Last week, the British press was in full-throated cry on the Libor scandal , both as a political story (the connections to the Conservative party; the questions over the Bank of England’s role) and for its economic repercussions (who else was involved, who wound up on the losing side). Many commentators took note of the Economist’s cover:
But despite the dramatic image and the use of the pejorative “banksters,” the article combined some helpful analysis with a call not to act against banks in haste:
The attempts to rig LIBOR (the London inter-bank offered rate), a benchmark interest rate, not only betray a culture of casual dishonesty; they set the stage for lawsuits and more regulation right the way round the globe. This could well be global finance’s “tobacco moment”.
The dangers of this are obvious. Popular fury and class- action suits are seldom a good starting point for new rules. Yet despite the risks of banker-bashing, a clean-up is in order, for the banking industry’s credibility is shot, and without trust neither the business nor the clients it serves can prosper….
Translation: don’t do too much while tempers are hot. Yet this stance also happens to be the one used again and again by incumbents and lobbyists: drag out discussions of what to do until the public’s attention has moved elsewhere. As Frank Partnoy recounted in his book Infectious Greed, this strategy was particularly effective in the 1994 derivatives wipeout, which destroyed more wealth than the 1987 crash. A series of investigations and hearings in the end produced close to nothing because the banking industry was able to drag out the process, and then argue that things were back to normal, so why were any changes needed?
The Economist’s recommendations:
The first is to find out exactly what happened and to punish those involved. Where the only motive was greed, the individuals directly involved in fraud should face jail. If the rate was lowered to keep the bank afloat, and regulators were involved, both the bankers and their rule-setters should explain why they took it upon themselves to endanger the City’s reputation in this way…
The second task is to change the way finance is run—and the culture of banking. This after all is not the first price-fixing scandal: Wall Street has had several. A witch hunt would be disastrous (see Bagehot), but culture flows from structure. The case for splitting retail and investment banks on “moral” grounds is weak, but individual banks could do more: drawing fines from the bonus pool is one example. And some rules must change. LIBOR is set under the aegis not of the regulator but of a trade body, the British Bankers’ Association. That may have worked in the gentlemanly days when “the governor’s eyebrows” were enough to keep bankers in order. These days the City is the world’s biggest centre of international finance.
This is thin gruel, particularly for a scandal of this magnitude. What seems to have contributed to the outrage in the UK is the casualness and regularity with which Barclays diddled with Libor. It correctly points to the way it has become normal for bankers to cheat every way possible to pad their wallets. Bid rigging and collusion are appallingly widespread. We haven’t even gone looking for it on the blog, yet have come across it frequently. For instance, in the early phases of the crisis, in the CLO and RMBS markets, it was widely known that dealers would “trade” very small order sizes with friendly parties (back scratching with other banks or with hedge funds) to establish phony (as in inflated) prices for valuation purposes. Similarly, it was common for CDO desks to cooperate with preferred short sellers and give them a “last look” at bids on credit default swaps, meaning allowing them a look at their orders in what was presented to most customers as an auction where all participants were treated equally. There is also evidence that points to collusive behavior between CDO managers and deal underwriters, not just the lack of independence in asset selection (meaning they’d take dreck if it was presented to them) but also in the pricing of the assets. In other words, the outrage is warranted because the Libor rigging provides confirmation of what many ordinary folks have suspected: the banks are rife with predators.
So what does the Economist suggest? Notice that when “profit” was the motive, they argue “the individuals directly involved should face jail” Huh? This means low level folks and maybe their immediate bosses, as well as perhaps some ritual sacrifices from compliance or risk management. But everyone up the line profited. The bigger the profits of the bank, the bigger the senior executive pay levels. Unless senior executives feel they are also at risk when producers play fast and loose, they have every reason to continue to give them free rein, enjoy the extra revenues, and cut them loose if they are clumsy enough to get caught. And note how it ducks the question of what to do about the cultural morass after implicitly rejecting making the top brass pay and explicitly rejecting breaking up banks.
