While many citizens favor criminal prosecutions of bankers (I recently had a BSchool classmate of Jamie Dimon ask me when he was going to jail), it’s been remarkable how little mention of it there has been in the mainstream media in connection with the Libor scandal (yes, sports fans, price fixing is criminal per the Sherman Anti-Trust Act). This interview of Dennis Kelleher and Felix Salmon by Eliot Spitzer provides a badly-needed counterpoint.
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No good deed goes unpunished, as they say.
Since banks weren’t lending to each other from 2008 onwards and a fictive LIBOR rate had to be synthesized to save the system with the cooperation of the central banks(yes, yes — I know about the earlier two decades of price fixing and the derivatives), it’s kind of beautiful that it’s precisely the banks’ agreeing to do something for the communal greater good” (true, mostly theirs)for once that has got them nobbled.
Couldn’t happen to a nicer bunch of guys. Handcuffs are fine. The Chinese or Iranian approach wouldn’t bother me, either.
Not really. First of all, it is a fraud in which Wall Street was complicit but the real facts are located in London where the Libor is formulated. (It is called the London Interbank Offered Rate and it is published around 11:30 in London.)
Second, it is the month of August and Europe is on vacation. The LIBOR fraud is not making the headlines, for the moment, in Europe either.
Third, it is being nonetheless taken Very Seriously in Europe and, though there will be no media bump-it-with-a-trumpet “perp walks here, there will be indictments. Why? Read further …
One final point: There is also the EURIBOR, which is exactly the same interbank rate for EuroBond rates. It is curious that the two markets that refuse most any regulatory authority should be complicit in the LIBOR fixing but the EURIBOR has known no such fraud.
Is there a “cultural” dimension of cupidity shared between the “cousins” on either side of the pond? Go figure …
‘It is curious that the two markets that refuse most any regulatory authority should be complicit … but the EURIBOR has known no such fraud.’
Want to buy a bridge?
No, JP Morgan, Citi, and BofA are also under investigation, and Citi and JPM look likely to be fingered. The US shoes have not dropped yet.
Ives you have used the term security theatre often. These guys are in fact untouchable. Its all investigative theatre here and they will pay fines that seem mind boggling to the person on the street but are in fact couch change. No admission of wrongdoing and things keep on goings. The fines/settlements will be just cost of doing business and governments “taste” of the biz.
We’ll see. If they call for Congressional hearings on Libor, then we will know that nothing will be done. Congressional hearings are the tell that crimes are going to be swept under the rug.
But the U.S. banks hired their own investigators who found (to use one of Yves’ favorite expressions), mirable dictu, that senior management wss not implicated in the LIBOR manipulation! So it was all low level employees, and the U.S. banks are therefore less culpable than Barclays, in their own minds.
I don’t want to be the first person to say, “Forget it, Yves!”– but these guys are truly untouchable.
I don’t know how the United States and Europe are going to catch themselves, (if they do at all.) Something is probably going to go “Bang” pretty soon, and there will be no prosecution action until the powers that be think that criminal action can not further destabilise the financial system.
This is just another one of those negative feedback loops which characterise the state of play at this time. “All our base belong to them.”
Evicting families from their homes?– Yes we can! Prosecute financial criminals?– This would not be an appropriate time, splutter, mumble, scratch-scratch.
Negative feedback loops are generally good despite the negative connotation. :)
The term you’re looking for is “positive feedback loops”. Negative feedback systems are ones where, for example, given a finite impulse, the system will tend back towards the zero-line. Meaninig that the system is stable in the limited meaning that no finite input can force the output to become infinite.
Positive feedback systems are ones where this fails to hold. Where old inputs of finite values can cause the system output to escape towards infinity until some real breakdown happens. In electronic systems this usually means that the excess current has destroyed a critical component. In economic systems it looks like the exess debt has destroyed the capacity for demand of products for the general public.
Spoken like a true engineer/physicist/mathematician. In the world of financial/economic reporting, negative feedback loops are feedback loops with bad effects (for example a feedback loop that amplifies random noise and makes the system unstable) and positive feedback loops are the good guys.
