The LIBOR Scandal: What It Means and Why It Matters

It’s really hard not to quantify Mitt Romney’s white-man elitist remarks to the NAACP as the foulest outrage of recent days.  Romney first went in front of the NAACP with a supercilious grin and sort of talked past the audience in front of him and explained to the Republican base that does not trust him or particularly like him that he was going to show these Negroes who’s boss. He was predictably booed, and then deified by the bitter angels of the right for his bravery. Then compounding the outrage he went on to Montana the next day and said, “When I mentioned I am going to get rid of Obamacare they weren't happy, I didn't get the same response. That's ok, I want people to know what I stand for and if I don't stand for what they want, go vote for someone else, that's just fine. But I hope people understand this, your friends who like Obamacare, you remind them of this, if they want more stuff from government tell them to go vote for the other guy-more free stuff. But don't forget nothing is really free.” Obamacare, like Romneycare, forces those who can afford it, who visit emergency rooms for more often than not government paid treatment, to actually get insurance and so pay their share into the system. Yesterday’s Times, reporting on Florida’s hotly contested but likely opt out of the Medicaid expansion reported that a single hospital in South Florida dispensed half a billion in such treatment last year. So the free part sort of mystifies. As usual Matt Taibi has the best most withering take: “He’s like a teenager who stays up all night thinking of a way to impress the prom queen, and what he comes up with is kicking a kid in a wheelchair. Instincts like those are probably what made him a great leveraged buyout specialist, but in a public figure? Man, is he a disaster.”
Well at least we can agree with Romney that “nothing is really free”.  Just yesterday, the Times reported that the Agriculture bill is stalled in the House owing to disagreements between Republicans over how and where to make cuts. The Senate already passed the bill, which included $16.5 billion in cuts to the Food Stamp program over 10 years, but some in the House want to go deeper and have proposed doubling that to $33 billion. Meanwhile, thanks to House Republicans sugar producers will not see any cut to their subsidy program. Cotton and peanut farmers who got little support in the Senate managed to get fallaciously budget conscious Republicans to add lobbyists provisions in support of their industries. By Romney’s calculation we can assume that food stamps are not free, but subsidies to commodity producers, subsidies which are in place regardless of whether or not some crops are even grown, are without cost to government.  It does not appear that children in need of basic nutrition have the same well-funded lobbyists as sugar, peanut, and cotton producers. American democracy in 2012 is a lie, a facade, a grimy curtain, behind which the legal corruption of lobbyists and totally unregulated and unreported campaign cash buys votes, loyalty and policies favorable to the well fed and powerful, at the expense of those both weak and hungry.

But even with the cascading stories of corruption at all levels of American government The LIBOR scandal, now rumbling around the financial press, has an even greater stench of outrage and a dizzying level of corruption. LIBOR (London Interbank Offered Rate) is the primary benchmark for short term interest rates around the world. The facts are still being ascertained, but what we do know is that at least one British Bank, Barclay’s, has already admitted their role in manipulating the rates and has agreed to a $450 million USD fine. Bob Diamond, Barclay’s CEO who initially called the charges of LIBOR manipulation “terribly unfair” and “unfounded” resigned. Barclay’s was not the only bank to be involved, and 12 other marquis brand international banks including Citigroup, Deutsche Bank, HSBC, JPMorgan Chase & Co and Royal Bank of Scotland, are also thought to be involved.

As we have seen with other financial crimes of late the stakes here are so much larger. The LIBOR rates affect the cost of virtually all consumer and business loans. The London Mail notes that “a family with a $100,000 mortgage would have been $50 to $100 worse off a month because of the fixing.”

So when we look at the home mortgage market for the last several years the collusion and corruption within the banking community seems to know no limits. So much of the corruption has taken place and intensified just in the past few years. From just 2004 to 2006 the number of sub-prime loans went from just 8% of the total to more than 20%. By 2006 more than 90% of the sub-prime loans were adjustable. The run-up in the creation of these high-risk loans was a direct response to the desire for them as investment vehicles. The loans were bundled and sold as investment grade bonds, which were often opaque in their structure. Bond agencies such as Moody’s and Standard & Poor’s gave the esoteric packages A-A-A ratings and gathered their commission for the “researched” effort, and insurance companies like AIG, certain that real estate values would never decrease, sold credit default swaps that would compensate the banks in the event of a loan default. All of this was largely unregulated because so many big and powerful entities were making so much money—showering much of it in return on Congress which – Democrat and Republican alike--for their ransom gladly turned a blind eye.

