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]

http://www.youtube.com/watch?v=ne408rvMK_4

JUAN GONZ�LEZ: 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 GONZ�LEZ: 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 GONZ�LEZ: 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 GONZ�LEZ: - 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 GONZ�LEZ: 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 GONZ�LEZ: 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 GONZ�LEZ: To crooked banks.

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

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.