Just when you thought it was safe to go back to the ATM ... or pad your money-market account ... or refinance your mortgage ... or take on a little strategic credit-card debt (there is such a thing) ... along comes the Libor scandal.
You would think—or at least hope—that consumers and businesses had already been buffeted by enough bad news: shocking financial manipulation, exotic financial products, taxpayer bailouts, deflated real-estate markets, and Botox-tight credit markets. This financial formaldehyde has taken a vast and hideous toll since 2007: global recession, anemic job creation, diminished consumer confidence, static wages, lost and unrecoverable real-estate wealth, crippled public pensions, and, recently, municipal bankruptcies in three California cities (Stockton, San Bernardino, and Mammoth Lakes), as well as the imposition of minimum wage for city workers in Scranton, Pa.
This is the damage we know and can tabulate.
Libor’s damage could be bigger, more far-reaching, and more consequential. Anyone who has tried to wrap their journalistic arms around the Libor scandal (many have done it and always do it better than I) finds that adjectives fail miserably to capture its true dimensions.
As is my wont, I fall back on movies—1960s and ’70s movies, to be exact. In the 1976 film Silent Movie, Mel Brooks plays Mel Funn, who tries to save Big Picture Studios from a greedy, bloodthirsty New York conglomerate called Engulf and Devour. The company’s motto is, “Our fingers are in everything.”
Libor isn’t about a company. It’s about a collection of banks. And interest-rate manipulation. And widespread, invisible (until now) financial harm, wreckage, and ruin. It’s a very technical story with many impenetrable layers. Many questions remain unanswered, and even for Wall Street and Fleet Street sophisticates, the essence of the scandal is hard to describe.
Before voters and politicians can get to these details, they first need to have a sense of scope. Helpfully, I suggest Silent Movie’s evil company—Engulf and Devour—and its slogan. Libor is, at its heart, about decisions made that engulfed and devoured vast swaths of the global economy—because Libor’s fingers were in everything.
Libor is the London interbank offered rate. It is the rate that the world’s 18 most powerful banks say they charge each other to lend funds to one another. It was, until recently, regarded as the gold standard of bank rates—rock-solid and reliable because the biggest banks, in theory, would not want to manipulate or deceive each other. This assumption led to the widespread use of Libor as the benchmark off of which interest rates were set for almost every financial product in the civilized world—from fancy derivatives ($550 trillion) all the way down to humble, vital, and consumer-necessary products like home mortgages, auto loans, credit cards, and student loans. Everything.
And now we know, thanks to sharp-eyed and courageous investigators at the Commodity Futures Trading Commission, that in the feverish days of the global financial meltdown, banks lied to each other. They said they were being charged less than they were actually paying for day-to-day loans. Why? Exposing the actual rate would have shown the public how awful their balance sheets were. That could have provoked a run on their assets and punched a fast ticket to oblivion. Banks lying to banks. Big deal, right? Well, yes. Those lies fouled up Libor and distorted interest rates for trillions upon trillions of dollars in global financial products. Barclays has admitted—the only bank so far to do so—that it intentionally manipulated Libor during the financial crisis. Barclays has settled and paid a fine of more than $450 million, and its CEO, Bob Diamond, has resigned.
But that’s just the beginning. Other banks are implicated, including Bank of America, Citigroup, Royal Bank of Scotland, UBS, and Lloyds.
New York Attorney General Eric Schneiderman and his Connecticut counterpart, George Jepsen, have already launched investigations into U.S.-based banks and their involvement in the Libor matter. A small bank in Wisconsin, Community Bank & Trust of Sheboygan, has already filed suit alleging Libor manipulation was a global conspiracy that kept interest rates artificially low and deprived it of free-market profits. The city of Baltimore is locked into debt swaps it can’t unwind because of low interest rates and wants compensation because Libor kept the rates down. California’s Public Employees’ Retirement System, the nation’s largest with $233 billion in assets, fears losses linked to Libor shenanigans.
The bigger and more tectonic loss is one of trust in the financial mechanisms of the global economy. Libor has shredded the last vestige of trust. That damage will last for decades.
Meanwhile, President Obama and presumptive GOP nominee Mitt Romney haggle over when Romney left Bain Capital. And Romney’s unreleased tax returns. And Solyndra loans. And outsourcing. Candidates make issues important. Voters decide in part on the basis of that debate.
But in the grand scheme of things, these “issues” are trivial compared to Libor. Obama and Romney have to know this. And yet, in the main, they have had nothing to say.
Which makes me wonder if this campaign is really about the economy at all.
This article appears in the July 18, 2012, edition of National Journal Daily.