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LIBOR Scandal More Than Fraud - Whole Game Is Rigged

Friday, 15 February 2013 11:11 By Paul Jay, The Real News Network | Interview and Video

Media

Costas Lapavitsas: From multimillion dollar losses by cities like Baltimore to pension fund losses and much more, the LIBOR interest rate scandal shows that such mechanisms must be taken out of the hands of banks and be run in public interest.

TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The Lapavitsas Report on Economics with Costas Lapavitsas, who now joins us from London.

Costas is a professor of economics at the School of Oriental and African Studies at the University of London. He's a member of Research on Money and Finance, and he's a regular columnist for The Guardian newspaper.

Thanks, Costas.

COSTAS LAPAVITSAS, PROF. ECONOMICS, UNIV. OF LONDON: Pleasure to be here, Paul.

JAY: So what have you been working on this week?

LAPAVITSAS: I think one of the most interesting things to hit the news this week is the Libor manipulation case and the fine that has been imposed on the large British bank RBS for manipulating the Libor.

I think we need to talk a little bit about this so that people understand the significance of it, because it hasn't really been widely appreciated by the public.

Now, the Libor is not a real interest rate. It's a benchmark. It's a benchmark that is set privately by the banks and in secret. There's a committee of banks that does that. On the basis of the Libor, a whole host of other interest rates that are charged to people for their mortgages, to businesses, and so on are determined.

Now, the case and the fine imposed on RBS has discovered, has found that actually RBS has been colluding with brokers and others to manipulate the Libor. This is a criminal dimension. And they've been charged. The British government—.

JAY: Hang on one sec. Just for people that haven't followed this story at all, just a little more on why this matters so much.

LAPAVITSAS: This matters enormously for a number of reasons. As I said to you, as I said, this is not a real interest rate; this is a benchmark. If the banks determine the benchmark in an untruthful way, then they can influence a whole host of other prices, and they can influence the receipts they make from people to whom they've lent money and from the various transactions they make in the derivatives markets. For the banks, the ability to manipulate the Libor is a key mechanism to make extra profits, basically. And they've got this ability to do it because they set the Libor privately and in a special committee, which they run themselves.

Now, the British government is making out that this is a criminal act, which it is, of course, because collusion with the aim of making extra profits is criminal. The point is, however—and this is something that the British government wishes to keep quiet—it isn't simply criminality here. It looks as if the entire game is rigged from beginning to end. In other words, it isn't simply collusion and illegality. The game is rotten.

And it is rotten for two reasons, I would argue. First, the banks have got an incentive to present falsely low rates, because they in this way appear to be stronger than their competitors. And the banks have got an incentive to manipulate the rate sometimes up, sometimes down, because they make different payments in this way on their derivatives portfolio. The banks, then, have got clear incentives to manipulate it, and they signal their incentives to each other.

So this committee doesn't work. It doesn't work systematically in the public interest; it works in the interest of banks. This is becoming increasingly clear, and this is going to be big news, I think, in the months to come, because, of course, there are more banks that would be hit—that will be charged fines in the months ahead.

JAY: How did we get to a situation that a group of banks, most of them private, or maybe all of them privately owned, get to determine what is essentially the most influential rate in the globe? I mean, in theory, central banks are supposed to establish rates, I would have thought.

LAPAVITSAS: Central banks establish the rates at which they themselves lend to the banking system. However, there is also a private market for funds. There's the money market. And in the money market, banks interact with each other and work out the rate at which they lend to each other.

This is the most important price in the financial system. It's more important than the rate at which central banks lend to banks. It's the most important financial price. And presumably, in a neoliberal free-market system such as the one we've got today, it ought to be set through the free competition among the financial institutions. It isn't.

And that's the significance of this. This rate is actually manipulated. These banks have got a secretive committee. They work out the rate, which is the Libor. They don't transact at this rate—this is a benchmark. And they announce it on a daily basis. They manipulate it. They handle it. And by manipulate it, they affect all other actual interest rates at which people undertake [unintel.] transactions.

JAY: Now, just to make this concrete for people, a city like Baltimore claims it's lost millions of dollars that could have been spent on schools or roads or housing or whatever, and they've lost this money, they claim, because of this fraudulently set Libor rate. But how does that work? Why is Baltimore out money because of what some bankers are doing on this committee?

