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Libor: The Largest Insider Trading Scandal Ever

George Washington's picture




 

Among other things, the Libor scandal is the largest insider trading scandal of all time.

It also shows that the big banks are literally rotten to the core. And see this.

UC Berkeley economics professor and former Secretary of Labor – Robert Reich – explains today:

What’s the most basic service banks provide? Borrow money and lend it out. You put your savings in a bank to hold in trust, and the bank agrees to pay you interest on it. Or you borrow money from the bank and you agree to pay the bank interest.

 

How is this interest rate determined? We trust that the banking system is setting today’s rate based on its best guess about the future worth of the money. And we assume that guess is based, in turn, on the cumulative market predictions of countless lenders and borrowers all over the world about the future supply and demand for the dough.

 

But suppose our assumption is wrong. Suppose the bankers are manipulating the interest rate so they can place bets with the money you lend or repay them – bets that will pay off big for them because they have inside information on what the market is really predicting, which they’re not sharing with you.

 

That would be a mammoth violation of public trust. And it would amount to a rip-off of almost cosmic proportion – trillions of dollars that you and I and other average people would otherwise have received or saved on our lending and borrowing that have been going instead to the bankers. It would make the other abuses of trust we’ve witnessed look like child’s play by comparison.

 

Sad to say, there’s reason to believe this has been going on, or something very much like it. This is what the emerging scandal over “Libor” (short for “London interbank offered rate”) is all about.

 

***

 

This is insider trading on a gigantic scale. It makes the bankers winners and the rest of us – whose money they’ve used for to make their bets – losers and chumps.

The fact that the big banks have committed insider trading on their core function – setting rates based upon market demand for loans – is particularly damning given that traditional deposits and loans have become such a small part of their business.  As we noted last week:

  • The big banks have slashed lending since they were bailed out by taxpayers … while smaller banks have increased lending. See this, this and this

And Libor isn’t the only way in which the banks trade on inside information.  As

Robert D. Auerbach – an economist with the U.S. House of Representatives Financial Services Committee for eleven years, assisting with oversight of the Federal Reserve, and nowy Professor of Public Affairs at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin – provided points out:

Billions of dollars can be made from inside information leaks from the Fed’s monetary policy operations. One necessary step to stop leaks is to severely limit inside information on future Fed policy to a few Fed employees.

 

This has not happened. Congress received information in 1997 that non-Federal Reserve employees attended Federal Reserve meetings where inside information was discussed. Banking Committee Chairman/Ranking Member Henry B. Gonzalez (D, Texas) and Congressmen Maurice Hinchey (D, New York) asked Fed Chairman Alan Greenspan about the apparent leak of discount rate information. Greenspan admitted that non-Fed people including “central bankers from Bulgaria, China, the Czech Republic, Hungary, Poland, Romania and Russia” had attended Federal Reserve meetings where the Fed’s future interest rate policy was discussed. Greenspan’s letter (4/25/1997) contained a 23-page enclosure listing hundreds of employees at the Board of Governors in Washington, D.C. and in the Federal Reserve Banks around the country who have access to at least some inside Fed policy information.

Senator Sanders also noted last October:

A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.

 

“The most powerful entity in the United States is riddled with conflicts of interest,” Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year’s Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.

 

The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves. “Clearly it is unacceptable for so few people to wield so much unchecked power,” Sanders said. “Not only do they run the banks, they run the institutions that regulate the banks.”

 

***

 

The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose “reputational risks” to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates “an appearance of a conflict of interest,” the report added.

The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and

companies that received emergency loans from the Federal Reserve during the financial crisis.

 

[T]here are no restrictions in Fed rules on directors communicating concerns about their respective banks to the staff of the Federal Reserve. It also said many directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. The rules, which the Fed has kept secret, let directors tied to banks participate in decisions involving how much interest to charge financial institutions and how much credit to provide healthy banks and institutions in “hazardous” condition. Even when situations arise that run afoul of Fed’s conflict rules and waivers are granted, the GAO said the waivers are kept hidden from the public.

Whether you want to call it crony capitalism, socialism or fascism, one thing is for sure … this ain’t capitalism.

Postscript: Reich says that the only solution is to break up the big banks and reinstate the laws which separate traditional banking from speculation.

 

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Sun, 07/08/2012 - 21:35 | 2597519 JustACitizen
JustACitizen's picture

Banks aren't rotten to the core...bankers are rotten to the core. Look, when everyone is raving about food-stamp people and welfare folks - asking for something for nothing - just remember - all of these bankers are exactly the same. Only the scale of the demand is different. These boys at Citi, JPMorgue, B-of-f-cking A, et al - they us log paper to plot their demands.

