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Excerpt: "...the Libor scandal presents really the mother of all regulatory dilemmas, because this scandal could not have happened if it was just one or two or even three banks acting as rogue participants."

Matt Taibbi at Skylight Studio in New York, 10/27/10. (photo: Neilson Barnard/Getty Images)
Matt Taibbi at Skylight Studio in New York, 10/27/10. (photo: Neilson Barnard/Getty Images)


Biggest Insider Trading You Could Ever Imagine

By Matt Taibbi, Democracy Now!

22 July 12

 

olling Stone’s Matt Taibbi joins us to discuss the pattern of systemic corruption by 16 banks accused of rigging a key global interest rate used in contracts worth trillions of dollars. The London Interbank Offered Rate, known as Libor, is the average interest rate at which banks can borrow from each other. Some analysts say it defines the cost of money. Barclays was recently fined $453 million for rigging Libor, and a number of other banks are under investigation. "Ordinary people actually suffered when Libor was manipulated downward, mainly because local governments, municipal governments tended to lose money," Taibbi says. "Even the tiniest manipulation downward, when you’re talking about a thing of this scale, would result in tens of trillions of dollars of losses. ... The banks weren’t doing this just to make themselves look healthier, they were also doing this just to make money. They were trading against this information in what essentially was the biggest kind of insider trading you could possibly imagine." Taibbi is author of the book "Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History." [includes rush transcript]

JUAN GONZÁLEZ: We end today’s show with Matt Taibbi. He’s a contributing editor for Rolling Stone magazine. His most recent in-depth piece is "The Scam Wall Street Learned from the Mafia: How America’s Biggest Banks Took Part in a Nationwide Bid-Rigging Conspiracy - Until They Were Caught on Tape."

Matt Taibbi has also been closely following the Libor scandal. Sixteen international banks are accused of rigging a key global interest rate used in contracts worth trillions of dollars. The London Interbank Offered Rate, known as Libor, is the average interest rate at which banks can borrow from each other. Some analysts say it defines the cost of money. The benchmark rate sets the borrowing costs of everything from mortgages to student loans to credit card accounts.

AMY GOODMAN: Matt Taibbi is with us here in New York. His latest book is called Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History. Matt, welcome to Democracy Now!

MATT TAIBBI: Good morning.

AMY GOODMAN: Explain Libor.

MATT TAIBBI: Libor is basically the rate at which banks borrow from each other. It’s a benchmark that sets - that a lot of international investment products are pegged to. When Libor is low, that means that the banks feel confident in each other; and when Libor is high, that means there is generally instability. And what we’ve been dealing with in this scandal are really two different types of manipulation: one in which the banks manipulated Libor downward so as to create the appearance of good health generally, and then, more specifically, a much more insidious kind of corruption where they were manipulating it both up and down in order to capitalize on particular trades, depending on what the banks were holding that day. So this is an explosive, gigantic financial scandal.

JUAN GONZÁLEZ: But, Matt, you know, I was listening to Lawrence Kudlow a couple of nights ago on CNBC, the guru of business journalism, and he claims this is a victimless crime, that this has been blown up out of proportion by the rest of the media and by some of the government regulators.

MATT TAIBBI: I mean, it’s - I can’t imagine how he could possibly - a sane person could possibly describe this as a victimless crime. Basically, every city and town in America, to say nothing of the rest of the world, has investments that are pegged to Libor. Most of them are holding investment accounts that actually will decrease in value as Libor goes down. So, you’re talking -

JUAN GONZÁLEZ: Well, I think that’s what most people don’t understand, that they say, well, if the interest rate goes down -

MATT TAIBBI: Right.

JUAN GONZÁLEZ: - that means you’re paying less. But they don’t understand the interest swaps that have occurred with many of these governments.

MATT TAIBBI: Right, most individuals think of it in terms of their own mortgages or their own credit cards. And it’s true, most of those people probably benefited when they were manipulating Libor down. But now, remember, they also manipulated it upwards at times. But when it was downward, those individuals did benefit. But on the whole, overall, ordinary people actually suffered when Libor was manipulated downward, mainly because local governments, municipal governments tended to lose money. So if you live in a town that had a budget crisis, that had to lay off firemen or teachers or policemen, or couldn’t provide services or textbooks in their schools, you know, that might be due to this. And remember, even the tiniest manipulation downward, when you’re talking about a thing of this scale, would result in tens of trillions of dollars of losses. So it’s an enormous scandal. It eclipses anything we’ve seen since 2008.

AMY GOODMAN: Matt, on Wednesday, U.S. Treasury Secretary Tim Geithner defended himself against criticisms that regulators should have done more to address concerns over the credibility of the Libor interest rate.

