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LIBOR - Insider Trading on a Massive Scale

Wednesday, 01 August 2012 10:26 By Paul Jay, The Real News Network | Interview and Video

Stephany Griffith-Jones: Major banks fixed interest rates to make short term profits and look stronger than they were.


TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay, coming to you from Baltimore.

And if you're in Baltimore or most American cities—in fact, most cities around the world—you're unlikely ever to have heard of something called the London Interbank Offered Rate. But LIBOR has become the center of the newest banking scandal. And if you're in a place like Baltimore, it might mean the closing down of recreational centers and underfunding for schools. Now, I'm not suggesting this is the primary factor for either of those two things, but Baltimore and many other American cities have apparently lost millions of dollars in this LIBOR scandal.Now joining us to talk about just what the scandal is, how it works, and what we might do about such things is Professor Stephany Griffith-Jones. She is the financial markets director of the Initiative for Policy Dialogue at Columbia University. She's published widely on the financial sector and its reform, especially focused on regulation, as well as international finance reform. Her latest book, Time for the Visible Hand, was coedited with Professor Joseph Stiglitz and José Antonio Ocampo. Thanks very much for joining us, Stephany.

STEPHANY GRIFFITH-JONES, FINANCIAL MARKETS DIRECTOR, IPD, COLUMBIA UNIV.: Pleasure to be with your very good program.

JAY: Thank you. So let's first of all talk about how this thing works. Now, if I understand it correctly, every day the various big banks kind of negotiate with each other or tell each other what they're paying for interest on interbank loans, and then some average is supposed to be taken, and then that average becomes like a benchmark which affects prime rates all over the globe. And we're told by The Wall Street Journal maybe $800 trillion worth of derivatives and loans are wrapped up in all of this. So, first of all, am I describing the process correctly? And then what went wrong with this process?

GRIFFITH-JONES: Yes, you're describing it correctly. This is an interest rate which is fixed by 16 banks in London, and it is supposed to determine—I've heard figures of around $500 trillion of transactions a year. I think it would be interesting to stress that this is far more than the total production of goods and services over all the globe. So the financial transactions that are affected by LIBOR are much more than what all the people produce on this planet.The way it has been fixed is based on evidence provided by the banks themselves, who tell us they tell each other every day in the morning how much they have to pay for obtaining funds on the interbank market. Now what has come out is that certain banks, and probably most of the large banks in the world, have been rigging and lying for two purposes. Firstly, they did it from 2005 to about 2007 with the sole purpose of making more short-term profits. So they were lying—if this is true—lying and cheating so that they could make money illegitimately. And this was increasing, then, the cost of loans to people like you and me who have mortgages, who have credit cards, who have kids' student loans.And then, in the crisis, they did something which was the opposite, which in some broad way could be a little bit more justified (although it is never justified to lie): they pretended that they were borrowing cheaper than they were, because they were trying to improve their image in the middle of this terrible financial meltdown, which, of course, the financial system itself had caused.So we have these two moments. But particularly the first one is what Robert Reich has called, very rightly, a sort of insider trading on a massive scale.

JAY: Okay. And so let's break down, first of all, how did they make money out of lowering the rates. How did that make them money?

GRIFFITH-JONES: Well, you know, when they lowered the rates, it was more to present a better image during the crisis, because they were afraid that if the bank, for example, Barclays, was seen as having a lot of problems, they would have to accept funds from the government, and they might have to have more directives, and there could be even a threat to the bank itself. So they were trying to offer a better image to the world than was the reality.

JAY: There's been a lawsuit launched against these big banks by some American cities—in fact, being led by Baltimore, and where we're coming from—and they're alleging that the banks deliberately lowered rates in order to make them look stronger, the banks, in better position. And the banks are denying this. They said: why would we deliberately lower rates? Because we would make less money if we lowered it, and our competitors would be made to think we were weak. So why would we do this? So how do you answer the banks when they say it wasn't in their interest to deliberately lower rates?