But this should not be surprising given the Economist’s history on the subject of banking. Even though it was early to identify the housing bubble by mainstream media standards (in a June 2005 cover story), at the end of November 2006, as the subprime market was coming apart (it recovered in March 2007 and went into its terminal decline in May 2007), it argued vociferously that financial services in the US was overregulated:
The familiar concern that China is going to steal the country’s remaining manufacturing jobs has been compounded by a newer fear: that Wall Street is losing its grip on the world’s money. Bankers and politicians worry that business will drain away from America’s capital markets to financial centres overseas, particularly London and Hong Kong. Several committees are sweating away on reports, the most important of which is to be published next week, on how to stop the rot. America’s treasury secretary, Hank Paulson, made it clear in a speech on November 20th that he shares their concerns.
Although it is still the world’s biggest market for capital, America’s lead is shrinking fast in almost every area (see article). In some it has been overtaken. The most spectacular collapse has come in the market for initial public offerings (IPOs) of shares, where the New York exchanges, miles ahead a few years ago, now trail behind London and Hong Kong. American stockmarkets are actually shrinking as domestic firms go private or buy back their shares; and it isn’t helping that foreign firms choose to list elsewhere.
Funny how the Economist fails to consider that as the US economy is smaller as a percentage of world GDP than is was in the 1980s, that companies would want to target investors in markets where their brand name was well recognized, since they might get a better price than in the US (ie ease of registration is secondary to how high a price the offering will fetch). And it does point out that the fall in the value of listed equities is due to big companies not acting like capitalists and investing in their businesses, but preferring to goose stock prices via share buybacks or leverage (LBOs). That’s a function of bad incentives for top executives, not US regulations.
The Libor scandal is sure to be a protracted affair, and as it continues, expect there to be more and more efforts to minimize the significance of these abuses. But I suspect if regulators keep exposing e-mails and other evidence of how banksters actually rigged prices, and particularly if it extends to derogatory comments about customers and counterparties, the defenders-in-waiting will have a hard time talking the public down. Lawsuits are also another source of damaging revelations. Recall the derivatives scandal at Bankers Trust. I didn’t have much sympathy when Procter & Gamble sued BT, alleging it had been cheated on over-the-counter derivatives trades. P&G is a sophisticated company that has a treasury operation that manages complicated foreign exchange exposures. They had access to the best lawyers, and if they were dumb enough to enter into a derivatives trade they didn’t fully understand, shame on them.
But even though P&G may not have had a very strong case, in discovery, they got their hands on internal recordings which showed how gleeful BT staff were at taking advantage of P&G, and how this was their preferred mode of operation. There was no winning with quotes like this: ” “Funny business, you know? Lure people into that calm and then just totally fuck ’em.” ” And I suspect as the Libor scandal wears on, we’ll have more than a few rapacious statements like this come to light.
Even if people don’t understand exactly how they were hurt (and the damage in many cases is likely to be indirect, such as through higher public transport prices or insurance costs), they do know that the banks were lavishly bailed out and that ordinary people would lose their jobs, and perhaps their freedom, if they tried anything like the routinized cheating in Wall Street and in the City. Public sentiment in the UK seems to have turned decisively against the financiers. Sadly, history suggests that banks, aided here by more cooperative reporters, will succeed in keeping Americans in their torpor.
The bankers are sociopaths hired, fired and directed by the global inherited rich to execute the Shock Doctrine event the world is now experiencing.
The Economist is providing cover for the biggest sector of the British economy and the global inherited rich who own the City.
Nice posting Yves.
You continue to fight the world of financial propaganda tirelessly…..thanks.
naomi klein-hear here..
“But this should not be surprising given the Economist’s history on the subject of banking.”
Absolutely, Yves. The Economist has been trash for a long while now. Occasionally there are interesting articles profiling individuals etc. but even then there’s always a strong sense of editorial “control.” Meaning, they are just an uncritical mouthpiece for the finance industry– albeit, as you point out, sophisticated, in as far, as they understand how the media is able to suggest not only content but the timing of public debate.
The authors of the article seem to share the same absence of morality as the banksters. Absolutely incredible. No moral reason to split credit and investment banking? And stealing is punishable if done for greed but not if done to save the company or if regulators are captured (unless one considers “having some explaining to do” is a punishment)? I’m not fluent in high finance like many here but I assume somebody is always on the other side of those Libor agreements.
How about when people are stealing to save their homes or feed their families? Is that punishable by jail or will they have some explaining to do?
