowed at a particular interest rate – we will need to see actual transaction data, i.e., what they actually paid.  Presumably there should be similar skepticism about other claims made by global megabanks, including whenever they plead that this or that financial reform – limiting their ability to take excessive risk and impose inordinate costs on society – will bring the economy to its knees.  It is all special pleading of one or another, mostly intended to rip off customers or taxpayers or, ideally perhaps, both.

Mr. Kelleher has the economics exactly right.  Global megabanks have an incentive to deceive customers, including both individuals and nonfinancial corporations.  Their size confers both market power and the political power needed to conceal the extent to which they are engage in economic fraud.  The lack of transparency in derivatives markets provides them with an opportunity to cheat, but the abuses are much wider – as the Libor scandal demonstrates.

The rip-off is not just for retail investors; chief financial officers of major corporations who should be up in arms.  Boards of directors and shareholders of companies that buy services from big banks should be asking much harder questions about all kinds of derivatives transactions – and who exactly is served by the terms of such agreements.

Compounding the problem here is that even describing the problem is difficult. Even well educated people without substantial expertise in the markets simply don’t know enough about how the system works to understand the gravity of this. This includes not only people like myself but, more importantly, almost everyone in Congress.  I’m not even sure most members of the various regulatory committees that have responsibility for the financial sector understand enough about how the system works to effectively regulate it—and that’s presuming they really want to.

FILED UNDER: General
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. My two additions would be:

    1) Glass-Steagall was really not such a bad idea.

    2) Too bad this didn’t break during Occupy.

  2. OzarkHillbilly says:

    A great (and necessary) read by Matt Taibi:

    The Scam Wall Street Learned From the Mafia

    Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.

    It is telling that it was 3 mid-level execs who were on trial.

  3. Ron Beasley says:

    Deutsche Bank under investigation for Libor manipulation
    Here is the money quote:

    If bankers don’t go to jail this time, forget about ever hoping for a reformed industry. We have a generation or more of corrupt-to-the-bone bankers who need to be removed from the system. Mitt Romney is doing a London fundraiser with a bunch of Barclays bankers though chances are high other bankers who we will know are under investigation will also surely be in the crowd.

  4. Woody says:

    . . . Aaaand another rather solid clue that the so-called “free market” that is so exalted by all is a royal scam.

    There’s plenty of reason to believe Barclay’s wasn’t the only player in this organized-crime caper.

    There are even more reasons to believe that there will be little prosecution and no punishment beyond a fine that represents less than a month’s executive compensation. After all, the major political parties are quite dependent on this money spigot, so, let’s see . . .

    SCORE! A union fireman is double-dipping to the tune of a thousand bucks in some small town out West! Quick, get Billo, Joe’n’Mika, and David Brooks on it, stat!

  5. BTW, this Nouriel Roubini video interview on the Libor crisis is a good quick coverage.

    He sums it up pretty easily, that when bankers are on both sides of every deal, they’ll take advantage of their position to profit.

    Glass-Steagall was good because it cut down on that “both sides” play. We probably need it and more.

  6. Racehorse says:

    Also unaccountable: Federal Reserve – needs to have an independent audit that is released to the public. Many feel that the Federal Reserve has way too much power: an unconstitutional “national bank”
    Other Congressional committees, members of Congress, Federal programs, agencies, and bureaucracies that have no audits, open accounting, and consequences. Some of these agencies have been around so long that Congress is not even aware of their existence – like some sort of wind up machine that keeps running and running as long as it is funded. Of course, some congress members don’t even read the bills that they vote on. What we have is a fourth branch of government that is unaccountable, had unlimited powers over the people, and unknown to many. There should be some sort of expiration law for agencies, programs, etc. of the Federal government that requires audits, studies, and changes before they are renewed! Many need to be done away with immediately! I read that up until a few years ago that there was an office that dealt with benefits to Civil War veterans’ widows! Still funded, still running with nothing to do!

  7. Drew says:

    The notion that banks shouldn’t be able to rent seek, commit fraude etc is of course obvious. And those who want to believe thi is just some sort of Republican thing are insane, just look at Obamas cuddly bear stance with t hem, and donations. It’s a government thing. Hence my philosophical positions.

    I am curious through. For those who don’t know, most floating rate loans are simply geared off of the lender borrowing cost: LIBOR, plus a risk spread. I assume the scam was to report to borrowers a highr LIBOR rate than real, and pocket t he difference. That’s fraud, pure and simple.

    And yet, the LIBOR rate is widely reported. You can look it up in the financial pages of any reasonable newspaper everyday. Why CFOs didn’t know is odd. Our CFOs check it, and we are just dinky little companies. Why the treasury depts of large corporate entities didn’t catch it baffles me.