GRIFFITH-JONES: Well, when the crisis got very bad, everybody was very desperate, and there was a possibility of financial meltdown, banks going bankrupt. And some banks, like Barclays, wanted to keep independence from getting bailouts from the government, because that could have conditions. So they were desperately trying to portray themselves as financially very strong. So there was a clear rationale for doing it. There was also a systemic rationale, and that is that it was in nobody's interest for the whole system to crash. So some of the comments from the regulators may have been well intentioned, but it is still no case for lying. And the other thing is, if the banks had been properly capitalized, if instead of paying themselves all these very high salaries and bonuses, if they had put all these profits into capital, this risk wouldn't have happened.

JAY: Right. So let's just go—now, the banks are also accused of raising the rates. Now, I understand why raising the rates artificially in a manipulative way would make them more profit, 'cause they're making more money on the loans. But I don't understand how, for example, in cities, when rates went down, in theory they would have been paying less for new loans. But this has to do with the kind of protection insurance that cities took out, does it?

GRIFFITH-JONES: Well, I think what happened is that this LIBOR rate determines contracts on derivatives, where banks can be on either side of the game. So it might have been convenient at a particular time for them to lower the rate and at other times to increase the rate. I mean, this is in the first phase of the crisis, when they were doing this manipulation purely for short-term gain. And this is a really quite—completely unacceptable that they should be raising the interest rates that, say, the city of Baltimore had to pay, or that the 900,000 mortgage holders that are affected by LIBOR in the United States had to pay, or that some poor developing countries make in borrowing on a major international loan, just so some traders in London and in the city of London and in Wall Street can make some outrageous profits. I mean, we cannot run the world economy on this basis. And that's why ordinary people are outraged, especially because this is not the first scandal that we've heard. There have been a number of scandals. You had one in JPMorgan recently as well.

JAY: Right. Now, the issue of what to do about this—now, in England, Barclays Bank has actually negotiated a settlement with the British government that's going to cost them several hundreds of millions of dollars, even though they have admitted to no wrongdoing. In the United States it's not clear, other than this lawsuit—which could drag on for years, if not decades, seeing as Wall Street has endless amounts of money to fight cases like this. But at the regulatory level, there seems to be next to nothing really getting done in the United States. In fact, Tim Geithner, you know, President Obama's secretary of the Treasury, he apparently was in on this whole LIBOR thing back when he was at the New York Fed. So how likely are we to see anything from the Obama administration on this? And Congress seems to be completely paralyzed. In fact, if anything, if more Republicans are elected in the next election and Romney's getting even more financing, apparently, from Goldman Sachs and others than Obama is—although I'm not sure why, 'cause President Obama, it's not like he really bucked them much. But the possibility of real regulation, either through Congress or through the Commodity Futures Trading Commission, it seems so unlikely here.

GRIFFITH-JONES: Just in broader terms, I think during the Obama administration and due to the initiative of some very good Democrat senators, like Frank–Dodd and Senator Dodd—sorry—and Senator Frank, we've had the Dodd–Frank bill, which particularly in its initial design was very good legislation, which implied a number of very important steps forward, like the Volcker rule. But in the way it was finally approved, and above all in the way it's being implemented, it's, of course, all the time being diluted.I think one of the good things coming out of the problems JPMorgan has had and the problems that now arise with LIBOR is that we can see again, if we need reminding, that unless regulation is properly tightened, we will continue to have crises and scandals one after the other, and that this will do real harm to ordinary people, to companies, to businesses, and broadly to the real economy. And so I think this will actually strengthen the hand of those who believe—like Senator Levin, for example, who's now making a call for further investigation on the LIBOR issue, an in-depth investigation. So I think this may actually, hopefully, tilt towards better regulation.And I think it is so urgent to do that, because we know that, for example, after the Second World War and as a result of measures like the Glass–Steagall Act, the U.S. had a financial system that worked, it was functional, that gave credit to the real economy, and that there were not these systemic crises.