I guess proximity to money/power and all that.
I don’t know what they *say* in the culture of finance, but when I think of examples of a negative feedback loop in econ, that would be some form of Keynesian Govt spending to counter a recession, the threat of prison to discourage greed leading to fraud, increasing taxes to reduce inflation, anything to counter the Minsky effect of destabilization.
A positive feedback loop would be banks/govt meeting a credit bubble by loosening terms and regulations, and using more exotic ARM loans while reducing interest rates, all tending towards an even bigger bubble/crash.
Another example of a positive feedback loop would be the EU/ECB meeting a recession with austerity demands that reduce output and reduce tax revenue while automatic stabilizers (unemployment benefits) expand, which compounds the crisis, while bond yields go higher until becoming unsustainable.
Maybe this distinction is why Modern Econ is all screwed up? The anti-Keynesian marginalists don’t understand basic applied systems? (I am not a scientist.)
To play devils advocate (and, for avoidance of doubt, I do agree that what happned was criminal), LIBOR isn’t price. It’s an opinion survey. Admitedly, an important one, being REFERENCED in a lot of contracts, but still only an opinion survey. Being referenced is not the same as being the price.
I keep going back to the rating agencies. Ratings influenced price a lot, and in the CDS world you could even argue that they “trade”. Yet even when they were blantantly influenced (bought is a better term), no one in US won a lawsuit against them yet (there’s hoping for one victory in Australia, so we’ll see…).
I do wish that both could be prosecuted successfully (ala throwing a match to profit from bets on it), but I doubt it.
Exactly – as much as I would like to see some of the banksters perp-walked (for plenty of unrelated reasons), I am curious as to exactly what laws were broken in rigging the LIBOR.
I am all for frog hopping the banksters. Even if we threw a dozen or so in club fed, like they did to Milken et al, I don’t think it will change much for regulatory capture, banking venality etc. these have been with us for awhile and are likely to be with us in some form in the future. The proximity to all that jack is just too tempting.
On the other hand, maybe cutting hands and ears for these crimes might deter such theft ….. Nahhhhhhhhh?!
Felix is boot licker for wall street. He is always making the thinnest arguments, in defense of his MEN!
I think a viral YouTube of a Diamond enjoying the benefits of prison “bitchhood” in the shower room at Leavenworth might do much to inspire compliance. Mencken had it right when he said “when a bank fails, the first thing to do is promptly hang the board of directors.” Speaking of whom, there’s the real weak link.
Lawsuits seem to be multiplying, so someone may pay — presumably shareholders or even creditors, though perhaps not the perps as their pockets are not as deep as their employers’.
Perhaps it’s a glimpse of the libertarian utopia, with criminal law enforcement functions of the State gone, replaced entirely by contracts and torts.
Perhaps it’s a glimpse of the libertarian utopia, with criminal law enforcement functions of the State gone, replaced entirely by contracts and torts.
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Exactly.
Warren Mosler said something to the effect that the use of bankruptcy, or even presumably prison, as THE main counter-weight to fraud, is the wrong place for the control or negative feedback loop to be engineered. In other words, we should not plod along merrily with our escalating bank profits until the day AFTER the destruction erupts to then look back for the culprits.
And then after a finance system Crash, which could have been avoided, you don’t wait for the “self-correction” of a total economic and social meltdown to eventually restore stability some day, maybe, in the long run, because “in the long run we’re all dead”.
Libertopia adherents insist that “market forces” are the ONLY necessary deterrent to financial stupidity and malfeasance.
This is also the Minsky/Keen explanation of capitalism trending over decades from caution towards Ponzi Finance, how the stability of capitalism leads to instability, due to growing confidence about risk-taking that only shows up as “mistakes” AFTER the melt-down.
Mainstream neo-classical econ models — including but not limited to Austrians and Libertopians — depict systemic stability and general equilibrium brought about by Mr. Invisible Hand, i.e. the “mob” of short-term traders. This is clearly delusional. It seems to be theoretically logical for isolated examples involving farmers and customers, and simple factories.
