Banks Were Picking Our Pockets — Former Under Secretary of Commerce, Robert J. Shapiro’s Article Explaining How Financial Institutions Manipulated the London Inter-Bank Offer Rate (LIBOR) under Self-Regulation

13 July 2012

Theme — when powerful exploiters are out and about, wise people should stay alert — but most of the time we don’t

Plutocrats control us by playing tricks that we are too busy, ignorant, or lazy to detect. Our “sleep” makes us easy victims to their wallet stealing schemes.

Take the most recent scandal regarding England’s Barclays Bank and, almost certainly, some of the most powerful among American and world banks.

Barclays and other banks had manipulated the London Inter-Bank Offer Rate to benefit themselves at ordinary people’s expense.

First — how does the LIBOR interest rate work?

This rate is an example of the complexity that allows powerful people to dream up tricks with which to trap the unwary.

The New York Times explained how LIBOR works (and how Barclays monkeyed with it) in a diagram, entitled Behind the Libor Scandal (10 July 2012).

The Times’ excellent diagram is a “must see” for people who want to learn how financial institutions use the systems that they create to enrich themselves at other people’s expense.

Economics journalist Matthew Yglesias explained the negative effects of this manipulation in just a few words

From Slate:

You may not be interested in the Libor—the London Interbank Offered Rate—but the Libor is interested in you.

Even though the typical American is never going to seek an interbank loan in London, the number is used as a benchmark for a wide range of other financial instruments.

Credit instruments with variable interest rates—private student loans, auto loans, adjustable-rate mortgages, credit cards, etc.—need to be indexed to some underlying marker of the overall cost of funds within the financial system. Often that’s something called the “prime rate” set here in the United States, but it’s also frequently the Libor.

So growing evidence that Libor numbers have been deliberately manipulated by banks for years means that millions of people have been paying the wrong interest rate on all manner of financial products.

Vast sums of money have been wrongly snatched from innocent people and created equally vast undeserved windfalls for others.

The basic structure of the world’s financial system has once again been exposed as fundamentally broken.

Jounalist Alex Klein provided a quantified example of how this fraudulent scheme affected “you”

This is the helpful kind of journalism that is all too absent these days, courtesy of Alex Klein and the Daily Beast:

What does that mean to you? In the simplest possible terms: say you have a $50,000 small-business loan or adjustable-rate mortgage, and its interest rate is “5 percent plus LIBOR” . . . .

If Barclays and other banks submit fake figures to raise LIBOR by 1 percent, you’re out $500 more a year. (If they’re the ones who gave you the loan, that’s $500 in their pocket.)

And if the banks depress LIBOR, and you’re an investor who owns $50,000 in 5-plus-LIBOR percent bonds (even through a mutual fund), it’s the same story.

Mr. Klein’s article included snippets of Barclays in-house emails, which indicate that employees knew that they were participating in massive fraud.

Former Under Secretary of Commerce, Robert J. Shapiro, explained the wide swathe that the banks’ deception cut in our pockets

From the (outstanding) online journal, The Globalist:

LIBOR rates are a very big deal, because they are benchmarks for countless other interest rates. The majority of U.S. adjustable-rate mortgages, for example, are set at a LIBOR rate plus two or three percentage points. So are millions of student loans, auto loans and credit card finance charges.

Early analysis suggests that for several years, the LIBOR was off by an average of 30 to 40 basis points. (A hundred basis points equal one percentage point in an interest rate.) That is enough, for example, to add $50 to $100 to the monthly cost of a $100,000 loan.

Notice that Shapiro said “monthly cost.” That translates to an added $600 to $1,200 dollars per year for that same $100,000 loan. Now multiply these annual amounts times the number of years the LIBOR fraud was operating.

Mr. Shapiro explains that LIBOR rates span the world’s currencies. So, virtually no one is unaffected.

Mad yet?

How the LIBOR scam benefited the banks

Most of us recognize that self-interest tends to overcome honesty.

My experience indicates that the very people who are most attracted to material wealth tend to be the ones who are least committed to the inclusive integrity that incorporates other peoples’ interests.