LAPAVITSAS: Because the prices Baltimore would have been charged on various loans it took or on derivatives transactions it engaged in—I don't really know the particulars of the Baltimore case, but the prices it would have been charged and the rates it would have been charged would have been false. They would have not have been true rates. They would have been based on the Libor, a premium would have been added to the Libor, and the Libor rate that would have been used as the base for this would have been a false, manipulated rate. And by manipulating it, the banks would have seen to it that money would have gone into their coffers, that their coffers would have gone up. It's a hidden, silent transfer of income and wealth from the public in general to the banks. It's arguably one of the biggest scams in the history of finance.

JAY: And Baltimore's leading a class action lawsuit of various cities, with Baltimore being the lead city, suing these banks to try to recover this money.

LAPAVITSAS: They're right to do so. As I said, I mean, there is obviously outright criminality in some respects, because these banks have been proven to have colluded with one another to handle—they manipulate the rate directly.

But the point I repeat is that criminality aside, it looks as if the entire game is rigged, that the banks actually can know how to handle and manipulate the rate without actually directly colluding with each other. And that's what's wrong about it, and that's what's bad about it, because it shows that the so-called free market in finance simply doesn't work.

I want to stress the importance of this. You see, neoliberalism and free markets, which is the mantra that we've been listening to and hearing for decades, pivots on the banks and the financial system. This is where it's supposed to be free. This is the markets, these are the markets, and the institutions are supposed to be as free as possible. Well, they're not. They're actually managing this rate, manipulating this rate in their own interests. And they are doing it through a private meeting.

You know, Adam Smith wrote more than two centuries ago that when you let capitalists meet in a nontransparent way on a regular basis, then they will do two things: they will defraud the public and they will raise prices. He argued that two centuries ago. Well, there you are. When you let banks meet on a daily basis, privately, without transparency, without public scrutiny, what they will do is to manipulate this key rate, the fundamental rate of the financial market, to make extra profits. That's what they've been doing.

This is one of the biggest scandals, as I said before, in the history of finance. It's about time the public realized what's happening and demanded intervention.

JAY: Alright. Thanks for joining us, Costas.

LAPAVITSAS: Thank you.

JAY: And thank you for joining us on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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LIBOR Scandal More Than Fraud - Whole Game Is Rigged

Friday, 15 February 2013 11:11 By Paul Jay, The Real News Network | Interview and Video

Media

Costas Lapavitsas: From multimillion dollar losses by cities like Baltimore to pension fund losses and much more, the LIBOR interest rate scandal shows that such mechanisms must be taken out of the hands of banks and be run in public interest.

TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The Lapavitsas Report on Economics with Costas Lapavitsas, who now joins us from London.

Costas is a professor of economics at the School of Oriental and African Studies at the University of London. He's a member of Research on Money and Finance, and he's a regular columnist for The Guardian newspaper.

Thanks, Costas.

COSTAS LAPAVITSAS, PROF. ECONOMICS, UNIV. OF LONDON: Pleasure to be here, Paul.

JAY: So what have you been working on this week?

LAPAVITSAS: I think one of the most interesting things to hit the news this week is the Libor manipulation case and the fine that has been imposed on the large British bank RBS for manipulating the Libor.

I think we need to talk a little bit about this so that people understand the significance of it, because it hasn't really been widely appreciated by the public.

Now, the Libor is not a real interest rate. It's a benchmark. It's a benchmark that is set privately by the banks and in secret. There's a committee of banks that does that. On the basis of the Libor, a whole host of other interest rates that are charged to people for their mortgages, to businesses, and so on are determined.

Now, the case and the fine imposed on RBS has discovered, has found that actually RBS has been colluding with brokers and others to manipulate the Libor. This is a criminal dimension. And they've been charged. The British government—.

JAY: Hang on one sec. Just for people that haven't followed this story at all, just a little more on why this matters so much.

LAPAVITSAS: This matters enormously for a number of reasons. As I said to you, as I said, this is not a real interest rate; this is a benchmark. If the banks determine the benchmark in an untruthful way, then they can influence a whole host of other prices, and they can influence the receipts they make from people to whom they've lent money and from the various transactions they make in the derivatives markets. For the banks, the ability to manipulate the Libor is a key mechanism to make extra profits, basically. And they've got this ability to do it because they set the Libor privately and in a special committee, which they run themselves.