JAY: But do you think we've reached a tipping point in the sense that there's been such a financialization of the global economy, and the power of what some people call this parasitical capital has become so strong, that the current politics is too dominated by them, we're just not likely to see regulations that matter, and that they're able, as you said, to dilute them so much? I mean, some people are arguing that there needs to be kind of, now, public pressure towards some kind of public banking system so there's some alternative to this sort of blackmail that comes from these big banks.

GRIFFITH-JONES: I think you're right. I mean, I think the financial sector is far too big, far too complex. And so one of the aims that we should have, actually, is to make it smaller and simpler, and therefore less powerful, because it's completely unacceptable, as you say, that they dominate regulators—or at least influence them too much in something that one can call regulatory arbitrage, and that they also have a lot of influence of politicians—but not with all politicians. I think that the attempts by the European Commission, attempts by Dodd–Frank have actually been quite valuable. But we have to prevent the pushback that comes from the banks who do this very, very strong lobbying.But I think, of course, if we have a Republican president, unfortunately, I think this—in the United States, I think that would make things much worse, because it's been the Republican legislators who have on the whole been very resistant to regulation.But I think, you know, we have to have a little bit of optimism of the heart—pessimism of the mind, optimism of the heart, because in the 1930s, good regulation was introduced, and then we had a 30- or 40-year period when the financial system worked very well. In developing countries the financial sector tends to be after all the crises they have had, and there's a strong public—public banks, which they have, works quite well.And I think that business in the United States and in Europe will suddenly realize that if the financial sector isn't fixed properly, isn't fixed so that it doesn't provoke all these crises and it does finance the real economy—.

JAY: Well, that's part of the problem. You know, when I talk to people in business, they don't want to piss off the big banks, 'cause they have to still go to all the big banks to get their loans. So, I mean, it's—anyway, I hope your pessimism of the mind and optimism of the heart—at least your optimism, proves to be rewarded. I ain't seeing it yet. Thanks very much for joining us, Stephany.

GRIFFITH-JONES: Thank you very much. It's been a real pleasure to be on your show.

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 - Insider Trading on a Massive Scale

Wednesday, 01 August 2012 10:26 By Paul Jay, The Real News Network | Interview and Video

Stephany Griffith-Jones: Major banks fixed interest rates to make short term profits and look stronger than they were.


TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay, coming to you from Baltimore.

And if you're in Baltimore or most American cities—in fact, most cities around the world—you're unlikely ever to have heard of something called the London Interbank Offered Rate. But LIBOR has become the center of the newest banking scandal. And if you're in a place like Baltimore, it might mean the closing down of recreational centers and underfunding for schools. Now, I'm not suggesting this is the primary factor for either of those two things, but Baltimore and many other American cities have apparently lost millions of dollars in this LIBOR scandal.Now joining us to talk about just what the scandal is, how it works, and what we might do about such things is Professor Stephany Griffith-Jones. She is the financial markets director of the Initiative for Policy Dialogue at Columbia University. She's published widely on the financial sector and its reform, especially focused on regulation, as well as international finance reform. Her latest book, Time for the Visible Hand, was coedited with Professor Joseph Stiglitz and José Antonio Ocampo. Thanks very much for joining us, Stephany.

STEPHANY GRIFFITH-JONES, FINANCIAL MARKETS DIRECTOR, IPD, COLUMBIA UNIV.: Pleasure to be with your very good program.

JAY: Thank you. So let's first of all talk about how this thing works. Now, if I understand it correctly, every day the various big banks kind of negotiate with each other or tell each other what they're paying for interest on interbank loans, and then some average is supposed to be taken, and then that average becomes like a benchmark which affects prime rates all over the globe. And we're told by The Wall Street Journal maybe $800 trillion worth of derivatives and loans are wrapped up in all of this. So, first of all, am I describing the process correctly? And then what went wrong with this process?