Sun, 07/08/2012 - 20:10 | 2597265 shovelhead
shovelhead's picture

Things were so much simpler when the Mafia ran the neighborhoods.

 

Sun, 07/08/2012 - 21:15 | 2597461 Dr. Sandi
Dr. Sandi's picture

Same guys, bigger neighborhood.

Sun, 07/08/2012 - 18:27 | 2597024 GOSPLAN HERO
GOSPLAN HERO's picture

Hang the bankster scum.

Sun, 07/08/2012 - 17:41 | 2596890 Totin
Totin's picture

But but but Obama was supposed to change things....

Sun, 07/08/2012 - 21:15 | 2597458 Dr. Sandi
Dr. Sandi's picture

 

But but but Obama was supposed to change things....

He did! I challenge ANYBODY to tell us that things aren't WAY different from back in January 2009.

He never promised BETTER, he just promised CHANGE.

Sun, 07/08/2012 - 17:44 | 2596904 Winston Smith 2009
Winston Smith 2009's picture

Ha!  The things he needs to change own him just as they own most other pols who need their big bucks to run brain-dead attack ads at the election events conducted regularly to provide the illusion of representative government.

Sun, 07/08/2012 - 17:25 | 2596844 Winston Smith 2009
Winston Smith 2009's picture

Isn't it amazing how one scandal just leads to another as it's revealed that the entire financial system of the world is as corrupt to the core as a banana republic but with the thievery being much more sophisticated.  It's no wonder why they left the same scumbags in charge after 2008 and don't act to prosecute any of them. Imagine what we'd discover in the courts if they did.

Sun, 07/08/2012 - 16:45 | 2596747 world_debt_slave
world_debt_slave's picture

but, but, it's for the common good.

Sun, 07/08/2012 - 15:46 | 2596655 Gadfly
Gadfly's picture

Sing a song of Bankers, pockets full of lies,

Four and twenty Bankers, hope that you will die.

Hope that you will fade away when you find out,

The whole financial system was rigged, just a con job,

To transfer your money to them, so don’t shout.

“I’ve been robbed, I’ve been had, things are not right,

Open up the bank if you don’t believe me, and you’ll find out.”

When the bank was opened the Bankers began to sing,

“It wasn't a scheme we cooked up, it wasn’t a fraud,

In fact it was sanctioned by the king.”

But the king was in his counting house counting his votes and money,

And the queen was in the parlor eating bread and honey,

And when the whole thing came tumbling down, no one had any money.

 

Sun, 07/08/2012 - 17:46 | 2596910 Winston Smith 2009
Winston Smith 2009's picture

Except the bankers.

Sun, 07/08/2012 - 15:30 | 2596613 Snakeeyes
Snakeeyes's picture

I would argue that Central Bank manipulation of interest rates "for the greater good" and screwing senior citizens is the biggest scandal.

Wny doesn't someone invert a NON-MANIPULATIVE benchmark rate? There isn't one that Central Banks can't manipulate.

So beating Barclays and Deutsche Bank like harp seals may be appropriate, but Central Banks will manipulate anything they can.

http://confoundedinterest.wordpress.com/2012/07/06/libor-fixing-and-the-fed-funds-target/

Sun, 07/08/2012 - 15:44 | 2596648 Gadfly
Gadfly's picture

It could easily be done with a computer and some real inputs.

Sun, 07/08/2012 - 14:57 | 2596563 Joebloinvestor
Joebloinvestor's picture

This is what happens in the UK.

Can you imagine how bad it will be if/when Russia become the "financial center" they seek?

HAHAHA.

Sun, 07/08/2012 - 17:37 | 2596866 Bob
Bob's picture

I dunno.  I'm picturing everybody with their hankies out reciting the Declaration of Independence and a massive hologram of Ronnie Regan hovering over it all.  Liberty totally wins, bitchez!

I think U2 might play that one.

Best ratings ever!

Sun, 07/08/2012 - 14:37 | 2596521 dcb
dcb's picture

the wall street busness model is to control the chain of fraud from start to finish. those with mba and business experience will undersand above, others maybe not so. the same way a car producer wanted to control all the inputs to his product, the wall street form wants to control all the inputs to their product. if you do this there is no reason for each level to detect or do anything about the fraud below.

 

I call it the chain of fraud business model. it is the standard business model of wall street currently

Sun, 07/08/2012 - 20:54 | 2597392 Questan1913
Questan1913's picture

I believe we need to toss aside all the euphesisms we have been spoon fed by the liestream kleptocracy owned media and start employing the language of truth.  That itself will almost rise to the level of a revolutionary act.  Let's start off with always referring to "wall street" as Fraud Street, or even better Crime Street.  And let's see how many you can come up with.  I've got a LOT more.

