Friday, July 6, 2012

This may send Wall Streeters to prison

With the four-year anniversary of the financial crisis approaching, Wall Street thought it had dodged a bullet. Now comes the Libor scandal.
The esoteric practice of banks “fixing” the price of the London Interbank Offered Rate (more on Libor in a bit) may have heads rolling — and hard time being served — unlike “sexier” bubble-era improprieties like selling toxic debt to the unsuspecting.
Since the 2008 collapse, not a single major US bank CEO has been removed from his job, much less charged with a civil infraction over these activities. (Ken Lewis left Bank of America over other issues.) We’ve had one failed prosecution of two Bear Stearns managers and lots of wrist slaps such as the one to Goldman Sachs a couple years ago for selling some lousy mortgage debt to clients. And that was about it.
But Barclays last week announced a $453 million settlement with US and British authorities over charges that it manipulated Libor — a benchmark interest rate that trillions of dollars in financial contracts are priced off of. In a manner of days, senior executives were ousted, including flamboyant CEO Robert Diamond — who until now was largely known for having one of the largest salaries in the banking world.
The reason Diamond stepped down so fast speaks to several things, including his uneasy relations with his UK bank regulators, but also the seriousness of the activities under criminal and civil investigation by the Justice Department, the Commodity Futures Trading Commission and the UK’s Financial Services Authority.
Libor is set by authorities at a UK banking trade group, who take the average of the borrowing costs of major global banks to compute a single interest rate — one of the most widely used benchmarks in global finance. Like similar barometers, Libor reflects market and economic conditions. So when banks’ borrowing costs rise — as they did during the crisis, as investors grew concerned over the big banks’ health and demanded higher returns to compensate for the added risk — Libor will rise.
Here’s the scandal: Regulators say Barclays submitted false borrowing costs during the runup to the 2008 meltdown — ones much lower than its true costs. Barclays, it is alleged, did this to hide the fact that investors were fearful of its financial condition and to make money (if Libor could be driven lower, its borrowing costs would fall when they should be rising).
All pretty sleazy, even by Wall Street standards.

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