GRIFFITH-JONES: Yes, you're describing it correctly. This is an interest rate which is fixed by 16 banks in London, and it is supposed to determine—I've heard figures of around $500 trillion of transactions a year. I think it would be interesting to stress that this is far more than the total production of goods and services over all the globe. So the financial transactions that are affected by LIBOR are much more than what all the people produce on this planet.The way it has been fixed is based on evidence provided by the banks themselves, who tell us they tell each other every day in the morning how much they have to pay for obtaining funds on the interbank market. Now what has come out is that certain banks, and probably most of the large banks in the world, have been rigging and lying for two purposes. Firstly, they did it from 2005 to about 2007 with the sole purpose of making more short-term profits. So they were lying—if this is true—lying and cheating so that they could make money illegitimately. And this was increasing, then, the cost of loans to people like you and me who have mortgages, who have credit cards, who have kids' student loans.And then, in the crisis, they did something which was the opposite, which in some broad way could be a little bit more justified (although it is never justified to lie): they pretended that they were borrowing cheaper than they were, because they were trying to improve their image in the middle of this terrible financial meltdown, which, of course, the financial system itself had caused.So we have these two moments. But particularly the first one is what Robert Reich has called, very rightly, a sort of insider trading on a massive scale.

JAY: Okay. And so let's break down, first of all, how did they make money out of lowering the rates. How did that make them money?

GRIFFITH-JONES: Well, you know, when they lowered the rates, it was more to present a better image during the crisis, because they were afraid that if the bank, for example, Barclays, was seen as having a lot of problems, they would have to accept funds from the government, and they might have to have more directives, and there could be even a threat to the bank itself. So they were trying to offer a better image to the world than was the reality.

JAY: There's been a lawsuit launched against these big banks by some American cities—in fact, being led by Baltimore, and where we're coming from—and they're alleging that the banks deliberately lowered rates in order to make them look stronger, the banks, in better position. And the banks are denying this. They said: why would we deliberately lower rates? Because we would make less money if we lowered it, and our competitors would be made to think we were weak. So why would we do this? So how do you answer the banks when they say it wasn't in their interest to deliberately lower rates?

GRIFFITH-JONES: Well, when the crisis got very bad, everybody was very desperate, and there was a possibility of financial meltdown, banks going bankrupt. And some banks, like Barclays, wanted to keep independence from getting bailouts from the government, because that could have conditions. So they were desperately trying to portray themselves as financially very strong. So there was a clear rationale for doing it. There was also a systemic rationale, and that is that it was in nobody's interest for the whole system to crash. So some of the comments from the regulators may have been well intentioned, but it is still no case for lying. And the other thing is, if the banks had been properly capitalized, if instead of paying themselves all these very high salaries and bonuses, if they had put all these profits into capital, this risk wouldn't have happened.

JAY: Right. So let's just go—now, the banks are also accused of raising the rates. Now, I understand why raising the rates artificially in a manipulative way would make them more profit, 'cause they're making more money on the loans. But I don't understand how, for example, in cities, when rates went down, in theory they would have been paying less for new loans. But this has to do with the kind of protection insurance that cities took out, does it?

GRIFFITH-JONES: Well, I think what happened is that this LIBOR rate determines contracts on derivatives, where banks can be on either side of the game. So it might have been convenient at a particular time for them to lower the rate and at other times to increase the rate. I mean, this is in the first phase of the crisis, when they were doing this manipulation purely for short-term gain. And this is a really quite—completely unacceptable that they should be raising the interest rates that, say, the city of Baltimore had to pay, or that the 900,000 mortgage holders that are affected by LIBOR in the United States had to pay, or that some poor developing countries make in borrowing on a major international loan, just so some traders in London and in the city of London and in Wall Street can make some outrageous profits. I mean, we cannot run the world economy on this basis. And that's why ordinary people are outraged, especially because this is not the first scandal that we've heard. There have been a number of scandals. You had one in JPMorgan recently as well.