TREASURY SECRETARY TIMOTHY GEITHNER: We acted very early in response to concerns that the processes to set this rate was impaired and flawed and vulnerable to misrepresentation. We were worried about it, we were concerned about it. I took the initiative to brief the entire U.S. regulatory community on this at a very early stage, early May. My staff then briefed the SEC, CFTC. We brought it to the attention of the British and took the exceptional step of writing them - putting in writing to them a detailed set of recommendations that revealed the extent of the concerns in that context. And the U.S., to its credit, set in motion, at that stage, a very, very powerful enforcement response, the first results of which you have now seen.

AMY GOODMAN: That’s Treasury Secretary Tim Geithner. Matt Taibbi, your response?

MATT TAIBBI: Well, first of all, the Bank of England chief, Mervyn King, says that the memo that he sent to the British actually didn’t outline any specific regulatory concerns. It didn’t give them any information but only proposed steps that they might take in the future. And those steps were actually just more recommendations for more self-regulation for the banks. My question is, if the Bank of England and the Fed knew about this activity dating back to 2008, why was nothing done? Why were there no criminal investigations until now? Why did the rest of us not hear about it? This is information that should be pertinent to everybody who makes investments, but it was kept secret from everybody. Remember, the information that the Fed got was that some of the banks not only were manipulating Libor, but they were doing it because they felt they had no choice, because everybody else was doing it. And for the Fed to get that information and not immediately launch a massive criminal investigation, or help the Justice Department do that, speaks to the ineffectiveness of their response.

JUAN GONZÁLEZ: Well, isn’t part of the problem, though, that some of these governments and central banks actually looked - looked aside at what was going on because they wanted to keep interest rates low, and hopefully bringing the economies back and having some kind of economic resurgence?

MATT TAIBBI: Yeah, absolutely. There’s one way to look at this and say, OK, the Bank of England and the Fed knew about this in 2008, but they had an interest, perhaps, in seeing Libor artificially suppressed, because in that panic of 2008, when everything in the markets was going haywire, it actually benefited governments by creating the image of financial soundness in the markets. But, A, that’s an irrational response, because it’s a terrible precedent to set for the government to allow manipulation of the markets in any way, and, B, the banks weren’t doing this just to make themselves look healthier, they were also doing this just to make money. They were trading against this information in what essentially was the biggest kind of insider trading you could possibly imagine. So, I don’t think that argument is going to hold water.

AMY GOODMAN: Matt, some, like you, say the Libor scandal could cost the banks tens of billions of dollars. But the Wall Street Journal editorial page has portrayed Barclays bankers as the victim. When the scandal first broke, the Journal ignored it for a week. Then, in a piece called "Barclays Bank Bash," it wrote, quote, "Federal gumshoes are hot on the trail of banks suspected of attempting to manipulate a key interest rate. If only it were easy to separate the effect of alleged manipulation efforts by private banks from the deliberate manipulation by government," unquote. Talk about the U.S. media coverage of the Libor scandal.

MATT TAIBBI: Well, first of all, there hasn’t been enough coverage in the United States, and that’s probably because the scandal has not yet spread to our shores. And it will, because this starts - it probably starts with Barclays and UBS and the Royal Bank of Scotland. These are the three banks that we know of already that have admitted to this conduct. But it’s eventually going to involve big American banks, as well. And we know who they are; we don’t have to mention them. But they’re the other - the American banks in the survey are also going to be involved in this.

But I think the American media generally has been slow to realize the gravity of the scandal. I think there’s a lot of fatigue out there among people with all of the financial corruption. I think news editors generally are reluctant to go there, especially with something as complicated as Libor. But what we’re going to see is a lot of coverage like what you just heard from the Wall Street Journal, where there’s going to be a suggestion that this was done in sort of a patriotic manner, in order to create an appearance of soundness in the markets during a period of crisis, that this was done at the behest of governments. And I would suspect that that’s going to be the first line of defense for these banks.

JUAN GONZÁLEZ: I wanted to ask you about something else not directly related to Libor but certainly to banks and to the - your connection to them to the Mafia: the recent revelations that HSBC, one of - the biggest bank in Europe, admitted that it was laundering tens of millions of dollars in drug money from the Mexican drug cartels, forcing one of its chief officers to resign publicly in a hearing?

MATT TAIBBI: Right, yeah, that’s obviously a big scandal, too. It probably has been overshadowed by the Libor revelations recently. We’ve obviously heard things like this before, banks not asking enough questions about where the money is coming from: the Bank of New York scandal back in the late '90s with the Russian mob money that was flowing there by the billion; you know, to a lesser degree, the scandal involving Jon Corzine and his company, and what questions did Chase ask or not ask when they were dealing with them. There's clearly a laxity among all the banks in asking enough questions about where money is coming from. I suspect that the HSBC scandal will help spread awareness in that regard, as well.

AMY GOODMAN: What is the solution, Matt Taibbi?

