Long reach of the Libor scandal
Washington’s aggressive stance on the Libor scandal signals ongoing intent to protect US interests wherever in the world they are perceived to be threatened.
The City of London interbank offered rate (Libor) revelations are hardly surprising. After all when the credit bust dawned the immediate reaction of all, the London joint stock banks was to stop lending to one another.
At the time there was much harrumphing in the City about troubled times and uncertainty. But the real reason hardly needed explaining. They did not trust each other.
They were right.
The strangest aspect of the Barclays involvement in manipulating to their advantage the Libor averaging was that it took so long to emerge. When it did break cover it became hard to sidestep the conclusion that many pillars of the City had been complicit in a cover-up. Also, that the other banks kept their mouths shut because they too had been involved in massaging the Libor interbank offering percentages.
Unnoticed still in all the public hand wringing is the obvious presence in the affair of Washington. It is known in very general terms that a portion of the $500 million fine levied on Barclays has been passed along to Washington as their share of the reparations. But there the matter has conveniently rested.
What is very hard for the City to admit is that it was the determination of the United States regulatory agencies to get the Libor rate fixing out into the light of day that saw the skeleton eventually tumble out of the closet.
These United States regulatory and enforcement agencies are currently involved in a purge around the globe, and especially in the Westminster sphere. They are using all the resources at their disposal to round up anyone and any organisation, or in the Libor affair, any collection of organisations, that they believe has tugged at Uncle Sam’s beard.
There is an example right under our noses in the shape of Megaupload’s Kim Dotcom and colleagues who are the target of an FBI extradition warrant based on copyright infringement allegations.
The FBI is only one United States agency determined to bring to book anyone that they believe has gamed what they also intensely believe is their system.
This intervention has been in progress now for 20 years and it began with extradition proceedings on Westminster-sphere arms manufacturers deemed by the United States to be trading with the enemy directly or indirectly. It then extended to insider trading and flurries of warrants were aimed at mid-level traders. Then the warrant net widened to include those like the New Zealand-based Megaupload executives considered to be threatening one of the United States’ strategic industries, in this case motion pictures.
In Washington’s eyes, the City was up to its neck in the credit bust and the ensuing recession. City types have, in their bland way, merely made some polite excuses and then suavely pushed the blame for the blame for the whole affair back on the United States’ own policies, notably those relating to the need to win elections by ensuring that voters can also become house owners.
Even when the City and Washington do agree on the proximate cause of the problem as they do in the fall out from permitting the merging of bank retail arms and their “casino” or the investment side, the City treated them with hauteur. This was exacerbated when Bob Diamond, the spectacularly successful head of Barclays investment operation, took over the helm in London of the entire bank including its High Street presence.
As Washington sees it, the City was the scene of a great deal of the blow-outs that lead to the recession, and this was due to lack of official regulation and supervision. Examples here include the Madoff operation, which had a big presence in London, and most recently the hypothecation over leveraging.
More venomously still, Washington blames the City for allowing AIG, American International Group, again with a big operation in London, to play fast and loose there with its insurance derivatives at gigantic cost to the United States taxpayer, which bailed out the insurer.
The Libor rate had claims to being the world’s primary interest rate benchmark setting, for example, New Zealand floating interest home loans. It set the rate for much of New Zealand’s corporate borrowing.
Washington is quite simply out for blood. Neither has the mood been improved by films with British actors such as Margin Call identifying Wall Street as the beginning and the end of the cause of the bust.
There are also some practical inconveniences associated with the disclosure of Libor manipulation, a rigging which may go back to 2005 or even further. Hundreds of thousands of contracts based on Libor will very likely now have to be rewritten.
The Libor affair obviously has a long run ahead of it, and not only because Washington will ensure that it does.
It is intensely engaging also for chartered accountants who have been saying for years that rate settings as important as Libor’s must be based on an assessment of proven data rather than on unsupported, generalised and even unfounded estimates. It is exactly this approach which leads to partial, self-serving assessment contributions.
The affair signals the end of the historical ethic of the City based on the value of a handshake and of an individual’s word being their bond.
No longer will Libor and other such benchmark contributors or submitters, as they are known, be able merely to posit their rate at face value. Verified records of the trades upon which it is based will also be required.
True also that Libor has about it a strong flavour of closing the stable door. Banks are quitting or cutting back on businesses such as securitisation, structured products, and long-dated unsecured trades. A problem for them now, too, is that so many of these are by their very nature asymmetrical in that someone must win and someone must lose. This is the casino effect. How many at the wrong end of a deal are now going to return to the bank counter and blame it on Libor with all the consequences that entails?
And with the Americans in an unforgiving mood there is among a slew of other disturbing questions this one: who is next on the extradition list?
- Peter Isaac is an author and financial commentator.