When “authority” says,”I am not a crook.” as Nixon did or ..The “behavior was not criminal.” as Obama did, it allows the general public to understand if they are idiots or crooks or both.
LL, “authors” and “banksters” have the same “owners.”
And it looks like they’ve taken the motive from your book for their cover! (Although, there’s no sense of impending danger. Maybe that’s all that’s changed in the last couple of years– the banksters /know/ they can’t be touched.)
Add ‘no lack of imagination’ to the Economist’s failings…
Wondering what people think the chances are of there being another crisis after the US and German elections? I’m getting the sense that at some stage the levy is not going to be able to hold back the debt. The illusion will fade…
Normal people here in Germany are buying real-estate, FFS! Maybe the hive mind is speaking– mind you betting against the Germans is probably a good idea. It’s a bit like a gladiatorial fight in ancient Rome at the moment: Ceaser’s thumb is still horizontal, but I don’t think we’ll be waiting too much longer to find out whether or not the fight has been successful or not.
The Economist does not have a mass readership. Accordingly, although those who write for it inhabit something less of a cocoon than figures like Diamond, they are not in a good position to grasp the way that opinion is changing over here.
A better picture comes in an article in Today’s Telegraph by Liam Halligan, a city economist who writes regularly for the paper. It opens:
“Finally, the British political classes are starting to get it. Finally, a head of steam is building. Over the past week, calls to impose a proper division between investment and commercial banking have become louder, more authoritative and part of mainstream debate. Pressure for the introduction – or reintroduction – of this crucial split could soon become irresistible, however much the politicians wiggle and the investment bankers deceive.
“Until now, it’s been mainly nerds like me who have advocated a full Glass-Steagall separation. Given the vested interests that would lose from this change, we’ve been lampooned for our “hot-headed” views.
“Yes, our message is awkward. Life would become difficult (and less lucrative) for a lot of powerful people, were we to prevail. Yet we “Glass-Steagallers” are right. We have history, logic and common sense on our side. And now – thanks to Barclays’ ex-CEO Bob Diamond, and “Liborgate” – we also have political momentum.”
(See http://www.telegraph.co.uk/finance/comment/liamhalligan/9383982/Liborgate-could-trigger-crucial-banking-reform.html )
The Telegraph also a shill “testing the waters.”
Here is how the bankers’ game works:
mansoor h khan
So the banks should explain why they did what they did in order to save themselves.
“Tell us, doctor, why you killed this man.”
“I didn’t kill him. I needed his organs to save three others.”
Another week of titillating banking burlesque and then we’re off to the Olympics.
The Big Blow-Out of .-1% Royalty, with Qatar’s SHARD uber alles.
I guess I read the article as something more akin to the beginnings of an awakening….something more like sticking a toe in the water to test the temperature. Though I agree that where they ended up in the article (e.g. recommendations for what’s to be done) was pretty thin, I thought the phrase ‘culture flows from structure,’ was pretty extraordinary. That implicates an entire system, and contrasts with their recommendations to jail a guilty few. So, I guess where you saw weakness, I saw a glimmer of recognition and acknowledgment that the foundation is (at least) wobbly.
Good point, Steph.
To enable idiots and crooks access to drones is a systemic failure.
The banks have stolen our birthright and given us a mess of pottage and their coming for that too:
The Lord arises to contend,and stands to judge the people. The Lord enters into judgment with the elders and princes of His people, “It is you who have devoured the vineyard; the plunder of the poor is in your houses. What do you mean by crushing My people and grinding the face of the poor?” Declares the Lord God of hosts. Isaiah 3:13-15 New American Standard Bible (NASB)
Morality aside, are we too stupid to think of a better way to implement money other than usury for stolen purchasing power? Yes we are, IF we leave morality aside. Amoral money creation is immoral money creation.
Money creating its own market. Or price. Crazy. Ann Pettifor’s insight recently that the banksters should not be allowed to control the market for money via their own “trade group” (what a euphemism) because money is not a commodity and cannot seek its own market whether it has banksters helping it along or not. Money is just a thing that is created out of thin air. And the whole system is alchemy.
correction: “their coming” should be “they’re coming.”