MATT TAIBBI: To the Libor situation or -

AMY GOODMAN: Yes, and overall, whether we’re talking about HSBC to -

JUAN GONZÁLEZ: To crooked banks.

AMY GOODMAN: - the power and to the administration, not to mention in this election

year, the opponents, shoring up and supporting and protecting?

MATT TAIBBI: Well, the Libor scandal presents really the mother of all regulatory dilemmas, because this scandal could not have happened if it was just one or two or even three banks acting as rogue participants. The way Libor works is, they take a survey of 16 banks every day. They take the four highest numbers and the four lowest numbers, and they throw them out. They average out the remaining numbers. And what that means is that pretty much all the banks have to be in on it in order to move the needle in any one direction. So you’re talking about 16 of the world’s biggest, most powerful financial institutions. And if they’re all cooperating in what essentially is a gigantic international price-fixing operation, what do regulators do? You know, fines are clearly not going to be sufficient. Even if they pursue criminal investigations and jail a few of the traders, that’s really not going to be sufficient either. So, it really poses a tremendous question. What are they - they’re going to have to revoke some kind of privileges to all of these banks, and that will really result in a massive shake-up of the entire financial system.

AMY GOODMAN: We’re going to do part two online at democracynow.org and particularly talk about your latest piece, "The Scam Wall Street Learned from the Mafia: How America’s Biggest Banks Took Part in a Nationwide Bid-Rigging Conspiracy - Until They Were Caught on Tape," and also find out, when we talk about Bain, what private equity actually is. Matt Taibbi, contributing editor for Rolling Stone magazine.


 

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+17 # ronnewmexico 2012-07-22 12:30
And by far this is the largest story with more implication, more anything..not being reported upon by national media.

Quick cover up before they get on to it..has to be the tune of this tale....quick subtle legislation must be passed or it will amount to potentially trillions in liabilty and loss to these banks.....all to big to fail will have failed.

...and they then will all fail as result of litigation.
The liability from municipalities states and others upon the banks is simply so large it is staggering.....

Virtually everyone and everything is affected....so they must keep it quite and rush...to stop that from happening...

So sad none know the implications of this thing.....not modified..it will crush the system...take a while but it is guaranteed to do so.

So first most importantly..it must not be known of...now come the legislative bridge burning to prevent all this from happening..guar anteed they are presently working fervently to do that as well.
 
 
+20 # tonywicher 2012-07-22 17:50
There IS a solution already before Congress with 70+ signatures. It is Marcie Kaptur's HR 1489, the Return to Prudent Banking Act. Currently referred to committee, it has 70+ co-sponsors.
It returns to and streanthens the Glass-Steagall act of 1933.

Official Summary

Return to Prudent Banking Act of 2011 - Amends the Federal Deposit Insurance Act (FDIA) to prohibit an insured depository institution from being an affiliate of any broker or dealer, investment adviser, investment company, or any other person or entity engaged principally in the issue, flotation, underwriting, public sale, or distribution of stocks, bonds, debentures, notes, or other securities.

Prohibits officers, directors and employees of securities firms from simultaneous service on the boards of depository institutions, except in specified circumstances.

Requires any such individual serving as an officer, director, employee, or other institution-aff iliated party of any insured depository institution to terminate such service as soon as practicable after enactment of this Act. Requires an insured depository institution to wind-down in an orderly manner and terminate any affiliation prohibited by this Act. Amends the Banking Act of 1933 (Glass-Steagall Act) to expand its prohibition against the transaction of banking activities by securities firms.
 
 
+15 # SMoonz 2012-07-22 20:11
Yes, all we need is a return to Glass-Steagall to get us back on track. The powers that be are doing everything they can to stop this from happening.
 
 
0 # Livemike 2012-08-02 18:48
Quoting SMoonz:
Yes, all we need is a return to Glass-Steagall to get us back on track. The powers that be are doing everything they can to stop this from happening.


Why would that help? None of these problems occured because investment banking and commercial banking were combined. In fact the GFC started in banks that did not combine them. Combined banks are actually safer and have been since before the Great Depression. Glass-Steagal was a corrupt piece of legislation designed to favor the banks with worst business model who caused the most problems. See
http://mises.org/journals/qjae/pdf/qjae1_1_1.pdf
 
 
+6 # John Locke 2012-07-23 06:22
tonywicher: I believe a better approach would be to nationalize the Banks. No matter what we do as far as regulate Banks they always find a way around it, or manage through their lobbies and payola to government officials to water it down or just plain, as in the current case just ignore it!

Banks will always be corrupt institutions, that is the make up of the people who run them.

We can never trust them no matter how strong our regulatory laws are...

JUst look at current history...one scam after another, a small fine for them, a large profit, and business as usual...

No one is ever going to put these criminals in jail as long as these criminals finance elections!!!
 
