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Thursday, July 12, 2012

High noon for 'banksters'?

Special to The Japan Times

HONG KONG — Recent revelations in Europe and the United States about cunning, corrupt and sometimes criminal ways that big banks and financial companies have used to make money are leading to a fine steam of moral indignation and outrage. Politicians and financial regulators have joined in the chorus of condemnations. It is great theater, but the authorities are still shuffling the blame between themselves.

Are the myriad devious — even "devilish" would not be too strong a word — ways that the "banksters" have devised to make money finally catching up with them?

The real proof of progress will be when shareholders summon their courage to curb bank managements, reduce their ridiculous salaries and generally clean house; when politicians get their act together to cut too-big-to-fail (TBTF) banks down to size; when regulators stop slapping wrists with small fines and bring criminal charges against the biggest banksters.

"Banksters" is a portmanteau word, made up of "bankers" and "gangsters" — which seems all the more appropriate given ongoing revelations about market-rigging have shown that a culture of greed and corruption has infected the financial business in the West. The resignation of Bob Diamond as chief executive of Barclays after the big British bank was fined a record £290 million for its part in a complex "Libor" bid-rigging process is only the start.

Authorities in the United Kingdom, U.S., Japan, the European Union, Canada and Singapore are still investigating what Barclays and 20 other banks, a roll call of international finance, may have been up to over Libor. Other authorities are looking at alleged rigging by banks in the U.S. municipal bond market and over electricity prices in California.

Libor — which stands for the London Inter-Bank Offered Rate — sounds so arcane and boring that it should not matter to anyone outside the banking industry. But the contrary is true. Libor is the interest rate at which leading banks in London charge when lending to other banks.

The rate, set daily along with its equivalent Euribor, is a benchmark for all sorts of interest rates on products from home mortgages, business loans and credit cards to complex derivatives, not only in the U.K. but all over the world. Altogether more than $10 trillion in loans and an immense $800 trillion of derivative products have their interest rates linked to Libor.

Besides cases and fines brought by financial authorities, there will be a spate of billion dollar lawsuits from aggrieved victims. U.S. broker Charles Schwab has already launched a lawsuit naming Barclays, Bank of America, Citi, HSBC and JPMorgan among others for allegedly violating antitrust, racketeering and securities laws. Schwab also claims that the "under-reporting of Libor had a $45 billion effect on the market, representing the amount borrowers (meaning the banks) did not pay" investors who had bought its financial products.

Documents released by the British authorities show a cozy club of callow traders. "Dude, I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger," one emailed when his counterpart fudged the numbers. A mere basis point (0.01 percent) move in Libor would mean a net gain of "about a couple of million dollars."

A Barclays banker wrote to "manager E" in December 2007 that "We are being dishonest by definition and at risk of damaging our reputation in the market and with the regulators."

Another manager ordered an employee to lower his Libor submission "to send the message that we're not in the s**t." A higher submission would have suggested that the bank was in financial trouble.

The obvious question is how high up the food chain knowledge of collusion went. If top managers did not know, were they doing their jobs? Equally, why did it take so long for regulators to move in?

The reputation of the City of London is on the line, along with those of leading politicians in successive British governments. Gordon Brown, then the British chancellor of the exchequer, boasted in 2006 that he had resisted a "regulatory crackdown" after the WorldCom scandal and promised a "predictable and light touch regulatory environment", a promise that does not seem so wise now.

Bank of England Governor Sir Mervyn King, declared, "It is time to do something about the banking system." Lord (Adair) Turner, chairman of the U.K. Financial Services Authority, said there was a "culture of cynicism and greed that is quite shocking." Confederation of British Industry President Sir Roger Carr also chipped in with his own fulmination, declaring that: "The manipulation of the Libor arrangements is deplorable and undermines international trust in the City of London. The weakness must be addressed and the culprits punished."

U.K. business secretary Vince Cable used the strongest words, declaring that "incompetence, corruption and greed have been endemic in British banking" and that the system is "faced with a quagmire of almost Biblical proportions." Where will the war of fine words end? — in action?

Financial London is hardly uniquely at fault. Indeed, Matt Taibbi reports in Rolling Stone about "the first trial of the modern American mafia." He is writing about a New York trial of three financial executives of GE Capital, the finance arm of General Electric, on bid-rigging in the municipal bond business. Taibbi contends that "the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street."

What happened in this case and in others was that big banks colluded to rig public bids on the $3.7 trillion municipal bond business. Any similarity between the Libor case and the muni bond market is presumably purely accidental.

Taibbi charges that: "By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes — from 'virtually every state, district and territory in the United States,' according to one settlement. They did it so cleverly that the victims never even knew that they were being cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime."

Meanwhile, losses in the JPMorgan trades by its chief investment office (CIO) "could reach as high as $8 billion to $9 billion", not the $2 billion that boss Jamie Dimon quoted, according to the New York Times citing "people who have been briefed on the situation." The size of the CIO's balance sheet would make it the eighth largest bank in the U.S., and it was running half of JPMorgan's total risk exposures.

Financial fudge is unfortunately a global problem. The Bank for International Settlements, the bank for the world's central banks, last week drew attention to the issue of bogus balance sheets at the world's biggest banks. "The financial sector needs to recognize losses and recapitalize," said the BIS. Unfortunately, the BIS itself also offered no sticks. Fulmination, not action, seems to be the order of the day among scared Western politicians.

Kevin Rafferty is editor in chief of PlainWords Media

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