Corrupt banks engaged in ‘organized LIBOR’

Visiting British friends reminded me that all summer, the press has occa­sionally covered the “LIBOR Scandal,” but many stories have been a lot of “inside-baseball”-style financial confusion. Actually, the situ­ation affects regular working people much more than has been noted.

Besides making a mockery of the “free market,” LIBOR – specif­i­cally, manip­u­lating LIBOR – costs us money in many ways. LIBOR – London Interbank Offered Rate – is supposed to gauge the average interest rate banks charge when they lend to each other. Ideally a measure of banks’ trust in their solvency, LIBOR is used as a foun­dation for other rates, like adjustable-rate mort­gages or complex financial deriv­a­tives. But: Big Banks don’t use data based on veri­fiable facts; there’s no check or balance.

So that ideal dissolved in June, when Britain’s Barclays bank admitted that it had routinely and repeatedly under­stated the rate for years. They did so in two ways. First, Big Banks conspired to move LIBOR levels (up or down) to benefit banks’ invest­ments, not customers. Next, during the 2008 financial crisis, Big Banks appear to have under­re­ported LIBOR to seem stronger.

LIBOR affects us because it changes the cost of money, whether personal or commercial borrowing. It influ­ences credit cards, student loans, mort­gages and more. Interest rates that banks charge are usually figured as LIBOR plus an addi­tional amount.

Barclays’ CEO resigned, and it’ll pay $453 million in fines to settle charges of LIBOR manip­u­lation as far back as 2005. More banks will probably be impli­cated. About 20 Big Banks contributed to LIBOR – including three giant U.S. outfits: Bank of America, Citi­group and JPMorgan Chase – at least some­times involving them­selves in the scheme, as well as possibly the Bank of England, the U.S. Federal Reserve, and the U.K. government, according to material Barclay’s disclosed.

“This is a very, very signif­icant event,” said Gary Gensler, chair of the U.S. Commodity Futures Trading Commission (CFTC), one of the regu­lators inves­ti­gating the scandal, in Time magazine. “LIBOR is the mother of all financial indices, and it’s at the heart of the consumer-lending markets. There have been winners and losers on both sides [of the LIBOR deals], but collec­tively we all lose if the market isn’t perceived to be honest.”

However, the CFTC neither charged Barclays with a crime nor required resti­tution to victims. Still, Barclays’ activ­ities may be felonies under federal RICO statutes. The Rack­eteer Influ­enced and Corrupt Orga­ni­za­tions Act autho­rizes victims to recover triple damages.

Another gigantic conse­quence of the banks’ manip­u­lation is that it hid 2008’s financial crisis for months. The scandal repre­sents a financial system that remains secret and under-regulated – four years after that crisis – further eroding people’s under­standable distrust of Big Banks.

Econ­omist, author and former Labor Secretary Robert Reich said, “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.”

The extent of the fraud and its conse­quences is incredible.

Attorney Ellen Brown, chair of the Public Banking Institute and author of Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free, said, “The losers have been local govern­ments, hospitals, univer­sities, and other nonprofits. For more than a decade, banks and insurance companies convinced them that interest-rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools.”

Heather Slavkin writing for AFL-CIO Now said, “Around $10 trillion in loans is indexed to LIBOR [and] when you add in all types of financial products including complex instru­ments like deriv­a­tives, LIBOR is the index for around $800 trillion in financial instruments.”

That $800 trillion is 11 times the Gross Domestic Products of every nation on Earth, according to 2011 figures from the Inter­na­tional Monetary Fund.

Again, Big Banks could face criminal pros­e­cution, civil lawsuits and regu­latory penalties, but how did it happen for so many years? Were regu­lators them­selves – admit­tedly dealing with weaker laws than decades past – incom­petent or corrupt? Further, will pros­e­cutors do their job and go after such corporate ille­gality? After this inter­na­tional cartel?