Who are the victims of the latest financial scandal? We have learned how major banks manipulated key interest rates used in hundreds of trillions of dollars of transactions each year. I am reminded of the Monty Python sketch where John Cleese as the "Merchant Banker," cheerfully answers his phone, saying "Ah, Mr. Victim..." and then offers Mr. Victim a deal, but noting: "We will need ... deposited in our vaults your three children as hostages, and a full legal indemnity against any acts of embezzlement carried out against you by any members of our staff in the normal course of their duties."
Traders at Barclays were not much more subtle, according to smoking-gun evidence detailed in the non-prosecution agreement signed recently with federal prosecutors. The traders asked each other to report lower or higher London InterBank Offered Rates (Libor) and Euro Interbank Offered Rates (Euribor) as favors to help their own trades or to help friends at other banks. They said things in email like: "Really appreciate ur help mate," and "very important that the setting comes as high as possible.... thanks," and "I know a big clearer will be ag[a]inst us... and dont [sic] want to loose money [sic] on that one," and "seriously, thanks a million dude."
Apart from using poor grammar and spelling, they were not careful like John Cleese's character to keep their misconduct on the phone. According to the prosecution agreement, there was gaming of rates, high and low, to make profits on trades, and then, after the worldwide financial crisis hit, efforts to push rates lower, so as not to admit higher borrowing costs than the other banks.
Everyone is waiting to see who will get prosecuted next, including other banks (and for other banking scandals as well -- witness the HSBC hearings earlier this week). However, we should not lose sight of the potentially vast numbers of victims of the scheme -- and so far the victims have been left out. Barclays received a deal rewarding it for its "extraordinary" and "extensive" cooperation. In addition to committing to future cooperation with authorities in the U.S. and the U.K., Barclays also paid a $160 million penalty to the U.S. Treasury, $200 million to regulators, and a fine to U.K. regulators.
Hundreds of trillions of dollars in trades rely on those rates -- so do student loans, mortgages and credit cards. Who is following the money? While the U.S. Department of Justice announced "Barclays is paying a significant price," the non-prosecution deal did not provide anything to the victims. Prosecutors often create vast restitution funds to compensate victims -- they sometimes dwarf the fines paid to the government. The billions of dollars in restitution paid by companies entering federal deferred prosecution agreements since 2001 is almost as large as the total fines. Prosecution agreements with Adelphia, AOL, Beazer Homes U.S.A., Bristol-Myers Squibb, Computer Associates and many other firms farther down the alphabet created restitution funds in the tens and hundreds of millions of dollars.
Perhaps prosecutors are for now focusing on holding employees and other banks accountable. Victims have a right to intervene and be heard if a case is filed in a court -- but the Barclays deal was not filed in a court. It can be hard to obtain restitution from the likes of Bernie Madoff. If the company collapses into bankruptcy, much of the money may be gone, leaving assets like sports cars, jewelry, and country club memberships to be auctioned off. Yet Barclays is in no such dire straits.
Maybe it will be hard to calculate harm to so many victims of different kinds. However, securities and antitrust and other financial cases typically require complex economic analysis. If bankers had not been manipulating them, what would these rates have been? The agreement notes "even very small movements in those rates could have a significant impact on the profitability of a trader's trading portfolio." There are vast numbers of potential victims.
Having been left out of government settlements entered so far at least, potential victims are rushing to file massive lawsuits on their own. In the past few days, a growing pile of class action lawsuits have been filed, including multiple antitrust class actions, and other claims including civil RICO racketeering claims and securities class actions. They of course rely on the smoking-gun evidence that Barclays provided to prosecutors.
The City of Baltimore leads one class action suit against the banks that set the Libor. Nassau County, New York says the rate-setting could have cost them as much as $13 million. Small community banks have also filed suit. Still others may come forward once they decide if they were harmed and triggered by Barclays own confessions. After all, Barclays formally admitted its responsibility for its conduct in the non-prosecution agreement -- although it did not plead guilty to a crime. Time will tell how these civil suits fare.
The criminal prosecutions of the other big fish aren't the only legal dramas that will be worth watching. These civil suits may be a sight to see. If the suits succeed, the fines may make the hundreds of millions already paid look like small potatoes. Let's watch as Mr. Victim comes back calling on the Merchant Banker.
http://dealbook.nytimes.com/2012/07/19/libor-scandal-shows-many-flaws-in-rate-setting/
The Libors are set every weekday around 11 a.m., a process overseen by the British Bankers’ Association. At that time, a group of big banks report how much interest they would pay to borrow money from other institutions over different periods and in different currencies. But the precise rates have little basis in reality. Libor was intended for an international lending market that has long since past. The whole concept of interbank lending died after Lehman Brothers collapsed. Now, regulators and investors are questioning whether the benchmark should play any role in determining borrowing costs."
They helped those in debt, at the expense of creditors. They should get a medal.
I put a petition up on www.WhiteHouse.gov asking Eric Holder to fully staff the Mortgage Fraud Task Force Schneiderman is suppose to be heading up, but I'm having trouble getting the required 25K signatures. If you share my desire for some CRIMINAL PROSECUTIONS, please sign it.
http://wh.gov/O8ed
The mis-quoted rates I have read about were UNDERSTATED, not overstated. Overstating the rate that you expect your fellow bankers would charge you for short-term lending is tantamount to admitting that your peers consider your bank to be something less than 100% solvent, or to be in some sort of shaky financial condition. No banker would be that dumb.
I am all for these civil suits. However, unless some of top dogs face serious criminal penalties, you can be sure that few lessons will be learned. Paging Eric Holder . . .
I put a petition up on www.WhiteHouse.gov asking Holder to fully staff the Mortgage Fraud Task Force the president talked about in his State of the Union back in January. It needs 25K online signatures before August 10th, then the White House will respond.
http://wh.gov/O8ed
Basically, its the achilles heel of any market: Large actors in the market can (and always do) nudge the markets off balance to create arbitrage opportunities for themselves, and if the player is big enough, it doesn't even have to be stealthy about it.
The net result is that the actions of the big players utterly swamp the "little guys."
All the technical trading algorithms and data in the world mean NOTHING when the real cause of market movement is because some gorilla investor has his thumb on the scales.
And this is the case whether we're talking corn, oil, petrodollars, stocks, bonds, pork bellies, or mortgages.
Unregulated markets, plutocracies, crash and burn, impoverishing the 99%, and enriching a few robber barons.
"When economic power became concentrated in a few hands, then political power flowed to those possessors and away from the citizens, ultimately resulting in an oligarchy or tyranny." John Adams
Thomas Jefferson, "I hope we shall crush ... in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country".
"The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the Bankers in the rear. Of the two, the one at my rear is my greatest foe.. corporations have been enthroned and an era of corruption in high places will follow, and the money powers of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in the hands of a few, and the Republic is destroyed. Abraham Lincoln
as usual from prison.
(Fanned)
The Banksters have won, we all know it.