Sun, 07/08/2012 - 17:16 | 2596800 Bob
Bob's picture

Nice conceptualization.  Vertical integration of moral bankruptcy in the pursuit of value . . . and Mr. Market #wins!  Well, He knows best!

Thank God I'm American! 

Til the pearly gates, at least.  Then I hope I can buy my way in. 

There'll be scalpers, right?

Sun, 07/08/2012 - 14:20 | 2596506 dot_bust
dot_bust's picture

This type of manipulation isn't surprising. After all, the big U.S. banks are all members of the Federal Reserve, which sets interest rates. So, these very same banks constantly trade on that insider information.

In addition, when the Federal Reserve bailed out the big banks, it was simply the big banks bailing themselves out with public funds. Since they're the Fed, they took the money they wanted.

The most outrageous thing is when the TBTF banks said they loaned the money back to the Fed for interest. In other words, they took loans from the public and made the public pay them interest on the loans. That would be the equivalent of my getting an auto loan and telling the supplier of the loan, "You have to pay me $500 in interest every month on the loan that you gave me."

This is the theft that should outrage everyone...but doesn't.

Sun, 07/08/2012 - 14:03 | 2596480 Vegetius
Vegetius's picture

This is nothing new -

 

“The more corrupt the state, the more numerous the laws.”

  Tacitus   

“Crime, once exposed, has no refuge but in audacity.”
  Tacitus   

Sun, 07/08/2012 - 18:50 | 2597075 WmMcK
WmMcK's picture

"Things forbidden have a secret charm."
Tacitus

Sun, 07/08/2012 - 17:06 | 2596791 mick_richfield
mick_richfield's picture

Hey, I like this guy 'Tacitus'.  He oughta run for the Senate.

 

Sun, 07/08/2012 - 21:12 | 2597452 Dr. Sandi
Dr. Sandi's picture

He's too old.

Sun, 07/08/2012 - 14:00 | 2596443 Gadfly
Gadfly's picture

Capitalism has no sense of ethics or conscience; profit is its only motive and ethic.  Its greatest strength is its ability to marshal capital, raw materials, and resources (human and otherwise) and turn these into cost effective products and services to sell in the world market place for a profit (whether you need all this stuff is another issue).  Its greatest weakness is its absolute inability to satisfy human emotional and spiritual needs, or comprehend the finiteness of resources and the mathematical impossibility of maintaining growth forever.

 

What is a bank?  It’s a hustle, a con game, a shell game.  Think about it.  You give them your money and they promise to pay you the “going” interest rate, which is always pathetic and a fraction of what they charge if you ask them to loan you money (if they agree), and which it turns out has been rigged.  Here’s some advice.  Keep your money.  Don't give it to them.  Invest in yourself, your property, or your own business.  If you make it, you’ll be the one who profits.  If you don’t, you won’t have anyone to blame but yourself or the market.  Cheers.

Mon, 07/09/2012 - 20:42 | 2600642 forexskin
forexskin's picture

Capitalism has no sense of ethics or conscience;

slightly disagree - it also requires trust to provide the grease that makes all the little gears turn.

of course, bank's model now presupposes that influence, leverage and deniability substitute for trust; and they don't of course.

that will go on until that cancer finishes infecting the productive economy - i'm seeing that infection more and more, mainly in larger enterprise. small business is too busy sucking wind and working hard to give up traditional business ethics, at least for now... not to mention how expensive lobbying is...

we are so fucked...

Sun, 07/08/2012 - 13:04 | 2596410 ebworthen
ebworthen's picture

Hangings and jail are the only things that will change this.

Otherwise, it's more MSM bread and circuses and decades more of banker thieving.

Mon, 07/09/2012 - 20:35 | 2600625 forexskin
forexskin's picture

Hangings and jail are the only things that will change this.

which of course depends on some majority of americans experiencing real hunger - IOW, not for a while...

Sun, 07/08/2012 - 16:14 | 2596704 Rip van Wrinkle
Rip van Wrinkle's picture

And it ain't just the bankers who should be either going away or being strung up.

 

The politicians and those in the mainstream media who have been giving these shysters cover are equally guilty.

Sun, 07/08/2012 - 12:24 | 2596350 realitybiter
realitybiter's picture

It is such BS that this will not result in every single one of these banks sending 5 or so execs to prison.