  8. al-Ameda says:

    @john personna:

    BTW, this Nouriel Roubini video interview on the Libor crisis is a good quick coverage.
    He sums it up pretty easily, that when bankers are on both sides of every deal, they’ll take advantage of their position to profit.

    Thank you John.

    I recommend Roubini’s website to everyone. It used to be free to all, and there was so much information on international financial markets. Now, much of it is available by subscription. Still, Roubini is an excellent economist.

  9. Drew says:

    JP

    GS was also good in that investment banks used partners capital. Focuses the mind. Heh.

  10. @Racehorse:

    That’s actually an interesting question, and problem. It’s not simple. If Foo Bank has a run, but good finances, the Fed can currently shoot them some money on the QT (either directly or through intermediaries). They’ll probably recover, while maintaining that all-important image of stability. They may be a good bank, or they may be a crooked bank. With full transparency Foo’s troubles would have made the news, their stock tanked, and their problems multiplied. Maybe they deserved that, maybe not.

    So … what should be our primary objective, stability or transparency?

    I think a fully visible Fed (with a real-time web page of transactions?) would be more democratic, but it probably would also have a harder time stabilizing the economy.

    The Ron Paul wing doesn’t really want the Fed involved. They’ve made their choice, that they’d rather see more banks go down hard than have “government intervention.” Be aware that is the trade they are offering you.

  11. @Drew:

    And yet, the LIBOR rate is widely reported. You can look it up in the financial pages of any reasonable newspaper everyday. Why CFOs didn’t know is odd. Our CFOs check it, and we are just dinky little companies. Why the treasury depts of large corporate entities didn’t catch it baffles me.

    As I understand it, it was an easy scam. Some, many, most (?) just reported a little higher than they were actually lending. They then used the public number to shape customer expectations.

    I guess in the worst case you could use the lie on the same customer. I lend to you at 2.4, report 2.5, and tomorrow say to you “sorry, Libor has gone up!”

    If you started from the standpoint “bankers always lie” you probably weren’t’ damaged. If you took the public Libor as what you and your peers were really paying, then you were.

  12. (I once had a variable rate mortgage tied to 11th District Cost of Funds. If that cost of funds was similarly manipulated, then I overpaid.)

  13. Drew says:

    JP

    Just to fade the language a bit. Inn your first paragraph change lending to borrowing.

    Now what you are saying is the opposite of what I pointed out. They found a way to borrow at lower than the public LIBOR. That’s a neat trick, and I’d like to know how they did it. We are talking ginormous banks in a ginormous capital market, but they found a way to borrow low? That just doesn’t seem to make intuitive sense. Further, that takes away the fraud angle. All loan agreements have a clause, and perhaps a table, saying that under such and such conditions we will lend at L+X%. Thats a market deal, and a contractual arrangement. If they can do better there is nothing wrong.

    For example, if I can buy plastic resin cheaper than my competitor, and businesses spend huge amounts of time trying. To buy raw materials cheaper than the next guy, you are not obligated to pass the cheaper RM price to the customer.

    Sump’n ain’t right here.

  14. Tsar Nicholas says:

    The Libor manipulation is fraud. It’s not merely a question of accountability. It’s criminal.

    Concerning banker unaccountability since ’08, governments have been aiders and abettors and, worst of all, facilitators. Public money bailouts by definition are invitations to and rewards for not being accountable. The elimination by FASB of mark-to-market accounting was and remains a veritable red carpet invite for banks not to be accountable.

    For bankers to be more accountable the necessary first step is for governments to stop acting like they’re dishing out free chips at casinos. Restore market accounting. No more bailouts.

  15. @Drew:

    OK. It’s the “interbank” rate. I thought, and I haven’t bothered to read too closely, that it was reported on the lender side. Regardless though, it’s a “reported” number, right? And if the reporting bank can fudge in a way to improve tomorrow’s lending-or-borrowing, then they started to do that, way back when.

    It’s kinda funny in a broader sense. As soon as banks started using computers the idea of “stealing fractions of a cent” entered popular culture and fiction. Heck, that’s what the boys in Office Space did. The funny thing is that they didn’t think anyone would be there first. They didn’t think the banks themselves wouldn’t be there first. In Office Space red lights should have gone off, because they were stealing pennies someone else was already after.

    As small fry we may not care. The funny thing might be that Martin Wolf thought the banks were lying to other people, but not to him!

  16. steve says:

    Drew- There were at least two kinds of LIBOR fraud.

    http://www.economist.com/node/21558281

    Query- Is this story being covered much by right of center media? I have not seen anything about it on Fox, Drudge or any of the right of center econ blogs.

    Steve

  17. ratufa says:

    @Drew:

    Two types of manipulation of LIBOR were happening:

    – Banks that had trading positions that would be affected by LIBOR were influencing the final rate to their advantage.

    – Banks that were in financial trouble were lowballing their LIBOR estimates to make them seem healthier than they were.

