“Libor fraud exposes Wall Street’s rotten core”
Elizabeth Warren chaired the TARP Congressional Oversight Panel from
2008 to 2010. She is the Democratic nominee for a U.S. Senate seat in
Massachusetts.
The Libor scandal is
more than just the latest financial deception to come to light. It
exposes a fraud that runs to the heart of our financial system.
The London interbank offered rate is a benchmark for a range of
interest rates, and the misdeeds making headlines have to do with how
those rates are set. If insiders can manipulate the basic measurement of
a loan — the interest rate — there is rot at the core of the financial
system.
The British financial giant Barclays has admitted to manipulating the rate from 2005 to at least 2009.
When the bank made a bet on the direction in which interest rates would
turn, the Barclays employees who submit data for calculating interest
rates would fake their numbers to help Barclays traders win the bet. Day
after day, year after year, bet after bet, Barclays made money by
fixing bets for its own traders.
We don’t know who else was fixing bets. Other big banks, including some of the largest in the United States, are under investigation.
Barclays doesn’t appear to have acted alone, and it is clear that its
fixes weren’t secret deals by rogue traders. Traders put requests to
manipulate the rates in writing and even joked about delivering
champagne to those who helped them.
It is also clear that many
of those who didn’t have a fixer — including consumers, community banks
and credit unions — lost money. Barclays padded its bottom line by
taking money from everyone else. It won when it shouldn’t have won — and
others lost when they shouldn’t have lost. The amount of money involved
is staggering. On any given day, $800 trillion worth of credit-related transactions are linked to Libor rates.
In
most markets, consumers could simply take their business elsewhere once
they learned that the scales were rigged. But interest rates are
different. Everyone who borrows money
on a mortgage, credit card, student loan, car loan or small-business
loan — basically, everyone — is affected by a crooked market on Libor.
According to the Federal Reserve Bank of Cleveland, in 2008 more than half of all adjustable-rate mortgages were linked to Libor. Even those who didn’t borrow but saved for retirement or their children’s future got hit with interest rates that had been faked.
It gets worse. During the financial crisis, Barclays and other banks also appear to have consistently manipulated Libor to show lower-than-real borrowing rates
to convince the world — and their regulators — that the bank was
stronger than it really was. In other words, they rigged the
interest-rate reports so that no one would know exactly how much trouble they were in.
With
a rotten financial system once again laid bare to the world, the only
question remaining is whether Wall Street has so many friends in
Washington that meaningful reform is impossible.
Real
accountability would mean prosecuting the traders and bank officials who
violated federal laws and prosecuting the executives who knew what they
were up to. It would mean forcing executives to pay back any inflated
compensation that was based on padded profits.
Going forward, the
rules would be changed so that Libor is calculated on actual borrowing
costs, not estimated or claimed costs. And enforcement agencies would
have the resources they need to launch investigations, to fight the
armies of private lawyers the banks hire and to prosecute the
law-breakers.
But the heart of accountability lies deeper. It
rests on acknowledging that we cannot trust Wall Street to regulate
itself — not in New York, London or anywhere else. The club is corrupt.
When Mitt Romney says he will move to repeal all of the new financial
regulations, he supports a corrupt system. When members of Congress
grill regulators for being too tough on Wall Street and slash the
budgets of the regulators charged with overseeing Wall Street, they prop
up a corrupt system.
Financial services are critical to the
economy. That’s why everyone — every family and every business — has a
stake in an honest system. The fantasy that reducing oversight of the
biggest banks will make us safer is just that — a dangerous fantasy. The
Libor fraud exposes rot at the core. Now, who will stand up to fix it?
http://www.washingtonpost.com/opinions/elizabeth-warren-libor-fraud-exposes-a-rotten-financial-system/2012/07/19/gJQAvDnDwW_story.html