Now, the British government is making out that this is a criminal act, which it is, of course, because collusion with the aim of making extra profits is criminal. The point is, however—and this is something that the British government wishes to keep quiet—it isn't simply criminality here. It looks as if the entire game is rigged from beginning to end. In other words, it isn't simply collusion and illegality. The game is rotten.

And it is rotten for two reasons, I would argue. First, the banks have got an incentive to present falsely low rates, because they in this way appear to be stronger than their competitors. And the banks have got an incentive to manipulate the rate sometimes up, sometimes down, because they make different payments in this way on their derivatives portfolio. The banks, then, have got clear incentives to manipulate it, and they signal their incentives to each other.

So this committee doesn't work. It doesn't work systematically in the public interest; it works in the interest of banks. This is becoming increasingly clear, and this is going to be big news, I think, in the months to come, because, of course, there are more banks that would be hit—that will be charged fines in the months ahead.

JAY: How did we get to a situation that a group of banks, most of them private, or maybe all of them privately owned, get to determine what is essentially the most influential rate in the globe? I mean, in theory, central banks are supposed to establish rates, I would have thought.

LAPAVITSAS: Central banks establish the rates at which they themselves lend to the banking system. However, there is also a private market for funds. There's the money market. And in the money market, banks interact with each other and work out the rate at which they lend to each other.

This is the most important price in the financial system. It's more important than the rate at which central banks lend to banks. It's the most important financial price. And presumably, in a neoliberal free-market system such as the one we've got today, it ought to be set through the free competition among the financial institutions. It isn't.

And that's the significance of this. This rate is actually manipulated. These banks have got a secretive committee. They work out the rate, which is the Libor. They don't transact at this rate—this is a benchmark. And they announce it on a daily basis. They manipulate it. They handle it. And by manipulate it, they affect all other actual interest rates at which people undertake [unintel.] transactions.

JAY: Now, just to make this concrete for people, a city like Baltimore claims it's lost millions of dollars that could have been spent on schools or roads or housing or whatever, and they've lost this money, they claim, because of this fraudulently set Libor rate. But how does that work? Why is Baltimore out money because of what some bankers are doing on this committee?

LAPAVITSAS: Because the prices Baltimore would have been charged on various loans it took or on derivatives transactions it engaged in—I don't really know the particulars of the Baltimore case, but the prices it would have been charged and the rates it would have been charged would have been false. They would have not have been true rates. They would have been based on the Libor, a premium would have been added to the Libor, and the Libor rate that would have been used as the base for this would have been a false, manipulated rate. And by manipulating it, the banks would have seen to it that money would have gone into their coffers, that their coffers would have gone up. It's a hidden, silent transfer of income and wealth from the public in general to the banks. It's arguably one of the biggest scams in the history of finance.

JAY: And Baltimore's leading a class action lawsuit of various cities, with Baltimore being the lead city, suing these banks to try to recover this money.

LAPAVITSAS: They're right to do so. As I said, I mean, there is obviously outright criminality in some respects, because these banks have been proven to have colluded with one another to handle—they manipulate the rate directly.

But the point I repeat is that criminality aside, it looks as if the entire game is rigged, that the banks actually can know how to handle and manipulate the rate without actually directly colluding with each other. And that's what's wrong about it, and that's what's bad about it, because it shows that the so-called free market in finance simply doesn't work.

I want to stress the importance of this. You see, neoliberalism and free markets, which is the mantra that we've been listening to and hearing for decades, pivots on the banks and the financial system. This is where it's supposed to be free. This is the markets, these are the markets, and the institutions are supposed to be as free as possible. Well, they're not. They're actually managing this rate, manipulating this rate in their own interests. And they are doing it through a private meeting.

You know, Adam Smith wrote more than two centuries ago that when you let capitalists meet in a nontransparent way on a regular basis, then they will do two things: they will defraud the public and they will raise prices. He argued that two centuries ago. Well, there you are. When you let banks meet on a daily basis, privately, without transparency, without public scrutiny, what they will do is to manipulate this key rate, the fundamental rate of the financial market, to make extra profits. That's what they've been doing.

This is one of the biggest scandals, as I said before, in the history of finance. It's about time the public realized what's happening and demanded intervention.

JAY: Alright. Thanks for joining us, Costas.

LAPAVITSAS: Thank you.

JAY: And thank you for joining us on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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