Robert J. Shapiro’s comment is pertinent:

The integrity of these [LIBOR] interest rates, however, depends entirely on the honesty of banks reporting the rates they would actually expect to pay. Inevitably, we got what we should have expected.

So, when Barclays (and almost certainly others) had investments that paid off, or simply paid off more, when interest rates rose, it simply reported a higher figure to LIBOR in order to nudge up the average. And that usually led to higher interest rates for millions of other businesses and people with loans indexed to the LIBOR.

Sometimes, it worked the other way. In late 2008, Barclays (and probably others) lowballed the rates they reported for LIBOR averaging.

The purpose was to make themselves look sounder than they actually were, since they would be willing to borrow only at low rates. They presumably figured that might reassure their shareholders and perhaps even dampen public demands for tighter regulation.

The LIBOR’s incredibly flimsy rationale — can you believe that “we” fell for this plutocrat-serving nonsense?

As a mostly rational person with a systemically oriented mind, I am often irritated by the ease with which human beings are suckered by the nonsensically designed systems we live under.

The LIBOR is an example of this. Notice — from reading the New York Times diagram and from Mr. Yglesias’ explanation in Lies and Libor — that the LIBOR interest rate is not based on actual interest rates. It is based on banks’ guesses of what they might pay for loans.

That objectively ridiculous mechanism is an almost explicit invitation to indulge in deception in favor of self-profit.

As Mr. Yglesias put it:

If this sounds like a remarkably flimsy form of economic data, it is. It’s just a guess, not a real measurement of anything.

And it’s generated by a trade group, not a regulatory agency.

And it’s self-reported, not based on any public data.

But over the decades Libor came to take on a foundational role in prosaic economic transactions. In a world of large multifaceted financial-services firms, the quirks of the Libor process were a conflict-of-interest disaster waiting to happen.

A bank could try to tailor its Libor submissions to meet the needs of its trading desk rather than offering good-faith estimates.

Meanwhile, what were governmental regulatory agencies doing? — Nothing

Regulatory agencies are (effectively speaking) headed by “employees” of the politicians who are effectively bribed to keep the system operating to the plutocrats’ profit.

At every turn, personal self-interest among the financially and politically powerful keeps the Plutocracy running the way that it does.

Our wallets are fodder for their avarice.

What to do? — Embrace two fundamentally conservative principles

To rouse ourselves from inept victimhood, we need to embrace two widely accepted conservative principles:

(1) Recognize that human nature is usually immensely selfish and not fundamentally aimed to benefit the community that actually sustains our lives.

(2) Accept that counter-balancing (diligently supervised) regulatory mechanisms reduce the harms posed by excessive self-interest displayed by excessively powerful people or institutions.

The crux is getting enough grip on the people in Congress and the Executive branch to make them do that which benefits the American Entirety.

And that means waking up to what has been going on and seeing it clearly. An enraged populace can vote to better manage the connivers who run the country.

This change in our voting behavior would require that significantly more of us be alert to how political advertisements are designed to manipulate our thinking in oligarchy-serving ways.

The moral? — Time to get off our dozing behinds

Anger is a spiritually dangerous emotion, but there are times in which it acts as a positive motivator.

Taking it on the other cheek, while the powerfully avaricious pluck our pockets is not my idea of the American Way.

Self-regulation in virtually anything that involves great power is not a good societal idea. Unless, one is designing a feudal culture in which most of us are assigned the role of serfs or slaves.

Self-interest is certainly a job creator. But, unregulated among the too-powerful, it demonstrably becomes a job and wallet stealer.

One would think that the current recession, and the multiple and massive frauds that created it, would have awakened the American public. The bank fraud demonstrates self-destructive vacuity of what Congress and the Executive have been doing (and not doing) for decades.

The LIBOR fraud is an excellent indicator of how the One Percent subtly manipulates social structures to benefit itself at the Ninety-Nine Percent’s expense.

PeteFree.com

Banks Were Picking Our Pockets — Former Under Secretary of Commerce, Robert J. Shapiro’s Article Explaining How Financial Institutions Manipulated the London Inter-Bank Offer Rate (LIBOR) under Self-Regulation