Keen and the late Minsky see a not-so-benevolent mob mentality & herd effect, not equilibrium. Even for the simplest neo-classical examples, the Crusoe and Friday economy of coconuts & bananas, he shows were the general equilibrium model is false.
Keen’s aim is to completely re-write econ with mathematical proofs that reflect reality instead of wishful thinking.
William Black has explained in many papers and lectures why a “race to the regulatory bottom” with “market forces” alone as a delayed negative feedback loop encourages encourage wildly-expanding systemic risk and an explosion of accounting control fraud.
I am not a financial expert, trader, or scientist.
I just remembered the name of Wm Black’s wonderful essay on “Theoclassical Economics” on Naked Capitalism. This is about how the Libertopian “faith-based” understanding of econ has come to trump obvious reality, facts, history, and common sense.
I think the fact that “The Invisible Hand”, a single line by Smith, is a metaphor for the God of the Bible, and Jesus vs the Roman Empire-666 and Caesar and the Devil, plays no small part in western society clinging to the neo-classical religion of Markets sans Governments.
That’s too obvious to even bother mentioning, right?
I ma currently reading Upton Sinclair’s 1908 novel “The Money Changers.” Wall Street and big industrialists thinking that they are above the law are hardly anything new. Until we prove them wrong, the bad behavior will continue.
Thanks for that reference. Need to buy that book. Secrets of the Temple – William Greider is also good but u probably have already read it.
Lasky can bring state cases, in which the perps – flight risks because of their non-U.S. status, their bank’s role and ability to move them out of the jurisdiction, their lack of meaningful ties to NY, etc. – can stay at Rikers rather than Club Fed until they squeal on their betters. And squeal they may once their new roommates say, “Limey, I like your brown shoes. Give them to me. And I like your smile. C’mere.”
To your point about the cuffs, Yves. This is the take in the NYT Gotham column by the excellent Michael Powell:
GOTHAM
In the Financial Industry, a Less Scrupulous Class of Lawbreaker
http://www.nytimes.com/2012/08/07/nyregion/in-the-financial-world-a-less-scrupulous-class-of-lawbreaker.html?ref=nyregion
when becomes evident that their boy mitt will be unable to close out the deal with the electoral college say mid october they will come running to the obama administration to buy protection with campaign $$$–ergo silence in DC letting the banksters think biz as usual whether it plays out that way or not
Nothing will come out of this but another big fine. And the crooks are off planning their next heist. History has shown that fines dont work, they are just factored in as a cost of doing business. Some terror must be instilled on the banksters, Some grusome public execution, with thousands cheering the executioners on.
“Are Handcuffs Needed for the Libor Scandal to Register With Bank Perps?”
Yes.
The problem is they have run out of handcuffs – too busy putting them on Pres candidates who protest the banks treatment of poor folk ….
Perfect summary of the State of the Union – one Pres. candidate protects the banksters and gets elected, another protests them and gets thrown in jail.
Cufflinks – yes, handcuffs – no and if you don’t remember that you get cuffed up the side of the head ….
Questions for any experts out there: is collusion in fixing the LIBOR actually illegal? (quite aside from being wrong) Is there anything that stipulates exactly how the member banks are supposed to arrive at their bids? Is collusion in fixing a rate the same legally as fixing the price of a good or service?
I’m just asking.
Time to bring back the guillotine!! That might do the trick!
Wheel these vipers in a tumbril down Wall Street straight to the blade!
Hand-cuffs are necessary. THis LOBOR scandal i just the tip of the iceberg. The “Banksters” manipulated the LIBOR rate down so they banks would (and stock market) would appear healthy. They then borrowed some 16 trillion (under the table money) from the FED so they could collude together to manipulate the XLF and the entire “risk on” trade. Of course, they positioned themselves to benefit from this ride. The sad thing is they lied about the extent of their losses (trillions) and then used the FED to help them cover up those losses. The banks should have come clean with the true magnitude of their losses….but instead they were having too much fun wiping out other investors….and defrauding tax-payers. If anyone questions them, they just say….”well we had to save the system”. Maybe Ben can share a prison cell with Bernie??