Anger unites these otherwise disparate movements. Anger over the worldwide financial crisis, huge compensation packages paid to those who failed to exercise fiduciary restraint, and the subsequent $700 billion Troubled Assets Relief Plan (TARP) bailout of banks deemed “too big to fail”.
In 1913 Europe, a series of treaty alliances amongst unstable parties ensured that once a match was set, all hell would break loose — and did. The match was the June 28, 1914, assassination of Archduke Ferdinand in Sarajevo. A month later, the Guns of August were mowing down young men worldwide.
Ninety-eight years later, almost to the day, a spark may have been struck, the spark which lights the hydrogen-filled dirigible of the financial crisis’ bad actors.
It’s all about LIBOR, and a eight-hundred-trillion dollar LIBOR pain.
LIBOR is an acronym for the London Inter-Bank Offered Rate. Each day, 18 banks in the City of London (a metaphorical place roughly equivalent to New York’s Wall Street) are polled: “at 11 am, what rate would your bank set for…?” For example, a key indicator is the “three month dollar LIBOR”, which is a consensus number for what the panel would pay at 11 am on that day to borrow dollars for three months.
The LIBOR is calculated by dropping the top four figures, the bottom four figures, and averaging the remaining 10.
If this reminds you of something, it should. It’s reminiscent of how figure skating used to be judged, before the system changed in the 2002 scandal. As the Canadian pair found, the apparent transparency and simplicity of the system also makes it easy for a single bad actor, or multiple bad actors acting in concert, to “game” the scoring. Barclays Bank, a 300 year old London bank, did exactly that.
While the United States was celebrating the 236th anniversary of the date on which the Declaration of Independence may or may not have been signed, the former head of Barclays Capital, Bob Diamond, testified in front of a Parliamentary commission that was understandably hostile to him. The day before, July 3, 2012, Diamond had resigned.
In a game of Prisoner’s Dilemma, Barclays had decided to come clean and rat out its partners in crime, in the hopes of minimizing their public relations losses and legal liability.
The LIBOR rate is important because an estimated $800 trillion in loans — car loans, consumer loans, mortgages, and many, many others — have an interest rate which is pegged to the LIBOR. (For comparison, the US Gross Domestic Product is about $15 trillion per year.)
Diamond was originally slated to get over £20 million ($30 million) as a nice going-away gift — after admitting illegal acts to regulators — but that deal has reportedly been cut to “only” £2 million ($3 million). I’d like to get three million smackers for augering my company’s plane into the ground while smoking an illegal substance.
Barclays did two bad things.
First, in settlement agreements with the UK’s Financial Services Authority and the US Department of Justice, Barclays admitted to manipulating the LIBOR rate on hundreds of occasions. For example, one trader wrote in his diary, “Ask for high 6M fix,” sort of like a reminder note to rob a bank today. Another wrote a colleague: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
Offering a weak defense in his resignation letter, Diamond said:
But we must help our customers and clients recognise that on the majority of days, no requests were made at all.
Or, in other words, “on a majority of days, Bonnie and Clyde did not rob banks.”
It is important to bear in mind that this behaviour stopped nearly three years ago.
As did the public’s faith in the banking system. By 2009, we’d all agree the damage had been done.
The second bad thing is much more complicated and messy but much more serious in terms of its financial impact. Barclays, and many other banks, were shaving 30 to 40 basis points (0.3 to 0.4 percent) off their stated rates, to hide just how bad things had gotten for them. Recall that as the financial system crashed, credit became almost impossible to get. If a bank like Barclays revealed just how much they had jacked up their loan rates, they would have appeared as though they were in trouble (which they were). Therefore, Barclays and other LIBOR banks had strong incentive to lowball their estimates.
This activity — which may have been actively encouraged or condoned by British authorities justifiably worried about the public’s confidence in the banking system — exposes Barclays to billions in legal liability.
Worse for these bank robbers, however, is that it might just be spark that lights the judicial Hindenburg on fire. Because unlike the previous scandals — housing bubbles and credit-default swaps and toxic assets and the like — this story has a clear, easily explained narrative. I just laid out the basics in a blog post. Barclays has already admitted wrongdoing. Consumers were directly harmed in ways that consumer members of a jury could easily understand, even with little financial knowledge.
Better yet, Bob Diamond sounds a lot like Jamie Dimon, and Barclays Capital has a certain assonance with Bain Capital.
This scandal, when it hits America, may just be the catalyst for a round of finger-pointing and a legal system China Syndrome. I predict a virtual, if not a real, tar-and-feathering of key financiers.
The complexity of the Enron disaster was too much for most to understand until they obviously and openly manipulated the price of natural gas. My monthly gas bill went from about $100 to $400. For me, what the Enron traders did in 2001 was exactly the same as a robber sticking a gun in my ribs at the ATM and taking $300 from me, except they robbed 100 million of us for several months in a row. Consumers can understand that, just like they can understand their mortgage rate being manipulated by London traders.
Perhaps Diamond and his swindler buddies will be sentenced to hard LIBOR.
- Baltimore seeks damages from Barclays and other banks over Libor scandal (itv.com)
- How the LIBOR Scandal Affected Your Car Loan Rates (loans.org)
- Rate-fixing scandal is about to hit the US (marketday.msnbc.msn.com)
- Libor scandal: Bob Diamond gives up £20m bonus — BBC News (bbc.co.uk)
- Lloyds could face £1.5bn claim over Libor — analysts — Telegraph (2012indyinfo.com)
- A scandal over rate-fixing is about to hit the US (marketday.msnbc.msn.com)
- Libor Scandal: Let’s Give Regulators Some of the Blame (news.firedoglake.com)
- Bank of England’s Paul Tucker ‘was a spymaster during Libor-fixing scandal’ (standard.co.uk)
- Barclays’ Libor Scandal Heats Up As Paul Tucker Tells His Side Of The Story (forbes.com)
- How the LIBOR Scandal Affects Private Equity (axialmarket.com)