As a Barclays customer I feel pretty peaved, but the debate needs to centre on getting the state out of banking and money – http://therealasset.co.uk/libor-austrian-gold/. Let bad business decisions be punished, ‘Too big to fail’ has become classic conventional wisdom needing to be undressed. As John Allison (a decent bankers!) of BB&T say, ‘don’t believe any of it!’
but the debate needs to centre on getting the state out of banking and money Harry J
Banking yes, but ONLY government has any business creating government money – that which is required to pay taxes and fees – and it should be inexpensive fiat.
As for private debts, we should leave that to the private sector to develop money solutions. That might include PMs but also common stock, futures contracts, store coupons, “service backed money” or anything else. Fiat would always be an option too for the payment of private debts.
Coexisting government and private money supplies is implied in Matthew 22:16-22 (“Render to Caesar…”). We have been very foolish to ignore that principle.
“but the debate needs to centre on getting the state out of banking and money – ”
Au contraire. Money should be a public utility. There should be a well regulated system of public and private banks with latter providing well defined services for a fee.
Economist quote: “Where the only motive was greed, the individuals directly involved in fraud should face jail.”
What other motive is there for the banks to exist at all? Everyone knows that this is their ONLY motive – but pretty hard to prove an emotion in a court of law. I can see it already, “Oh but I was trying to save the bank for the good of our customers. Personal gain wasn’t the issue”. Sigh.
LIBORFEST TV: Paul Tucker, Deputy Governor, Bank of England – UK Parliament TV – Treasury Select Committee
4.30 pm (London time) 11.30 am (Eastern).
Here’s the link for Parliament TV:
Question of Mr Tucker’s testimony regarding the infamous internal memo re: telephone chat between “Legs” Diamond and the Deputy Gov…will Tucker provide cover for “Legs” and admit essentially that the call “could have been interpreted as being ambiguous” about what Barclay should do about keeping LIBOR rates down. Fun to watch the Elite squirm when set against each other.
Yves, thanks for calling the .01% shill Economist on the carpet.
BTW, is Hong Kong still the City in Chinese Drag?
The Economist is pure drivel and swill, and has been for decades.
Elite bankster propaganda at its finest.
My copy of the Economist for July7th – 13th is titled “A giant leap for science” and subtitled “Finding the Higgs boson”. The cover picture looks like a nova with some dude leaping across in the foreground. Must be different covers for different countries (I am in the US).
As a long term subscriber I noticed a major right turn in tone about 3-4 years ago. Maybe a coincidence but I recall a change in editor about the same time.
WT, you “recall.” Your memory serves you well.
Much is made of media elites’ distraction of the “masses” with unlimited low-brow entertainment/news. The elite has its own versions of these distractions, one of which is the pursuit of very expensive/impressive “public” science. It’s important for the elite to view their horizons as essentially unlimited – even more important for purposes of authority. Spending billions to find the “God” particle by smashing bits of matter together with so much energy a serious but small minority of physicists believe it extremely dangerous fits admirably. Very instructive – not only by the Economist’s reckoning is it premature to question the supremacy of London’s (or Wall Street’s/Washington’s) claims, but what could be better than finding “God” as misdirect?
Banksters have one question to answer…only one!
What will happen to them when trust is completely gone?
Answer: They shall be replaced or terminated, for politicians will know then that they’ll be next. And if politicians don’t know by then, they’ll be terminated too; the only question will be how. The voting booth…or some other method best not discussed in sensitive touchy-feely company.
real question=what happens to society..
If more clear cut information was made available to the public about these crooks and less about which blonde got caught drunk and drugged, maybe folks would pay attention.
The same thing, greed, motivates the media to publish and broadcast trash as motivates the bankers to steal. Greed drives the media as more folks watch and read about sluts than do about dishonest bankers.
This is ridiculous. Yves (bought your book and read it by the way) the solution is very clear, and not going to happen. As William Black explains over and over again, once a criminogenic environment is created, crime will happen. We can identify those places in financial institutions where fraud will lead to the greatest rewards (the LIBOR case, the ratings agencies, etc…)and sadly, the greatest costs to others, and monitor them closely. This is undoubtedly already known, but the monitoring is not going to happen. When diamond can say over and over again…. “when it became known….” about activities that were shouted across a trading room floor (as in they were known.. duh… somehow the supposed serious inquisitors never saw to point this out to the point that they say to Diamond… these activities were know, so do not say that again! This is all fluff. You are right, they will stall, it goes away, and then goes on all over again, especially in the City of London. To hell with the Brits and their posturing. The City of London pays the salaries of every member on that question board, and they know it.