    A good description of the issue is at:

    http://www.economist.com/node/21558281?fsrc=scn/tw/te/ar/therottenheartoffinance

  18. Note that each reporting bank only sees their number going out, and then the average coming back. Unless there is outright collusion, they only fudge, and know that the number coming back is part fudge.

  19. Interesting factoid via the Wikipedia page:

    Six-month USD Libor is used as an index for some US mortgages.

    So, if the rates were manipulated downward, at least those little guys benefited.

  20. More via Barry Ritholtz:

    Sometimes the big banks manipulated the Libor rates up, and sometimes down. Different groups of people got hurt depending which way the rates were gamed.

  21. Scott O says:

    @Woody:

    There’s plenty of reason to believe Barclay’s wasn’t the only player in this organized-crime caper.

    If it was only one bank it would have no effect on the libor rate.

    Every bbalibor rate produced by Thomson Reuters is calculated using a trimmed arithmetic mean. Once Thomson Reuters receive each contribution submission they rank them in descending order and then exclude the highest and lowest 25% of submissions – this is the trimming process. Details of this are shown in the table below. The remaining contributions are then arithmetically averaged to create a bbalibor quote

    Link

    So if Barclays reported the lowest rate their number would have been discarded before the average was calculated.

  22. Ben Wolf says:

    The true extent of what has happened will never be known. We’re talking about hundreds of trillions in OTC derivatives which are totally opaque. Libor is a holdover from a period when banks were far more heavily regulated than today. Unlike the Fed Funds Rate which is monitored directly by the Federal Reserve, Libor was an aggregate of what banks chose to report as their interbank loan rate. Deliberate manipulation is not a new problem; The Economist has been reporting on this since at least 2002 and there is simply no way central bankers were unaware of these practices.

  23. Dave Schuler says:

    @Ben Wolf:

    Ben reported the key point

    Unlike the Fed Funds Rate which is monitored directly by the Federal Reserve, Libor was an aggregate of what banks chose to report as their interbank loan rate.

    The LIBOR is a composite based on information reported from member banks. The banks were reporting the information fraudulently and reaping enormous profits by doing so.

    Very little will be done about this. The Powers-That-Be are just too afraid of rocking the boat.

  24. @Tsar Nicholas:

    Concerning banker unaccountability since ’08, governments have been aiders and abettors and, worst of all, facilitators.

    Our country’s problems did not all puff into existence on January 20, 2009. And perhaps if the Republicans had not blocked the prosecution of Goldman Sachs for securities fraud, the banks might have been more wary of engaging in something like this.

  25. Dean says:

    @Ron Beasley:

    I’m sure the numerous banking investigations underway by President Obama’s DOJ will net several arrests and convictions. Oh, wait. Never mind.

  26. Gustopher says:

    If no one goes to jail over MF Global, where is was just plain simple theft, why would anyone expect accountability elsewhere in the financial system?

    People need to go to jail.

    But I would go further than that. The punishment has to be high enough that it is a deterrance, rather than a cost of doing business. Assets need to be seized. For privately held companies we need to go after the owners’ wealth. We need to start dechartering corporations, and forcing the shareholders to take a complete loss when the corporation commits fraud.

  27. Ron Beasley says:

    @Dean: I was opposed to Holder’s appointment as AG because the last thing we needed was a Wall Street lawyer in that position. We needed a prosecutor.

  28. john personna says:

    Impact on the campaign? Harder to believe in affably distant rich guys with Cayman accounts?

  29. An Interested Party says:

    Concerning banker unaccountability since ’08, governments have been aiders and abettors and, worst of all, facilitators.

    Our country’s problems did not all puff into existence on January 20, 2009.

    I’m glad I wasn’t the only person who noticed this risible trash from the usual suspect…

    I’m sure the numerous banking investigations underway by President Obama’s DOJ will net several arrests and convictions. Oh, wait. Never mind.

    I guess those who want to paint the President as a socialist/communist haven’t noticed this…

  30. anjin-san says:

    A small price to pay to get rid of dirty hippie drum circles…

  31. jukeboxgrad says:

    Bankers Still Unaccountable

    Yes. Which reminds me of this book title: “The Best Way to Rob a Bank Is to Own One.”

    And this:

    Give a man a gun and he will rob a bank. Give a man a bank and he will rob the world.

  32. jukeboxgrad says:

    SCORE! A union fireman is double-dipping to the tune of a thousand bucks in some small town out West! Quick, get Billo, Joe’n’Mika, and David Brooks on it, stat!

    Only foolish crooks are small. Small-time crooks get punished. Big-time crooks get to buy elections. We have the best government money can buy.

  33. Drew says:

    Ratufa

    This thread might be dead, but after investigation I think you are correct.

    JP and others

    It will be off topic but we should go back to this issue. This is a scandal of monumental proportions, as I understand it.