 
+4 # jlohman 2012-07-23 06:41
A $10M fine for a $100M prize sounds okay for the politicians that share the profits of their campaign funders.
 
 
+2 # tonywicher 2012-07-23 18:56
John,

I am in agreement with you. If Glass-Steagall is reinacted, all the big investment banks will be bankrupt. That means they disappear - the only private banks left will be local commercial banks. The only national bank left will be the Fed. If we seize seize the Fed, and use its credit power to finance large scale national infastructure projects, research and development, training and education instead of using it to bail out the gambling debts of investiment bankers, we would reach full employment and a rising standard of living for all Americans in short order.
 
 
0 # John Locke 2012-07-28 07:29
tonywicher: To achieve full employment we would have to terminate the Fed and go back to bills of credit! The mandate of the fed in 1913 was to create full employment, it did not, the reason, the Fed is behind big business and if we had full employment capitalism would not make the large profits they make, as employees would control wages not business...leav ing less for these enormous bonuses and executive salaries...
 
 
+5 # John Steinsvold 2012-07-22 20:15
An Alternative to Capitalism (if the people knew about it, they would demand it)

Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.

I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:

http://evans-experientialism.freewebspace.com/steinsvold.htm

John Steinsvold

“Insanity is doing the same thing over and over and expecting a different result."~ Albert Einstein
 
 
+10 # DemocracyNeedsDefenders 2012-07-22 23:30
What Taibbi is talking about is NOT capitalism - it is theft. Theft is a crime and should be punished. Corruption is also a crime and should be punished. Unfortunately, the thieves have corrupted the politicians, so no punishments will be meted out.
This will only stop when the electorate stops being distracted with petty issues, including "Dems vs Republicans", and makes anti-corruption the central choice for the vote. Unfortunately we are not there yet. Perhaps we never will me. People are easily distracted.
 
 
+1 # tonywicher 2012-07-23 18:59
We don't need an alternative to capitalism, we just need the proper regulations to make it benefit society as a whole. We need New Deal economics. Call it socialist capitalism, if you want. It was working well until the bankers undermined it.
 
 
+8 # jlohman 2012-07-23 03:58
NOTHING will change until we have public funding of campaigns and politicians cannot share in the booty.
 
 
+1 # tonywicher 2012-07-23 19:04
Macroeconomic forces are causing changing outside the electoral process. Forget the election. Concentrate on getting Marcy Kaptur's bill past.
 
 
-3 # Pancho 2012-07-23 04:33
Somehow, I think Taiibi misspoke himself when he said "tens of trillions." I noticed that when I was listening him on Democracy Now.

That would make the losses, for instance, far larger than the national debt.

The difference in interest rates illegally engineered by those constructing LIBOR were fractional. How then could that number be legitimate.

Rather than repeating the number, quoting him, RSN would have been better off perhaps in checking that number for accuracy before publicizing it.
 
 
+2 # RobertMStahl 2012-07-23 08:36
It has an origin even more evil, Clinton's repeal of the Glass-Steagall Act, http://www.paulcraigroberts.org/2012/07/19/the-libor-scandal-in-full-perspective/. But to go after the real criminals, google Indira Singh. She left it resolved as a series of court cases. Follow covert behavior back to the drugs and the drug wars, and worse.
 
 
+4 # elmont 2012-07-23 09:49
Interesting. This story appeared a while ago (yesterday is forever in these digital times), yet there are not very many comments. Which suggests to me that not many people are reading/followi ng this story. The eyes start to glaze over when talk turns to complicated financial topics. Too bad. This is very important stuff, and once again I tip my hat to Mr. Taibbi, who stays on the case. Currently, he's the most important journalist in the country.
 
 
+2 # RobertMStahl 2012-07-23 10:49
The Libor problem is a product of a corrupt system and goes back to the repeal of the Glass-Steagall Act to put it in perspective. Perspective, also, will indicate that discussion of this topic on these grounds may not address our real concerns with the system, or the true depth of this dire cesspool of human behavior, collectively. Please review this article, and please understand something of Gregory Bateson's psychology.

http://www.paulcraigroberts.org/2012/07/19/the-libor-scandal-in-full-perspective/
 
 
0 # Livemike 2012-08-02 18:52
Look, the LONDON interbank operating rate has nothing to do with US legislation. London is not in the US. What is it with every no-nothing claiming that Glass-Steagal kept everything OK? NONE of thes problems occured due to repeal of Glass-Steagal. NONE. So shut up about it.
 
 
+1 # leslie1935 2012-07-23 21:33
We must demand the immediate resignation of the banksters servant Geithner and his indictment on many counts, not the least of which is Treason against the People of the United States of America!
 
 
+1 # Futilitarian 2012-07-24 07:08
3 words... CLASS ACTION LAWSUIT! every citizen has been harmed.
 

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