JAY: Right. Now, the issue of what to do about this—now, in England, Barclays Bank has actually negotiated a settlement with the British government that's going to cost them several hundreds of millions of dollars, even though they have admitted to no wrongdoing. In the United States it's not clear, other than this lawsuit—which could drag on for years, if not decades, seeing as Wall Street has endless amounts of money to fight cases like this. But at the regulatory level, there seems to be next to nothing really getting done in the United States. In fact, Tim Geithner, you know, President Obama's secretary of the Treasury, he apparently was in on this whole LIBOR thing back when he was at the New York Fed. So how likely are we to see anything from the Obama administration on this? And Congress seems to be completely paralyzed. In fact, if anything, if more Republicans are elected in the next election and Romney's getting even more financing, apparently, from Goldman Sachs and others than Obama is—although I'm not sure why, 'cause President Obama, it's not like he really bucked them much. But the possibility of real regulation, either through Congress or through the Commodity Futures Trading Commission, it seems so unlikely here.

GRIFFITH-JONES: Just in broader terms, I think during the Obama administration and due to the initiative of some very good Democrat senators, like Frank–Dodd and Senator Dodd—sorry—and Senator Frank, we've had the Dodd–Frank bill, which particularly in its initial design was very good legislation, which implied a number of very important steps forward, like the Volcker rule. But in the way it was finally approved, and above all in the way it's being implemented, it's, of course, all the time being diluted.I think one of the good things coming out of the problems JPMorgan has had and the problems that now arise with LIBOR is that we can see again, if we need reminding, that unless regulation is properly tightened, we will continue to have crises and scandals one after the other, and that this will do real harm to ordinary people, to companies, to businesses, and broadly to the real economy. And so I think this will actually strengthen the hand of those who believe—like Senator Levin, for example, who's now making a call for further investigation on the LIBOR issue, an in-depth investigation. So I think this may actually, hopefully, tilt towards better regulation.And I think it is so urgent to do that, because we know that, for example, after the Second World War and as a result of measures like the Glass–Steagall Act, the U.S. had a financial system that worked, it was functional, that gave credit to the real economy, and that there were not these systemic crises.

JAY: But do you think we've reached a tipping point in the sense that there's been such a financialization of the global economy, and the power of what some people call this parasitical capital has become so strong, that the current politics is too dominated by them, we're just not likely to see regulations that matter, and that they're able, as you said, to dilute them so much? I mean, some people are arguing that there needs to be kind of, now, public pressure towards some kind of public banking system so there's some alternative to this sort of blackmail that comes from these big banks.

GRIFFITH-JONES: I think you're right. I mean, I think the financial sector is far too big, far too complex. And so one of the aims that we should have, actually, is to make it smaller and simpler, and therefore less powerful, because it's completely unacceptable, as you say, that they dominate regulators—or at least influence them too much in something that one can call regulatory arbitrage, and that they also have a lot of influence of politicians—but not with all politicians. I think that the attempts by the European Commission, attempts by Dodd–Frank have actually been quite valuable. But we have to prevent the pushback that comes from the banks who do this very, very strong lobbying.But I think, of course, if we have a Republican president, unfortunately, I think this—in the United States, I think that would make things much worse, because it's been the Republican legislators who have on the whole been very resistant to regulation.But I think, you know, we have to have a little bit of optimism of the heart—pessimism of the mind, optimism of the heart, because in the 1930s, good regulation was introduced, and then we had a 30- or 40-year period when the financial system worked very well. In developing countries the financial sector tends to be after all the crises they have had, and there's a strong public—public banks, which they have, works quite well.And I think that business in the United States and in Europe will suddenly realize that if the financial sector isn't fixed properly, isn't fixed so that it doesn't provoke all these crises and it does finance the real economy—.

JAY: Well, that's part of the problem. You know, when I talk to people in business, they don't want to piss off the big banks, 'cause they have to still go to all the big banks to get their loans. So, I mean, it's—anyway, I hope your pessimism of the mind and optimism of the heart—at least your optimism, proves to be rewarded. I ain't seeing it yet. Thanks very much for joining us, Stephany.

GRIFFITH-JONES: Thank you very much. It's been a real pleasure to be on your show.

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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