Libor-rigging scandal shows failures of deregulation

As much as the Republicans brag about the wonders of deregulation or self-regulation, they do a glorious job of glossing over the hard facts. Bankers being bankers, we have centuries of history to show us that when given the chance to abuse the system they will abuse the system.

But in the GOP fairy tale land, this doesn’t count or it’s dismissed as just one example. The unfortunately reality is that this is more the rule than the exception. Even worse, it costs everyone else a lot of money in terms of mortgage rates paid, interest on your bank account, your student loans and more. In the case of Libor it meant higher borrowing costs for everyone and in extreme examples like RBS, it means taxpayers are actually forking out the hundreds of millions of dollars of fines.

What is especially offensive, though predictable, is that managers knew about this. In all fairness, they probably didn’t care since the entire industry has abused the system for so long and gotten away with it. When you are the law, you probably don’t care how bad the cheat was.

Bloomberg:

rich guy 1% cnbc bankers wall street

Rich guy via Shutterstock

Danziger typically would have swiveled in his chair, tapped White on the shoulder and relayed the request to him, people who worked on the trading floor say. Instead, as White was away that day, Danziger input the rate himself. There were no rules at RBS and other banks prohibiting derivatives traders, who stood to benefit from where Libor was set, from submitting the rate — a flaw exploited by some traders to boost their bonuses.

The next morning, RBS said it would have to pay 0.97 percent to borrow in yen for three months, up from 0.94 percent the previous day. The Edinburgh-based bank was the only one of 16 surveyed to raise its submission that day, inflating that day’s rate by one-fifth of a basis point, or 0.002 percent. On a $50 billion portfolio of interest-rate swaps, RBS could have gained as much as $250,000.

Events like those that took place on RBS’s trading floor, across the road from Bishopsgate police station and Dirty Dicks, a 267-year-old pub, are at the heart of what is emerging as the biggest and longest-running scandal in banking history. Even in an era of financial deception — of firms peddling bad mortgages, hedge-fund managers trading on inside information and banks laundering money for drug cartels and terrorists — the manipulation of Libor stands out for its breadth and audacity.

Can we finally stick a fork in the idealistic right wing idea about self-regulation? As we see time after time, this strange belief is not just limited to the Republicans (or the Tories in the UK) because somehow, both sides have taken this ludicrous idea and made it gospel.

Bill Clinton and Tony Blair (and also, sadly, Obama) have much more faith in this system than it deserves. Or at least I hope that it’s faith and not a blind obsession with the campaign money that flows from the banking industry.

Whichever it is, this also cuts to the heart of the “makers versus takers” load of garbage churned out by Republicans such as Paul Ryan. For ideologues like Ryan who have barely ever worked in the real world (he’s a political lifer) it’s not a complete surprise that he would be stupid enough to believe that Wall Street is made up of “makers.” As anyone with open eyes knows, the rent-seeking freeloaders of Wall Street are anything but makers. They’re takers and it’s not even close.

The big problem here is that people like Paul Ryan enabled real world takers and injected billions of dollars into their hands and thought that it made sense. Enabling them to make up rules on the fly with taxpayer money flowing (thanks to bad Fed policies by both Greenspan and now Bernanke) was just asking for trouble. Talk about naive, wow.

Regulation is not a dirty word but deregulation and a belief in the value of bankers certainly is.


An American in Paris, France. BA in History & Political Science from Ohio State. Provided consulting services to US software startups, launching new business overseas that have both IPO’d and sold to well-known global software companies. Currently launching a new cloud-based startup. Full bio here.

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  • guest1

    They bankers put themselves out of business until regulations(bailouts) saved them

  • Asterix

    Given all of the subsidiary instruments from bonds to loans that had interest rates set by LIBOR, is there enough money in all of the involved banks to compensate those that were defrauded?

    Somehow, I think it’s like the collateralization of mostly worthless mortgages–nobody, not even the Fed has the funds to fix the damage. Perhaps that’s the new game–pull some scam with such devastating effects that the repair costs are unimaginable and let the public bail you out, while you take home your fat bonuses.

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