How Big Banks Are Still Lying, Cheating and Ripping Us Off
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Earlier this year, researchers at the university of Southern California published the results of a study examining whether the wealthy – the mythical “engines of our economy” – display a better character than the rest of us.
As it turned out, after conducting seven experiments they found that the narrow pursuit of self-interest at the top of the economic heap leads our elites to behave like complete dirtbags. As Bloomberg summarized, the researchers found that the richest among us “were more likely to break the law while driving, take candy from children, lie in negotiation, cheat to raise their odds of winning a prize and endorse unethical behavior at work.”
“It’s not that the rich are innately bad, but as you rise in the ranks -- whether as a person or a nonhuman primate -- you become more self-focused,” Paul Piff, the lead author of the study, told Bloomberg. It is their lust for wealth, paired with a lack of empathy for others – their disregard for the consequences of their actions on the “little people” – that makes them, at times, appear to simply be evil.
That research may help us understand why high-flying traders at Barclays Bank – and those at an as yet unknown number of other financial institutions – were willing to risk the credibility of the entire financial sector, as well as their cushy jobs, to rig interest rates in order to squeeze out more profits. And it certainly helps explain why they didn't think twice about the individual and institutional investors they ripped off: millions of ordinary people with credit cards, auto and home loans and other lines of credit.
That is what the budding scandal over banks lying in order to manipulate key lending benchmarks is all about. It's a story that doesn't lend itself to flashy headlines, and hasn't been getting the media attention it deserves in this country, so we asked David Dayen of Firedoglake to help break it down for us on this week's AlterNet Radio Hour. Below, is a lightly edited transcript of the discussion (you can listen to the whole show here, or subscribe to the podcasts on iTunes).
Joshua Holland: David, I want to talk about this LIBOR scandal. You’re a wonky guy and I wanted to get the story in a way, I hope, that my grandmother Ethel can understand.
I think it’s important to point out that this isn’t a story about boring interest rates. It’s about high-level banking executives lying and manipulating the system in order to make a bigger profit, and in doing so ripping off millions of people around the world. First, what is the London Interbank Offered Rate or LIBOR?
David Dayen: The London Interbank Offered Rate is sort of the rate that banks charge amongst themselves for lending. More important than that, it’s used as a benchmark rate for pretty much all loans. We’re talking student loans, car loans, adjustable rate mortgages, and all sorts of structured finance deals. There almost isn’t a lending product that isn’t affected by the LIBOR in some way or another. It’s a benchmark which is used to set those other rates.
JH: So this is what a bank lending rate in London has to do with you folks out there. If you have a home loan, if you have a credit card, if you have an auto loan, if you’re living in, say, Nebraska, this London bank rate affects your pocketbook. This is really the nub of it. So what happened, David?
DD: It’s almost a bit unfair to single out Barclays Bank. Let me go through that, and then get into what happened with the LIBOR.
Barclays agreed to a settlement with the Justice Department over allegations that it rigged, or tried to manipulate, the LIBOR. It did that in a number of ways. In some cases their traders were asking for the LIBOR to be set up or down based on how they could make money off of derivatives trading. The spread in the rate would give them a leg up on the competition and improve their profits.
In a second deal, especially during the financial crisis, it was found that Barclays was submitting their rate for the LIBOR at the high end. Obviously if you’re a bank and you’re submitting an interest rate that’s higher than everybody else’s you’re asserting, in a way, that your bank is in more trouble than some of these other banks because you’re having to pay a higher interest rate. They were asked to submit a lower interest rate by their executives so that it didn’t look like Barclays was doing as badly during the financial crisis. So there are a number of different ways that Barclays was manipulating the rates.
The reason I say that it’s almost unfair to single them out is that they’re the one bank that has agreed to a settlement -- that has agreed to play ball here with the Justice Department. The LIBOR is set by a number of different banks submitting an overnight lending rate, and then the top and bottom are sort of thrown out, and the range is set that way.
There are plenty of allegations that every bank pretty much that was involved in creating the LIBOR was gaming the system in very similar ways to what has been alleged to have happened at Barclays. We only know about Barclays because they’ve come clean. We don’t know about all of these other banks that are under investigation. That includes banks in the United States like JP Morgan Chase, Bank of America, and on and on.
JH: The Wall Street Journal reports that a number of banks are being investigated for similar fraud. It also appears that Barclays may have colluded with other banks in this scam. We should also point out that it’s not just LIBOR. There’s another major benchmark rate called the EURIBOR. It also has been subjected to some manipulation.
The way this works is again -- let’s step back for a moment – is that the British Bankers Association publishes this LIBOR. What they do is get reports from major banks and they use those reports to come up with the rate. So when the banks had it in their interest to push those rates up or down they basically lied. They lied about what they were reporting.
DD: That’s why it’s called “Lie-bor.” That’s generally the idea. Because they sometimes pushed it up and sometimes they pushed it down it’s kind of harder to say exactly how people were affected in terms of their interest rates on their student loans or what have you.
I’ll tell you a way people were definitely affected whether it went up or down. That was in terms of local government. There are all these interest rate swap deals where local governments can lock in an interest rate at a certain level, and they do these deals with large, major banks. Banks are gaming the rate down – the locked-in rate makes them more money over time. When you’re talking about local governments you’re talking about local tax dollars. That really affects everybody. There are local governments across the country who engage in these local rate swap deals, who have been just completely ripped off, and the LIBOR gaming had something to do with it.
JH: Thomas Ferguson wrote recently about these interest rate swaps and how devastating they are on local and state budgets.
