Good morning monkeys,
Last week, I discussed Stiglitz's arguments with respect to adequate punishments for bankers who manipulate the system, as it were. You can find the article here. It was a 4th of July article, so there's a good chance you haven't taken a look at it yet.
This morning, in light of the recent LIBOR scandals, I came across on article on Naked Capitalism in which Yves Smith takes a look at how The Economist, a fairly well-respected publication, can never really make up its mind when it comes to bankers, or as the publication puts it, "banksters".
You can check out Yves' article here.
So what's the deal here? The Economist is an English publication, headquartered in London, and in case you've been living under a rock, London has been the epicenter for the recent LIBOR scandals. More info on that here. Although I was interested in seeing The Economist's take on the situation, I wasn't interested enough to reneg on my very American Independence Day plans in order to keep up with the news over the last several days. Thankfully, Yves takes care of that for us...
To put it bluntly, The Economist has always had the reputation of taking questionable stances when it comes to banking. Here they argue the following: that a comprehensive investigation ought to take place, and those who benefitted directly (read: profited) from the LIBOR scandal need to be jailed. And secondly: finance needs to be run differently.
To the first claim, I buy the argument that Yves purports: that it is nearly impossible to tell who benefited directly from the LIBOR fixing scandal. Why? Because profits are disseminated throughout the bank, from senior executives to junior bankers. What this means is simple: even if folks were to be jailed, the evidence would likely only support the incarceration of a few individuals, even though many people were involved. Witch-hunters who really wish to prove that finance is corrupt through and through would want to see anyone and everyone involved in the scandal punished, and that is simply an impossibility. What could represent the rotten core of an industry, and I'm not saying that it does, will at most be seen as the resignation (and although it's unlikely, perhaps incarceration) of a few individuals at most. This would only demonstrate the evil ways of select individuals, not of the bank necessarily as a whole, or of the industry.
So to the second claim...finance needs to be "run differently". The Economist argues that splitting retail and investment banks (similar to many arguments we've had on here about Glass-Steagall) on moral grounds is weak. Not so sure about that -- I think it's one of the best solutions to the problems we're facing in the financial services industry, but whatever. And LIBOR needs to be set under the supervision of a regulator, not a trade body (in this case, the British Bankers' Association).
Yves goes on to show that The Economist had an interesting take on the crisis, arguing that the subprime market was falling apart due in part to overregulation in the United States, which is interesting given they make a big for regulation over LIBOR.
Naked Capitalism wraps the article up by saying that, as an investigation takes place, the public is sure to become more and more outraged at the situation. He references the Proctor & Gamble derivates scandal of 1996, wherein someone representing Bankers Trust was quoted as saying "Funny business, you know? Lure people into that calm and then just totally fuck ‘em.".
...typical banker behavior.
What do you guys make of the LIBOR scandal? What's going to happen in the coming months? Is The Ecomonist right, or Naked Capitalism? I tend to favor the side of Naked Capitalism here.
My problem with all of this is how long it took regulators to do anything about it. I remember reading an article on manipulated LIBOR rates months ago, sometime during winter. It shouldn't take regulators 6 months to get their heads out of the sand and start running.
I also wouldn't be surprised if some of the "regulators" were involved in the market manipulation. A regulator who used his/her position of power to affect the rate should be punished much more harshly than a banker.
That said, should junior bank employees be punished if they had knowledge of the manipulation? I have a feeling that we might see some scapegoating.
In regards to punishing people who "benefitted" from the scandal, I think laying down fines on board members and C-levels should be an option. If you are an executive or board member of a public company, it is part of your duty to ensure employees aren't committing crimes using the company's name. Good corporate governance is something many businesses have been lacking for years.
This will likely end up like the bailout of 2008-09. The scale is simply so enormous that inaction will serve as a general pardon. Why? Because this isn't just the LIBOR itself and the rates the banks may have borrowed at a few basis points lower than the 'market rate'. Nominally, untold trillions are likely based on the LIBOR via derivatives which could equate to hundreds of billions in real losses/gains. If a portfolio manager bought interest rate protection from an insurance company at a rate of LIBOR+0.5%, he or she has been affected by a manipulated rate even though neither party is involved in setting the LIBOR.
And the real twist about the situation, as The Economist points out, is the asymmetrical nature of liability. Meaning the banks involved may have to pay out on losses they have indirectly caused, but may be unable to expropriate/claw-back gains from traders on the other side.
That said, those stupid enough to have recorded conversations/requests to manipulate the LIBOR stand a good chance of indictment/punishment. Although regulatory bodies have been largely captured, to maintain any legitimacy with a lay public, they have to prosecute obvious violations, even if they don't want to.
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