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.