No perp-walks = no change.
Nobody takes The Economist seriously any more. It’s a Neo-Liberal rag.
What should you expect from the double talking magazine like the economist. Remember who it’s first editor was….
Competition on money by these people is considered a sin.
The most important thing Marx said to my mind was that if we are to get anywhere at all in our thinking we must first understand that “everything existing must be subject to a ruthless criticism.” (or close enough).
The Economist is simply a higher income propaganda vehicle aimed at the educated, but politically/economically thoroughly uncritical majority of the broader elite (top 20%) – something anyone from any silo/discipline/specialty/line of business/department might browse in order to fulfill some minor interest or perceived obligation to be “up” on the “global” picture.
Note: I recall seeing an interview with some big wig who had just moved to Newsweek, and he was asked what he’d like to do to take that publication back to the top. He said “The Economist.” That about says it.
Yves. A not-so-implausible scenario:
I’m sure you and others will think me daft, but I have a gathering sense we’re going to see more than a couple of symbolic head-rolls, both in this fiasco and re the Dimon/JPM scandal, which I believe will prove to be related. The longer I follow this crisis, the more it’s like watching a blend of war and theatre. I can almost admire the architects of the seamless shifting in bankster/1% strategy, for example, first appropriating, then destroying the Tea Party while Obama simultaneously destroys any real “Progressive” brand.
And who would’ve thought 2 of the biggest Anglo banks, having each survived a near-death experience and back to huge profitability (even if most of it isn’t real), would choose these last 2 months to so amateurishly founder, to be followed with such high-profile ritual public flogging even while dragging in enough other important banks to sink the system twice if markets were not now so heavily managed? How else to explain “markets” that so perfectly yawn in response to such damaging revelations? No, I smell a “1%” strategic re-deployment involving some TBTF’s in their current form, now despised by everyone on the planet (and, not to be forgotten, by some other, very powerful financial entities). The Oners didn’t get there because they are stupid. Just the opposite, I submit.
1) Early clue. Geithner’s out end of term. His job was to shovel money to banks until he dropped, no matter how hated. He performed “above and beyond”, but somehow “underperformed” on housing and other “people” matters. Gee. What a shame, isn’t that right Mr. President? Ain’t that a shame?
2) The banks blew most of Geithner’s and Bernanke’s largesse and have not been able to legitimately dig out from under the dead weight of the mortgage/housing mess (even demolition, as in the mass program in Cleveland, chews up money and time). Their real balance sheets are hopelessly zomboid. Perhaps an exchange for some degree of “breaking up” those with TBTF status would appeal if the entire rank pile of all outstanding crap of all description becomes cement overshoes for the public, and the now small-enough-to-fail are free to innovate another disaster. So Obama, who like every orthodox un-critic of an economist in the US, believes housing must be the driver of the US economy, seeks a fix that
3) Materially moves the housing situation toward resolution/recovery/expansion by seizing on these developing scandals to, with some new faces around the Cabinet table, after re-election, crudely ape FDR by “breaking up” TBTF’s (in legal legisleese, if not in future fact). And
4)The public interest, of course, is crushed. In exchange for a temporary mini-boom economy and significant “clearing” of the housing market and the polished theatre of “finally” taking real action re Wall Street “misdeeds”, (with a similar script for London) the public goes into the hole for another couple $trillion at minimum with no idea what to expect. Maybe nothing.
5) Geithner, Dimon, Blankfein, Bernanke and many more very senior criminals pass through the magic door to their next station at the money/power trough over the next 2 years in time to miss the next scheduled massacre. Justice, if it comes at all to these scum, will be dispensed by one of their own.
The current Bankster leadership is ready for rotation. It’s a good plan. But it fails to adequately assess and incorporate the extent of the damage done to the global economy – made much, much worse by the refusal (on all sides, sadly) to deal with the reality of what neoliberal globalization has wrought geopolitically – the model whereby China/Asia/BRICS transfer stupendous real wealth annually to “developed” markets in exchange for mountains of paper is just about done.
I get the economist, did not get that cover….
You are right. Especially your point about throwing low-level traders under the bus.
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