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Barclays Libor Scandal: Who’s Really to Blame?

Posted by Larry Doyle on July 10, 2012 8:10 AM |

The London Interbank Overnight Rate, aka Libor, is the referenced benchmark rate for only some multiple hundreds of trillions of dollars worth of securities and contracts. As such, the rate is of enormous importance to the markets and global economy. I personally recall beginning almost every day as a trader on Wall Street by inquiring of an individual on the finance desk, “Where’s Libor?”

With the manipulation of this rate rocking the markets, everybody wants to know who’s to blame.  There is certainly plenty of blame to go around.

If we were to listen to Bob Diamond, former CEO of Barclays, we would be inclined to believe that the blame in that organization rested merely within a very small group of individuals. How convenient. Do you think the CEOs of other banks would also like to ring fence this issue to a small group of expendable individuals on selected trading desks? No doubt. 

Are we to believe that a manipulative scheme of this scale is the work of a relatively small number of mid-level execs? Stop it. Talk about taking naivete to a stratospheric level.

The heads of each desk involved in this mess have/had enormous managerial oversight responsibilities. Included in those responsibilities is the review of e-mails which are flagged to detect questionable activities. Should the blame stop there? Not even close. Those managers would be required to report questionable activities to their superiors and the appropriate people within Compliance. At this point, we are reaching into very senior levels of each and every Wall Street bank. Can we stop digging? Not yet.

It defies logic to think that at some point the heads of Compliance and Trading would not have mentioned the manipulation of a rate such as Libor to the highest levels of the organization. Not to do so would be to risk career suicide — the very career suicide these individuals now face.

So with blame now firmly directed at the heads of every Wall Street bank, we should sit back and watch what happens, correct? Nope.

In my strong opinion, the real blame for the manipulation of this rate goes right through the top levels of each and every bank and beyond. Beyond where? Who is really to blame? How far back do we have to go to affix real blame? Let’s navigate back to the late 1990s and the testimony provided by a group of individuals who collectively derailed any sort of meaningful regulation of the derivatives markets. Who were these individuals?

Larry Summers, Alan Greenspan, Robert Rubin, Arthur Levitt, and Phil Gramm with the support of others in Congress and the Wall Street lobby worked to pass legislation in February 2000 that overran then head of the CFTC Brooksley Born’s attempt to regulate the derivatives market. I believe that legislation provided the green light or, dare I say, the necessary cover for the ensuing manipulation of Libor.

With credit to Capitalism Without Failure, I STRONGLY recommend you review the 23:00-27:00 minute clip from the movie Inside Job:

Let’s bring Summers and crew back out for another round of questioning. Let’s also make sure this Libor chapter is included as part of their lasting legacy.

“Raise your right hand and repeat after me gentlemen . . .”

Larry Doyle

Related Sense on Cents Commentary
Barclays Libor Scandal: When Did Manipulation Start? 
Barclays Libor Scandal: How Big Will This Get?
Barclays Libor Scandal: Reports Regulators Knew; Time for Independent Investigation and Eliot Spitzer
Barclays Libor “Price Fixing”: Collusion Is Illegal. . .

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred

    LD,

    Why stop there, the problem started when our gov’t decided to manipulate markets by reconfiguring CPI. This was how the most powerful economic institutions in the world, the Fed and the Treasury, began applying Keynesian economic principles to monetary policy, the genesis of financial reengineering.

    By reconfiguring CPI, almost instantly, inflation was subdued, wage pressures abated and interest rates guided lower.

    Lower rates fueled the housing boom, unprecedented gains in corporate productivity/profit margins and the explosion in the derivatives markets, full employment had no choice but to follow.

    Who needs adequate reserves, rates always go down and asset values always move higher, right? If that’s not enough just slap on a gov’t guarantee and print, print, print.

    LD, on another topic, just how/when did our regulators begin delegating their oversite and audit responsibilites to organizations such as FINRA and SIFMA? How is this any different than ‘a fox guarding a hen house’?

    I find it interesting that the majority of primary dealers are also involved in setting Libor. Smoking gun anyone?

    • LD

      Fred,

      Your point is a good one. The change in the inflation index definitely had an impact on those asset classes you reference BUT the case could be made that the change in the index had an implicit effect.

      I would maintain that the legislation passed in early 2000 and pushed by Summers and team actually provided a de facto explicit effect that led to this manipulation.

      In regard to the self-regulation of the industry, the NASD, a predecessor to FINRA, was formed in 1939. The inherent conflicts of interest present today were evidenced back then as well and throughout its history.

      Why did the industry move to a self-regulatory approach? Supposedly to save money. How much has been saved lately?

  • David Hill

    Until the pockets of those who commit fraud against the people and not the businesses that they work for (Barclays, GlaxoSmithKline etc) are targeted, nothing will change. Why should it if there is no individual accountability only corporate accountability.

    The sooner that individuals are dragged before the courts and are given prison sentences together with having their assets and finances taken from them, the sooner all this malpractice and criminal action will stop.

    Indeed by just fining the companies like Barclays and GlaxoSmithKline (recent largest fraud fine in US corporate history of $3+ billion) we the taxpayer and purchaser of goods/services eventually end up in paying these fines, not the banks or global corporates. Hit the individuals fixated with greed and you will be doing something but without this regulators and governments are on a hiding to nowhere.

    Dr David Hill
    Chief Executive
    World Innovation Foundation






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