“Viewpoint” host Eliot Spitzer, Matt Taibbi, Rolling Stone contributing editor, and Dennis Kelleher, president and CEO of Better Markets, analyze the Libor interest rate–rigging scandal engulfing the banking industry.

Barclays CEO Bob Diamond recently resigned after the bank was fined $453 million for its part in the scandal, which involved manipulating the London Interbank Offered Rate (Libor), a key global benchmark for interest rates, by essentially “faking their credit scores,” according to Taibbi. And as Taibbi explains, Barclays couldn’t have acted alone.

“It can’t just be Barclays and the Royal Bank of Scotland. In fact, it can’t even be four banks or even five banks,” he says. “Really, in the end it’s probably going to come out that it’s going to be all of them … involved in this. And that’s what’s critical for people to understand: that this is a cartel-style corruption.”

Kelleher argues that the Libor scandal is proof that the financial industry “is corrupt and rotten to its core.” “The same executives [using] the same business model that crashed the entire financial system in ’08 are still running these banks,” he says.

Category: Legal, Video

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5 Responses to “Taibbi/Spitzer/Kelleher ‘Cartel- Corruption’ Behind Libor Scam”

  1. David Merkel says:

    A few people have liked this recent post of mine:

    http://alephblog.com/2012/07/06/an-analysis-of-three-month-libor-2005-2008/

    It comes to the conclusion that there are two equal-sized coalitions of banks pulling opposite directions on LIBOR. Open to other thoughts…

  2. Non Sequor says:

    I’ve been trying to wrap my head around this scandal. From what I understand, LIBOR is supposed to be an objective benchmark of banks’ average borrowing costs and the scandal is that the banks are actually treating their LIBOR submissions as game theoretic moves to maximize their advantage.

    So if I understand the real issue correctly, it’s that in a contract tied to LIBOR between an entity that can influence the LIBOR rate and an entity that can’t, we can expect the LIBOR entity to on average have the upper hand. Really it’s a similar issue to what you have with ISDA rulings on what constitutes a default: you have contracts that reference an external standard determined by a body that is a consortium of parties to those contracts.

    It seems to me like the only wy to make a system robust against these kinds of failures is to restrict banks exposure to contracts tied to things they can influence. This would mean either replacing LIBOR with a benchmark determined from a broader base of borrowers or letting banks continue to use LIOR, but requiring them to net out or cap their potential gains from influencing it.

  3. Blissex says:

    As Sreve Waldman and others show the “prime rate” in the USA has been “managed” by USA banks and the Fed/regulators to greatly boost bank lending profits to individuals, to allow them a cushion when they have trading losses:

    http://www.interfluidity.com/posts/1160447599.shtml
    “the spread between the Federal funds (and Treasury bill) rate and the prime rate widened from 1 1/2% to 3% in 1991. That was Greenspan’s gift to the banking sector to insure that major banks would not fail. You may recall at the time that rumors were rife — including some repeaed on the floor of the House — that Citibank was about to go under. By doubling the margin between the prime and the funds rate — and essentially increasing the profitability fourfold after taking into consideration the costs of processing loans”

  4. Blissex says:

    «the scandal is that the banks are actually treating their LIBOR submissions as game theoretic moves to maximize their advantage.»

    So if I understand the real issue correctly, it’s that in a contract tied to LIBOR between an entity that can influence the LIBOR rate and an entity that can’t, we can expect the LIBOR entity to on average have the upper hand.»

    Not in an individual sense, but in the aggregate yes. Note that the LIBOR was underreportred thus giving a discount on interest rates to those who borrowed from the banks at LIBOR plus a spread.

    But of course banks were trying to hide their insolvency, because LIBOR is in effect also an indicator of the insolvency risk of a bank, and thus underreporting LIBOR made banks in aggregate look better and thus able to postpone insolvency and to pay less for credit default swaps on each other.

  5. KingCast says:

    Ha!
    In another life I remember closing Libor loans…. ick. I’m sorry.

    On the local front at least Sand Canyon took a hit in NH… but too late for my friend Jeanne Ingress, who lost on the EXACT SAME ISSUE in the EXACT SAME COURT…

    http://www.youtube.com/watch?v=j50fXCojAkI

    We must press on.