Then immediately before the crisis and certainly during the crisis the banks started to collude to manipulate LIBOR rates. This helped their bottom lines in multiple ways.  In Barclay’s case the manipulation was done at least in part to make the bank look healthier by making the cost of its borrowing appear to be less.  In addition fractional manipulation of the rates in a trillion dollar market could result in hundreds of billions in capital gains. According to the Mail, “$360 trillion dollars in loans around the world are indexed to the LIBOR, a figure which is five times the value of the world's entire annual GDP.” These manipulations would not only affect the cost of loans but would also weigh heavenly on the hedges or bets these thirteen big banks were making in the market. This is robbery on a gargantuan scale, largely carried out in secret by the same banks and Wall Street firms that brought on the catastrophic financial crisis in the first place.

Once again the role of the regulators has come into question. In today’s Washington Post Zachary Goldfarb reports “…in April 2008, the New York Fed was explicitly warned by an employee of the British bank Barclays that it was participating in a ruse”.  The NY Fed at the time was run by Obama’s current Secretary of the Treasury, Timothy Geitner. Goldfarb goes on to report that “The manipulation by Barclays did not end until some point in 2009.” Sometime in late 2007 or early 2008 according the British Banking Authority (BBA) which brought the charges and levied the fines against Barclay’s, a senior Barclay’s treasury manager called the BBA and warned them that rates were not accurate, but that Barclays was not the worst offender. "We're clean, but we're dirty clean, rather than clean-clean," the Barclay’s treasury manager was quoted as saying. To which the BBA representative responded, "No-one's clean-clean." So regulators knew that there was a year’s long, at least, conspiracy underway to illegally and artificially manipulate LIBOR rates. These rates which affected trillions of dollars in loans and had the potential to add billions to the bottom line of the too big to fail banks that were at the time being bailed out by American tax payers to the tune of a trillion dollars.

In the aftermath of the crisis millions of people were thrown onto the streets, their loans hastily foreclosed, often illegally. US based banks agreed in February to pay $25 billion to settle claims that they processed foreclosures without verifications, sometimes with forged signatures, and generally in an accelerated process by which they took possession of homes illegally, thus exacerbating a housing crisis already well underway. Just imagine the consequences across the country of this. Reuters reported that in San Francisco that audits of almost 400 foreclosures “found that 84 percent of them appeared to be illegal”. I’m not sure that anyone is suggesting that 84% of all foreclosures were illegal, but in 2009 there were 2.8 million foreclosures across the United States.  What if a third were illegal? Imagine the impact on a community of homes where two of ten houses are abandoned and vacant rather than four or five of ten. The banks created the crisis, made it worse in their mad rush to cut their losses, and manipulated rates and costs before, during and after the crisis. All the while regulators stood (and stand) on the sidelines with a “Gee, I don’t know” look on their face.

In comparison to the $700 billion TARP bailout of the banks, and the $3.3 trillion the Fed Loaned to the banks at near zero interest through the Discount Window, as reported by Bloomberg in March-2011, the corresponding effort to save actual homeowners from losing their homes has been minuscule and infective. HOPE for Homeowners (In return for reducing the balance on the mortgage, the Federal Housing Administration will insure the loan), HAMP (Housing payment -- mortgage, property taxes, homeowners and mortgage insurance -- demands more than 31 percent of pay),  UP ( Unemployed Homeowners), and HAFA (lender incentives to let homeowner give up the deed or sell the house as an alternative to foreclosure) have touched maybe hundreds of thousands in a market which saw millions of families lose their homes.

In this environment no one with the possible exception of Cornell West and Tavis Smiley, God bless them, are talking about the poor and poverty in America. Even then no one seems to understand or can be bothered to care. Sighting a Heritage Foundation study on how well the poor in America live, Carol Costello on CNN had the audacity to ask West and Smiley in 2011, "What are they (the poor) complaining about?" Everyone talks about the middle class, of course, that’s where the votes are, but much of that is just talk. The real action is taking place in the banks and on Wall Street. There a gathering storm of self-interest and glad-handing back-slapping golf-buddy bravado obliterates any effort at reform. Everyone knows the game is rigged, but too often the focus is more about the race then what victory would mean, what policies would be pursued and what wolf-like special interest would be tamed. The mendacity, to use Dr. West’s term, has reached epic proportion, the size of the corruption almost immeasurable, the scope of the crime almost unseen. It is like trying to see Rushmore clinging to the edge of Lincoln’s nose. One knows there is something of immensity before them but cannot quite make out the image.