6 years ago the DOJ cracked down on chip makers and their price fixing.  Some plea bargained, some went to jail.  But time was given and I doubt there are many execs sharing price data today....How is this different?  DOJ get off your ass!

http://www.internetnews.com/bus-news/article.php/3633676/Samsung+Execs+D...

How is it different?  Oh, I know, chipmakers aren't in lawmakers and the DOJ's pocket.

The irony is that the chipmakers at least provided something vitally necessary and constantly improved their product, ultimately benefitting everyone.  Like your smartphone?  Thank the flash memory makers.  The banks, conversely, have nothing but a history of destruction of capital and impoversishing a sea of homeowners, students, and governments.  Just so that a very few can maintain a lavish lifestyle, whiie lining the pockets of politicians that could never rub two nickels together in the private sector.

Sun, 07/08/2012 - 21:47 | 2597552 andrewp111
andrewp111's picture

Eric Holder isn't going to go after banks. He only cares about race and reelection issues.

Sun, 07/08/2012 - 12:17 | 2596338 automato
automato's picture

The first rule of gambling has ALWAYS been,"NEVER gamble more than you can afford to lose!". Leverage(debt) has been the cornerstone of EVERY economy that ever went bust. When you buy a house with 5, 10, even 20% down you are using leverage to purchase an asset where you are gambling that you will be able to make the payments or at least sell the home and break even at a minimum. Most of us are guilty of having used leverage at least once in our lifetime. It is the fastest way to riches on the way up and the fastest way to insolvency on the way down. Everyone knows this but we gamble anyway and like many a gambler, we encourage others to do the same on the way up and accuse them of being a 'sucker' when they refuse. On the way down we look anywhere but at ourselves for someone to blame claiming,"The SYSTEM is rigged!" or "We were cheated!". Like the WOPPR said in the movie 'War Games', when it comes to leverage,"The only winning move is NOT to play!".

Sun, 07/08/2012 - 12:01 | 2596299 bugs_
bugs_'s picture

How many central banker's wives were "in" on the LIBOR?

Sun, 07/08/2012 - 11:47 | 2596270 Vendetta
Vendetta's picture

Pure corruption to the core in the banking system for decades, say it isn't so

Sun, 07/08/2012 - 11:54 | 2596283 anarchitect
anarchitect's picture

"Reich says that the only solution is to break up the big banks..."

Starting with the central banks.  But I bet that Reich is more than clueless in this regard.

Sun, 07/08/2012 - 20:41 | 2597355 Questan1913
Questan1913's picture

anarchitect,

Yes, you know so much more than he does.  What a fount of wisdom you are!  Many, many thanks!!

Sun, 07/08/2012 - 11:25 | 2596231 swmnguy
swmnguy's picture

It SHOULD be the largest insider trading scandal ever.  But it isn't, and it won't be.  The banksters are way ahead of us in realizing that our finance system is all abstractions at this point.  So if you run into a dead end, you just change the rules.  For most of us, finance isn't very abstract at all.  We either have the money or we don't.  So we don't understand the larger workings of this very man-made system.  We tend to think money and finance obey rules such as those that govern other physical entities, like matter and gravity.  What goes up must come down.  You can change and rearrange matter, but you can't create it or destroy it.

Well, we're wrong and they're right.  They can just keep changing the rules and doing whatever they feel like doing--as long as we put up with it.  It's a man-made abstraction.  As long as we keep playing along, they can do whatever they want.

What puts an end to this will not be a "Black Swan."  If you haven't noticed, the corpses of "Black Swans" have piled up so high it's hard to see over them.  It won't be a "Debt Crisis."  Every "Debt Crisis" currently going on is nothing more than a shakedown of one form or another; for every penny of debt there is a corresponding penny on the asset side, so there's someone to whom it isn't a crisis at all, but a potential windfall.

What will end this will be a loss of faith and participation in the man-made abstract system.  It's like a game of Monopoly.  When one player owns all the property and the other players can't even roll the dice because they couldn't pay what they'd owe no matter what they roll, the game is over.  You can keep the game rolling artificially by giving all the other players some money, but without the ownership, that fix won't last for long.

The Soviet Union collapsed under its own weight when one day, more or less, nobody showed up.  No "Black Swan," no dramatic crisis.  Just...nobody showed up.  That's what it will take to start the process of ending this busted game of Monopoly and moving on to some other system, which won't require infinite growth in a finite world.

Mon, 07/09/2012 - 20:32 | 2600616 forexskin
forexskin's picture

When one player owns all the property and the other players can't even roll the dice because they couldn't pay what they'd owe no matter what they roll, the game is over. 

