Day of LIBOR Reckoning

Though collusion on rate executions
Was the norm in finance institutions,
When the tide quickly turned
Many bank traders learned
They would naturally face prosecutions.

The trouble with a culture of open financial fraud is that it leaves behind quite a paper trail in the unlikely eventuality that the authorities ever decide to crack down. So it is with the London Interbank Offer Rate-setting process, in regard to which US federal prosecutors and European regulators now intend to arrest individual traders on both sides of the Atlantic. Accounts differ as to how long the manipulation of LIBOR and related interest rates has gone on - some say 15 years - but central banking authorities in the US and UK have known of it since at least 2008. That was when staff members of the Federal Reserve Bank of New York discussed LIBOR with one or more traders who told them that their submitted rates were fake. Alarmed, then-FRBNY president Timothy Geithner sent off a "best practices" memo to Bank of England governor Sir Mervyn King, outlining ways to curb the abuses. Four years later, the media attention and public outcry have seemingly forced the hand of officialdom; against whom, we will soon hear.

A Victimless Crime?

Said an interbank trader, at pains
To manipulate LIBOR for gains:
"Though perhaps this offense
Is at someone's expense,
It's alright unless someone complains."

After the scandal and outcry over the fraudulent LIBOR fixing at Barclays and other banks, and the large fines and executive dismissals imposed upon Barclays by British regulators, came the inevitable, what's-the-big-deal backlash from those arguing that this is old news, that everybody does it, and that it's a victimless crime. MIT economist Simon Johnson answers the naysayers in a New York Times column. First, the fact that the rate-rigging has long been an industry practice is more - not less - troubling, as it goes to the heart of the cultural encroachment of fraud and corruption in the financial industry. Likewise, if everybody is in fact doing it, how much more Herculean is the task of cleaning the financial Augean stables. Finally, the notion that the LIBOR fraud is a victimless crime is false on its face. If two parties enter into a transaction and one of them is secretly rigging the price to his benefit, then the other party loses. Though the complexity of the global financial system may make it conveniently difficult to identify the victims, they nevertheless do exist.

A Banker Called To Account

Said Barclays' Bob Diamond quite bluntly:
"I roundly resent the effrontery
To be fired abroad
For a silly old fraud
We'd soon overlook in my country."

The LIBOR-setting scandal has caused heads to roll at Barclays Plc, the first bank to be investigated in the case. Among them is CEO Robert E. Diamond, Jr., a "hard-charging" American who has been relieved of his duties at the behest of the Bank of England and the Financial Services Authority.

As Gretchen Morgenson wrote in The New York Times, he may have "thought he’d be subject to American rules of engagement when confronted with evidence of wrongdoing at his bank. You know how it works on this side of the Atlantic: faced with a scandal, most chief executives jettison low-level employees, maybe give up a bonus or two — and then ride out the storm. Regulators, if they act, just extract fines from the shareholders."

In a refreshing change of pace, British regulators actually demand that bankers be called to account for their wrongdoing.

LIBOR Rate Upset

There's an interbank market in London
To set rates where one's fellows will fund one,
But if dubious sorts
Give phony reports,
Then faith in the market is undone.

Barclays PLC Chairman Marcus Agius has resigned to take responsibility for the LIBOR rate-setting scandal that resulted in a $453 million settlement paid by the bank. The significance of the scandal is that, by reporting artificially low rates to the British Bankers' Association in the months before the financial crisis unfolded, the bank (and other participants in the rate-setting scheme) made it appear as though the market for bank liquidity was more stable than was actually the case. Thus, what could have been a valuable warning sign was missed; the canary in the coal mine was kept on artificial life support.