So, anyway, at times they lied in order to move the rate up and at other times they lied to move the rate down. Am I right in the belief that in doing so they managed to screw over both their own investors and consumers whose interest rates were tied to the benchmark?
DD: Absolutely. It’s a little hard to pinpoint because there are so many banks who deal with creating the LIBOR by handing in their rates to the British Bankers Association. There’s no question if you have banks that are manipulating this rate for the purpose of making more and bigger profits, or in protecting their bank and giving a false impression that the bank is doing better than it is, that money has to come from somewhere. In most cases it’s coming from the pockets of ordinary people.
JH: So they ripped off everybody in sight and they were fined. Do you know how big those fines are?
DD: The Justice Department fines are in the range of $450 million, which is really trivial comparatively. This scandal from the perspective of Barclays has already metastasized in Britain. The CEO Bob Diamond has had to resign. The chairman of Barclays Bank has had to resign. Parliament just launched an official inquiry into the scandal. The Serious Fraud office in Britain has opened a criminal investigation. So I think the odds are pretty high that we’re actually going to see prosecutions out of this.
Unlike in the United States, the British press has been going crazy about this scandal, particularly tying it to a larger question about the culture of banking in the City of London, which is the financial center of England. Much like we see here, it has favored greed and profit taking over ethics. I think the Barclays scandal is really coming to a head in Britain. Because it’s just the beginning, there’s no reason that might not happen over here.
JH: Just to put those fines in context Barclays profits last year were around $9 billion. While Barclays CEO Bob Diamond (who is a Yank by the way) apologized and stepped down, nonetheless, according to NPR, he is keeping a $48 million golden parachute.
DD: He was asked about that in a Parliamentary session last week. I think his answer was he’s worked 16 years for this company.
JH: Forty-eight million for having screwed things totally. Diamond said in that same inquiry that he knew nothing about this, and it was all the work of a few bad apples. He called them rogue traders.
You talked about the US Commodity Future’s Trading Commission. They found, and I want to quote from their report, that Barclays manipulated these rates, “on numerous occasions, and sometimes on a daily basis over a four-year period.” And they also said that “this conduct occurred regularly and was pervasive.”
DD: And yet he didn’t know about it.
JH: Right, how could he have possibly known?
DD: What’s really funny about Diamond is he simultaneously said he didn’t know about it and also that the Bank of England instructed him that it would be okay if they lowered their rate to help the bank. I don’t know how it squares -- that he could have known nothing about it but also was told directly by the Bank of England that it would be okay to manipulate the rate.
JH: Now let me ask you for a prediction. Is this story going to get a lot of play in the American media? I had Jeff Thigen, who is Register of Deeds in Guilford County, North Carolina, on the show talking about massive foreclosure fraud perpetuated by the big banks right here at home in the robo-signing scandal. He told me how it affected his office. He basically doesn’t have any paperwork he can trust in his Register of Deeds. He’s suing a number of banks to try and get them to clean up the mess they made.
This whole thing, I think, was kind of dismissed by many in the mainstream media. It was all mere “paperwork issues,” never mind that it showed this remarkable sense of entitlement. They didn’t like the way we registered deeds so they decided they’re going to set up a corporation called MERS and they’ll just skip that -- screwing over country registrars all across the country and utterly confusing the chain of title on millions of mortgages, and nobody seems to be upset about this.
DD: Yeah. I’ve of course been following that story for upwards of two years now. It is hard to get traction on it. Certainly you look at the track record, and it seems that the LIBOR scandal will play out in the financial press, not on the front page, and it will only be a blip. You can sort of look at the difference between the furor in Britain over the Barclays portion of the LIBOR scandal, and what we saw here when Jamie Dimon was brought in to testify before the Senate and the House over what I call the “fail whale” trades -- these trades, also in London, that lost $9 billion -- and those hearings were a farce. To suggest that the US press and US policymakers are going to wake up and recognize the enormity of this scandal and take appropriate action is kind of wishful thinking.
JH: I struggle to figure out why that is. Part of me says that it’s because the political press likes to have a he-said/she-said kind of tension -- a partisan tension. What you’re seeing is that nobody is really calling for heads to roll in the financial sector. We heard very big talk from New York’s Attorney General Eric Schneiderman and his new commission that was going to study foreclosure fraud. They didn’t even get office space. They have no resources whatsoever. There’s just nobody, it seems, who's terribly concerned about any of this. I wonder if that leads to a kind of scandal fatigue?
DD: I think in a sense it does. When you see these things raised over and over again and there’s no appropriate accountability as a result, you tend to lose interest. Keep in mind the Justice Department settled with Barclays and forestalled any criminal investigation into the specific vendors. There are going to be civil lawsuits that play out -- I think there’s one with the city of Baltimore as one of the plaintiffs -- but the Justice Department said we got our $450 million and we’re done for the day. There’s still investigations underway. There are still other banks that are implicated in the scandal, but if you just look at the track record you cannot be optimistic in any way.
JH: I come to this from an ideological perspective. Let me ask you a question from a banker’s perspective. What is the potential harm from this massive loss of faith and trust in these institutions?
DD: There’s a serious reputational risk. If I’m an investor, I don’t know why I would ever come within 50 feet of an investment bank or anything of that nature, given how they have just abused me over the last several years. Whether it’s with mortgage-backed securities that they didn’t tell me were based on fictions and bad loans, or this particular scandal where all the interest rates were actually falsified. It’s very hard to have continued faith in these institutions.
But of course if you’re a major investor, there aren’t that many institutions that have the economy of scale to be able to handle you. As we know, after the financial crisis the too-big-to-fail banks just got bigger. There are less of them, and they hold more assets now. It’s kind of a catch-22.