 

or think about it another way - rationing

Sun, 07/08/2012 - 20:28 | 2597310 Questan1913
Questan1913's picture

swmnguy,

Spot on.

Sun, 07/08/2012 - 11:00 | 2596190 rsnoble
rsnoble's picture

So what's the outcome of all of this? Besides a bunch of bank closings maybe?  For starters you'll get a check for 50 cents for a class action lawsuit while lawyers rake in trillions and all the bad guys will get dropped off on Fantasy Island. LOL.

On a serious note this entire planet is looking ripe to blow sky high. Financially and millitarily.

Sun, 07/08/2012 - 11:01 | 2596180 Bob
Bob's picture

Let's see.  The mass media defines what's "news" for the masses.  They're owned by corporations headed by self-dealing pirates exploiting vast sums of OPM to further expand their own power while living like jet setting royalty off corporate tax write-offs supplemented by kingly salaries and "incentives."  Looks like the system works for them. 

Then we've got their fellow self-dealing pirates in the banking industry. which devotes great sums of money on the advertizing that the media depends upon for revenue.   The simplest level of sociopathic self-interest would dictate that corporate news outlets would leave this one alone. 

Of course, there are a few people in the finance industry--which has perversely been annointed the only credible voice of matters financial--who command a platform for whatever views they would like to promote.  How many of those people want this scandal to become a big public issue?

There's a reason that even the vaunted Tea Party idealists in congress aren't making a peep about Corzine, much less the banksters as a group. 

The problem seems to be that the means of crime and the mechanisms for bringing attention to it are owned by the criminals or those who depend upon them for their own enrichment. 

I'm inclined to think nothing is gonna come of this.

Let's get back to things that people should care about, like the Blue-Red Mud Wrestling Championships. 

Sun, 07/08/2012 - 11:07 | 2596199 AnAnonymous
AnAnonymous's picture

The mass media defines what's "news" for the masses. They're owned by corporations headed by self-dealing pirates exploiting vast sums of OPM to further expand their own power while living like jet setting royalty off corporate tax write-offs supplemented by kingly salaries and "incentives." Looks like the system works for them.

________________________

But all of this has to correspond with the US citizen middle class tastes, expectations, longings etc

Corporations are creatures of the US citizen middle class. This is where the corporations find the aggregate demand that give them birth.

US citizen middle class is the king class in US citizenism.

Sun, 07/08/2012 - 19:06 | 2597119 The Watchman
The Watchman's picture

You're annoying anonymous. That must be what the "An" is short for.

Sun, 07/08/2012 - 07:24 | 2596019 Zero Govt
Zero Govt's picture

"...."

Holy Crap! ..is that a dinosaur with arthritis Dimon's riding?

Mogan is just not the 'private' bank frisky filly it's billed as. And daring dashing Dimon more the babe in nappies sucking on the State teet. 'Bang' goes some more illusions of Wall Street

Sun, 07/08/2012 - 06:11 | 2596004 Catullus
Catullus's picture

What would be even better is if the banks involved used the "central banks told us to do it".  That would mean a lot of his buddy economist professor friends (the Fed employs more university professors than anyone other than the IMF and World Bank) are cupable in this.

I wonder if this story doesn't get killed in a week or so.  They're treading down a dark road.  If you ask people what they're most pissed about -- the fact that banks lend out the money that you give them for safe keeping or that they shave a few basis points off an average rate that every other bank has been lying about for nearly a century -- I wonder what response you'll get. 

You don't have to "trust" a bank when you require them to hold 100% reserves of checking accounts.  Every other debt instrument and account with the bank can be fair game.  A bank wants to attract more dollars to loan out?  They'd have to pay a higher interest rate on savings or investment accounts. 

Sun, 07/08/2012 - 04:19 | 2595975 nickels
nickels's picture

Banks are utilities. Make it so.

Sun, 07/08/2012 - 06:02 | 2596001 Catullus
Catullus's picture

Says the person who had power all this week during the worst heat wave in years.  Ask  someone in the Mid-Atlantic if they want their bank to be run like PEPCO.

Mon, 07/09/2012 - 20:28 | 2600608 forexskin
forexskin's picture

waaaaaa

Sun, 07/08/2012 - 02:21 | 2595934 Kimo
Kimo's picture

We earn money the old fashioned way... we steal it.

Sun, 07/08/2012 - 01:38 | 2595910 DavidPierre
DavidPierre's picture

911...THE LARGEST INSIDER CRIME EVER !!!

Sun, 07/08/2012 - 21:09 | 2597445 Questan1913
Questan1913's picture

Excellent post.  Thanks Washington, and Tyler.

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