Tag Archive for Matt Taibbi

LIBOR-fixing Scandal

Last Monday, I learned about the fraud around municipal bond dealings by major US banks and financial institutions (my blog entry about the original Rolling Stone article).  It was a pretty big deal, and left me disappointed with the state of ethics among the financial institutions, individual bankers who benefited personally and corporately and the management that permitted it.  I thought that it would be the  “once-in-a-decade” level misdeed, or perhaps even a “Watergate” moment that catalyzed the demand for punishment and reform.

I was wrong.

As I was praising Matt Taibbi for his work in uncovering and reporting on this, he (along with others) were digging up the details of a larger, more pervasive racket, whereby some (perhaps “many” or maybe “all”?) of the 16 largest banks charged with setting the LIBOR (London Interbank Offered Rate) were lying on their rates in order to make a greater profit or to appear to be in a stronger position than they actually were.  Barclays is the first bank to admit wrong-doing, and faces a $450 Million fine.  It is almost certain that other banks will be blamed as well.  The “misdeed of the decade” didn’t even hold the record for two weeks.

The LIBOR is a base rate upon which many financial products ($360 Trillion worth, according to the articles) are priced.  These include credit card rates and some mortgages–things that impact end consumers.  But beyond that, financial institutions have the responsibility to behave in accordance with law and regulations, and the type of manipulation carried out here is inconsistent with trust-worthiness.  What does it mean when banks cease to be trustworthy?

John Gapper, in an editorial in Financial Times called “Trading Floor Culture No Longer Acceptable”,  castigates the “if-you-don’t-get-caught-it-isn’t-wrong” mentality that seemed to have been rewarded in the banks’ trading operations, the breeding grounds for the current crop of chief executives.  He suggests:

An obvious start would be to clear out the investment bankers who now run universal banks… They may be honourable individuals but, as a group, they symbolise the relentless ascendancy of the securities trading floor.

“It would be a very good thing if an awful lot of people lost their jobs in a lot of banks,” says one former bank executive. “Not because I wish them ill but because only by making many examples will you get through to people that this is a very important business.”

He goes on to note that such an outcome is unlikely, given the entrenchment of such forces, their embedded nature in “too big to fail” institutions, and their being “remarkably immune to shame.”

Self-regulation appears not to be working.  The existing government regulation appears not to be working (in a timely fashion–these events appear to date back to 2005).  While $450 million sounds like a lot of money, Barclays made $9.1B in 2011, so the fine amounts to less than a nickel on each dollar of profit, for just one year, when it sounds like the larceny went on for five or six years.  We need greater accountability within the financial segment.  I favor a return of the Glass-Steagal act.  And maybe our legislators need a subscription to Rolling Stone to keep up with the latest financial investigative journalism.

The Bond Market, Rolling Stone, and Feeling Let Down

Bottom Line:  Matt Taibbi of The Rolling Stone has broken a powerful story about fraud (“fixing” auctions in the municipal bond market) by big investment banks stealing from municipalities.  It also implicates politicians accepting bribes.   It’s worth a read, and also asking “Why are we hearing about this through an entertainment magazine and not the financial press?”

[I’m still working on the “Alternatives with a Social Return for your Bond Investments” post as part of my Mission Related Investing for the Rest of Us series, but this post preempted that one.]

Image from the original article

Image from the original article

The Rolling Stone has a powerful financial investigative journalism piece in the July 5, 2012 issue called “The Scam Wall Street Learned From the Mafia.”  It details a trial in New York with the conviction of 3 “bit players” in what appears to be a routine practice among the larger investment banks (“not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more”) of fixing the bids on the interest rates that the banks offered cities and states across the country for the bonds they sold on the cities’ behalf.  Instead of letting the highest bidder win, the banks conducting the auction would provide guidance to the bidders, telling them the minimum bid they would need to win the auction, and in other cases, asking potential bidders not to submit real bids (in exchange for the opportunity to win an uncontested auction elsewhere).  The winning bidders would provide kickbacks to the banks on unrelated transactions.

Given the size of these dollar amounts, even a small rate difference (the examples in the article were about .04%) makes a huge dollar difference, money taken straight from the depressed city coffers, fattening the profits of these banks.  The article makes the point that it was so common that the bankers had even stopped remembering it was wrong.  They carried on discussions on phone calls they knew to be taped.  Even the defense at the trial was something along the lines of “Hey, maybe this was the fair price.  How do you know?”

So, today I’m feeling let down:

  • Let down that the banks would resort to this level of criminality.  (Here, I especially include GE, in which I am a shareholder.)
  • Let down by the financial press and mainstream media.  Why am I hearing about this through The Rolling Stone?  Can the entertainment press really do a better job of covering financial investigative stories?  Maybe they can.  Author Matt Taibbi’s previous article on “The Real Housewives of Wall Street” was another memorable expose on people with dubious credentials claiming TARP funds.
  • Let down by Bill Richardson, former Governor of New Mexico and Democratic Presidential candidate.  He is cited in the article as taking $100,000 in campaign contributions (to his PAC) and subsequently awarding $1M contract to the firm  (“Tell the big guy I’m going to hire you guys,”) while paying a second firm to actually do the work.  I’d met Gov. Richardson on the campaign trail, and been impressed enough to make a contribution to his campaign.  Guess I am not the best judge of character.

Changes to make things better

  1. Public funding of campaigns (whoa, subliminal slip there….  I’d originally typed “auctions”).  The Richardson example is yet another of how the need for campaign fund raising is corrupting the business of government.
  2. Stronger enforcement of these laws, with greater penalties to the banks (and potentially splitting them up so that if we needed to wind down a bank because of its criminal behavior it can’t claim that doing so would pull the economy down with it.)  Personal liability needs to be increased somehow as well, though I’m not sure how.
  3. Moving to a different/more transparent auction format.  “Sealed bid, highest bidder wins” auctions can be subject to strategic bidding with companies understating their real value in order to try to minimize the price they pay for a winning bid.  If they understate it by too much, they can end up losing to a firm that values it lower.  Google uses a second price bid system for their Adwords.  Under that scheme, each bidder has the incentive to bid his or her true value for the good, knowing that whether they win depends on that, but the price paid depends on the competitive bidders’ values.  Ironically, the bid shaving described in the article is almost the same effect that moving to a second price auction would have (the winning bidder would pay the price of the second highest bidder).  EXCEPT:  1)  The firms need to know the rules of the auction so that they submit their real values as bids and 2)  NO WAY should some priviliged bidders be permitted to see the bids of others prior to the close of the auction.