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July 06, 2012 1:10 PM The LIBOR Disaster

By Ed Kilgore

I’ll admit freely that for a financial-issues naif like me (I took a college-level Finance course in 1975, which is equivalent to studying Physics in 1775), reading about the LIBOR scandal has been a bit like reading screaming headlines in a foreign language newspaper where I grasp just enough words like HORREUR or CATACLISMO to understand something really big is going on. And there is no question the complexity of the issues involved, as much as any suspected MSM effort to protect the Big Boys of Finance, has inhibited broader coverage. Moreover, as Kevin Drum notes:

[E]veryone’s a little vague about just who got ripped off here. On a listserv I subscribe to, a seemingly knowledgeable participant2 said the victims of the scam include investors who owned floating rate notes, LIBOR-linked CDs, or pay-fixed-receive-floating interest rate swaps; or anyone who traded LIBOR contracts on a U.S. futures exchange and lost money. And let’s face it: that doesn’t sound much like widows and pensioners, does it?

But any scandal that involves, well, the entire global banking network and a system used to set rates on 800 trillion smackers worth of financial instruments at a time when said network and said system has recently sucked the life out of most of the world’s economies is by definition a pretty big deal. As with the 2008 financial disaster, however, it’s not clear whether the most appropriate emotional response is anger or fear—the desire to see many Masters of the Universe sent to the slammer or to give them a lifeline lest they drag the rest of us to the bottom of hell.

But it should be clear that this time around, there need to be repercussions beyond the damage these people have inflicted on the innocent. Whether you join with Robert Scheer to call LIBOR the “Crime of the Century” or simply agree with The Economist that it exposes “the rotten heart of finance,” it is obvious these dudes were casually breaking all the rules in a private game that treated the paper wealth of the planet like Monopoly money. If these confidence-destroying activities are not fully exposed, punished, and prevented from recurring, we might as well all admit we are completely helpless to exert any control over our economic life, now and in perpetuity.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • t on July 06, 2012 1:18 PM:

    Some middle-class borrowers may have benefited from the big boys' games: those with a loan with a floating interest rate pegged to LIBOR, a pretty common practice.

  • paul on July 06, 2012 1:25 PM:

    It doesn't sound like widows and pensioners, unless the pensioners pension fund had or the widow's town had some money invested in something that paid off depending on the LIBOR.

    The other thing that's important to recognize here is the magnifying effect of leverage and swaps. Sure, the difference between, say, 2.75 percent and 3 percent doesn't appear to mean a lot. But when you've promised to pay someone based on the difference between Libor and 3.01, the first number multiplies your expected payment by 26.

  • Robert on July 06, 2012 1:25 PM:

    Will anyone go to jail? I doubt it as the entire system has been corrupted from top to bottom, and there is no one willing to step up and do what is necessary to stop the crimes.

  • c u n d gulag on July 06, 2012 1:35 PM:

    I think we need to reopen "Devils Island!"

    Let's put all the high-level bankers and their political cronies on it - and leave them there for the rest of their hot, sweaty, thirsty, hungry, insect-infested, miserable lives.

    http://en.wikipedia.org/wiki/Devil%27s_Island

    But I'm sure I know what the solution will be:
    YOU GET A BONUS!
    AND YOU GET A BONUS!!
    AND YOU GET A BONUS!!!
    EVERYBODY GETS A BONUS!!!!!!!!!!!!!!!

    Listen, nothing says "Disaster Averted! YAY!!!", like a nice 7, 8, or 9 figure bonus.
    After all, dumb luck, is still luck.
    And luck must always be rewarded.

    OY!

  • Hedda Peraz on July 06, 2012 1:36 PM:

    Sexy photos, please.
    Otherwise we cannot waste valuable ink and air time on this sort of arcane stuff!

  • Proudhon on July 06, 2012 2:24 PM:

    Widows and pensioners, yes! Especially pensioners. Many municipalities bought interest rate swaps pegged to the LIBOR. These deals would have sucked even had the LIBOR not been fraudulently manipulated, but toss in fraud and you have a big reason why infrastructure hasn't gotten built, public employees have gotten fired, and pensions have been cut.

    Notional amount of these swaps is probably north of $400 trillion right now (no kidding!). Lawsuits are, I'm sure, being prepared as we speak. As Joe Biden might say, this is a BFD.

  • Crusty the ex-Clown on July 06, 2012 4:24 PM:

    I'm still going long on tar, feathers, and rails.
    There's gonna be a big demand in the near future.

  • DisgustedWithItAll on July 06, 2012 5:53 PM:

    These pieces of shit have only gotten more arrogant as they were let STUPIDLY let off the hook. That needs to be revisited and no amount of legal rock unturned to get these fucking assholes in jail. NOW.

  • Rob on July 06, 2012 6:07 PM:

    Ed, I may have missed it, but I don't think you or many others have commented on the fact that right before the LIBOR revelations Romney was scheduled to attend a fundraiser hosted by former Barclay's president Bob Diamond. This was reported in the Boston Globe earlier in the week but not picked up elsewhere that I saw. Diamond bowed out of the event.

    http://www.bostonglobe.com/news/nation/2012/07/02/embattled-bank-chief-pulls-out-mitt-romney-fund-raiser/feVhOSPx20n8IhsQEHexxH/story.html

    Romney and Diamond seem like perfect partners and a good example of the scandal that is likely to accompany his proposed policies.

  • Doug on July 06, 2012 8:38 PM:

    The SFO (Serious Fraud Office) in the UK has opened an investigation.

  • zandru on July 07, 2012 1:26 PM:

    "Will anyone go to jail? I doubt it as the entire system has been corrupted from top to bottom, and there is no one willing to step up and do what is necessary to stop the crimes."

    Come on, Robert! "No one willing"? How's about YOU? At least by contacting your elected representatives and letting them know that you are not amused, and demanding action. The rest of us ought to be doing that, too. At least.

    In my not particularly humble opinion, any time we think everything is just hopeless and can never be repaired is a time to step back and think again. There's ALWAYS something you can do, even if it's merely to pick the wild strawberry growing out of the cliff and eat it.