The crisis is, at its heart, a cultural failure combined with a political collapse. Behavior by bank executives that once was discouraged by a lifted eyebrow created complex structures abetted by an aggressive reading of the statutes—anything not explicitly prohibited was considered permissible. As Mervyn King, governor of the Bank of England, put it, “There was a cultural tendency to be always on one side and always to be pushing the limits.” The crisis almost immediately destroyed the rule of law. Secretary of the Treasury Henry Paulson told The Washington Post in November 2008: “Even if you don’t have the authorities—and frankly I didn’t have the authorities for anything—if you take charge, people will follow. Someone has to pull it all together.” In 2011, Phil Angelides, chairman of the U.S. Financial Crisis Inquiry Commission, summarized the problem: “These banks are too big to fail. They’re too big to manage. They’re too big to regulate. They’re too complex to understand and they’re too risky to exist. And the bottom line is they offer very little benefit.”
Four years after the crisis began, another election is upon us. What have we learned? Where are we now? What are the prospects for meaningful reform of the financial system? Will our debt crush us? Should we let it? Is it legitimate? What comes next? An open discussion of these questions needs to take place now. The health of the financial system, and of our republic, depends on it.
Yet for the bankers, it is still business as usual. In his book, Bailout, Neil Barofsky, the former special inspector general in charge of oversight of TARP (the $700 billion Troubled Asset Relief Program), writes that a major cost of the bailout is the perpetuation of the existing financial system: Paulson and his successor, Timothy Geithner,“hadn’t just saved the banks, they’d also preserved a status quo that was dangerously broken, and in so doing they might have actually increased the danger lurking in our financial architecture.”
Nick Carraway, the narrator of The Great Gatsby, says that when Jay Gatsby tells him their luncheon companion, Meyer Wolfsheim, fixed the World Series in 1919, “the idea staggered me.” Nick says he knew that the Series had been fixed, but he had thought of it as a thing that just happened, the end of some inevitable chain of events. “It never occurred to me that one man could start to play with the faith of fifty million people—with the single-mindedness of a burglar blowing a safe.”
Like Wolfsheim, the big banks have since 2005 fixed a benchmark thought by millions to be beyond manipulation or reproach—the London interbank offered rate. The LIBOR is an average reported by 16 big banks of what they estimate it would cost them to borrow from another bank. It is used to set rates on mortgages, credit cards, and many other personal and commercial loans. The amount of money affected by the rate, at any given time, is estimated at $800 trillion. The British bank Barclays routinely altered its submitted rates to push the LIBOR high or low to benefit bets it had made on interest rate derivatives. That is, it was fixing the result of its outstanding bets. One Barclays executive was recorded as saying, “We’re clean but we’re dirty-clean, rather than clean-clean.” Barclays derivatives traders made at least 257 requests to the bank’s London rate submitters over a four-year period. The emails between Barclays New York derivatives traders and its London rate submitters are stark: “For Monday we are very long $3 m cash here in NY and would like the setting to be set as low as possible … thanks”; “Always happy to help, leave it to me, Sir”; “Done for you big boy”; and “Dude. I owe you big time! … I’m opening a bottle of Bollinger.” Lord Turner, chair of the British regulator, the Financial Services Authority, expressed disbelief at the blatant behavior on the New York and London trading floors: “One of the shocking things about this,” he said, “is that on some occasions, the derivatives trader is not asking the submitter to change his submission on the basis of a hidden phone call or a note that he believes is hidden, but by shouting it across the trading floor.”
A single bank could not have that much effect on a 16-bank average, and sure enough, the scandal has spread. British regulators found that Barclays colluded with other big banks, among them JPMorgan Chase, Citigroup, UBS, Deutsche Bank, and HSBC. The banks seem to have a huge potential liability to those on the losing side of the fixed bets and to those who paid too much interest when the LIBOR was fixed too high. According to the July 7 Economist, “This could well be global finance’s ‘tobacco moment.’ ” Even now, the problems may persist. Federal Reserve Chairman Ben Bernanke told the Senate on July 17 that he “lack[s] full confidence in the rate-setting procedure.” Moreover, “it’s clear beyond these disclosures that the LIBOR structure is structurally flawed.” Andrew Tyrie, chair of the British parliamentary committee investigating the LIBOR, asked Paul Tucker, the deputy governor of the Bank of England, whether he was confident that it was now working normally. Tucker replied, “We can’t be confident of anything after learning of this cesspit.” Lord Turner added, “We would be fooling ourselves” to assume that trading manipulation was limited to trades. “There is a degree of cynicism and greed which is really quite shocking … and that does suggest that there are some very wide cultural issues that need to be strongly addressed.” In June, Barclays agreed to pay $450 million to British and American regulators, and arrests in connection with the LIBOR are thought to be imminent.
by William J. Quirk, American Scholar | Read more:
Photo by Josh Hallett
