I read things like this and by fixing LIBOR they're treating a symptom rather than addressing the cause.<p>My belief--and many seem to disagree with me on this whenever I've brought it up before--is that we erred in allowing investment banks to incorporate.<p>IMHO investment banks need to act like law firms: as partnerships with <i>unlimited</i> liability. Currently there is no incentive to not pervert the system and manage risk because:<p>- no one is going to jail for criminal acts committed in these financial crises (eg loan documentation fraud and illegal foreclosings in the subprime fallout);<p>- there is no financial incentive to act responsibly because if you go bankrupt this year last year's bonus is already banked;<p>- central banks have been perverted into being welfare for investment bankers as a so-called "lender of last resort". Ostensibly they are ensuring the function of the financial system. In practice they are giving investment banks an unhealthy appetite for risk. Banks and funds need to be allowed to fail; and<p>- governments are complicit in this.
This is why when you hear politicians bleating about de-regulation, you need to read between the lines to figure out what they are actually saying.<p>Conduct of markets so critical to our society need to be done in the open, in an publicly accessible exchange. Banks will not fix themselves, they need to be compelled to do so by strong regulation. For all of the hand-wringing over high-frequency trading of equities, at least you can ultimately figure out what is doing on.<p>Bankers used to be boring people whose primary job qualifications were looking distinguished and having the ability to follow instructions precisely. We need a regulatory environment that brings that kind of banker back to the mainstream.
Benford's law strikes! I was all set to read about crazy, complex data analysis that detected this, but instead check out the abstract below:<p>"With an eye to providing a methodology for tracking the dynamic integrity of prices for important market indicators, in this article we use Benford second digit (SD) reference distribution to track the daily London Interbank Offered Rate (Libor) over the period 2005 to 2008. This reference, known as Benford's law, is present in many naturally occurring numerical data sets as well as in several financial data sets. We find that in two recent periods, Libor rates depart significantly from the expected Benford reference distribution. This raises potential concerns relative to the unbiased nature of the signals coming from the 16 banks from which the Libor is computed and the usefulness of the Libor as a major economic indicator. "<p>Abrantes-Metz, R. M., Villas-Boas, S. B., & Judge, G. (2011). Tracking the Libor rate. Applied Economics Letters, 18(10), 893-899. doi:10.1080/13504851.2010.515197
I say this as an outsider to the industry, but the 'large' £290m penalty appears to be a joke and the media are either complicit or too thick to realise. Annual profits for Barclays were £5.9 billion to Q1 this year. May not be appropriate for comparison purposes, but if over a year the financial penalty Barclay's paid was the same basis as the penalty for dodging a £2 tube fare in central london - the fine for being caught would be just south of a whopping 10 pence! Simple incentive theory here. At that rate I'd dodge the fare every. single. day. The fine (reputation damage be damned as I'm not sure there is a honest broker to take my business to) is off by at least 2 orders of magnitude.
What blows me away about this story is that, as far as I can tell, the entire financial world is built on this rate that is calculated by taking completely unverified estimates from a handful of enormous banks who have every incentive to manipulate those estimates. How on earth is such a conflict of interest allowed to parade around out in the open? And why should we have any reason to believe that there aren't other similarly absurd structural problems with the financial system? The whole thing sounds like a house of cards.
Imagine a slightly sweaty central banker dancing on stage:<p><pre><code> Transparency, transparency transparency, transparency ...
</code></pre>
So much of the problems since 2008 arise because it was not known what others were borrowing or lending or from whom at what price.<p>The LIBOr rate is set by asking not what rates do you borrow at, but what rate would you like to borrow at!<p>Sorry folks, commercial confidentiality is a fig leaf too far now. Publish and be damned.
"Banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with."[1]<p>[1] <a href="http://blogs.ft.com/martin-wolf-exchange/2012/07/02/banking-reforms-after-the-libor-scandal" rel="nofollow">http://blogs.ft.com/martin-wolf-exchange/2012/07/02/banking-...</a>
This long-term fraud is one of the better cases for which there are likely to be thousands of individuals who should be held criminally and financially responsible. It is clear that many financial institutions will be held responsible.<p>If the thousands or even perhaps tens of thousands of individuals involved are forced to pay restitution damages in addition to punitive damages, would this further the cause of justice? I am of the mindset that it will. Do the world's prosecutors and politicians have the balls and/or resources to do it?
Robert Reich[1] in <a href="http://robertreich.org/post/26708840314" rel="nofollow">http://robertreich.org/post/26708840314</a>:<p><pre><code> And it would amount to a rip-off of almost cosmic
proportion – trillions of dollars that you and I and other
average people would otherwise have received or saved on
our lending and borrowing that have been going instead to
the bankers. It would make the other abuses of trust we’ve
witnessed look like child’s play by comparison.
Sad to say, there’s reason to believe this has been going
on, or something very much like it. This is what the
emerging scandal over “Libor” (short for “London interbank
offered rate”) is all about.
</code></pre>
[1] Chancellor’s Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration.
Manipulation of the LIBOR would impact all the variable rate mortgages that are indexed to it. In California, home loans with a 0% interest rate for the first year and very low rate for next few years (negatively amortized) were very popular and pushed by Washington Mutual and other banks. But these loan's interest rates were tied to the LIBOR. A lot of foreclosures were do to these types of loans where the payment will increase 10 - 20%. How often does ones income increase 20% in a year or two?<p>The economist article is not exaggerating IMO.<p>How these banks are dealt with by our governments will illuminate the extent banks have corrupted our governments.
Public companies should just be forbidden to do speculative prop trading at all. If one does and is lucky for a couple of years, then all others need to follow suit to achieve compatible profit levels... And that gets everyone stuck in a stupid rat maze that benefits society just as much as ebola or scientology.
Just like any group, organization, family, company, establishment: A fish rots from the head down.
The system has to be setup in such a way, that the heads of an organization are least likely to start "rotting":
- checks and balances
- personal liability
- transparency