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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 5, 2012 at 9:54 AM

A new banking cancer: The LIBOR scandal

Sigh. Another day on the crime beat.

The London Inter-Bank Offered Rate, or LIBOR, is an interest-rate benchmark that affects borrowing costs and credit for some $800 trillion in financial instruments. And the banksters have been manipulating it for their profit. Ground zero, for now, is the probe of Barclays, which thought it would quickly dispense with the problem by settling with U.S. and British regulators for $450 million. Now its American-born CEO Robert Diamond has been forced to resign, along with the bank’s chairman and chief operating office. He was interrogated by a parliamentary committee Wednesday, which did not fawn on him as the U.S. Congress did on Jamie Dimon.

Other big banks, including American institutions, are under investigation. As the Economist magazine put it, “The attempts to rig LIBOR…not only betray a culture of casual dishonesty; they set the stage for lawsuits and more regulation right the way round the globe. This could well be global finance’s ‘tobacco moment’.”

Why manipulate LIBOR? To pad trader’s profits and perhaps give a dishonest reading of a bank’s true borrowing costs and financial situation. Collusion among banks is also alleged in faking the borrowing rates. The more explosive allegation, made by Diamond, is that the rigging received the green light from the Bank of England, the central bank, apparently in an effort to calm the panic during the financial crisis. This latter issue reminds us of the lapdog, compromised regulators in the United States. But the behavior continued and was highly profitable, dishonest and produced losers among those who weren’t part of the “in circle” of collusion. Again, these are institutions that know they can take high risks because they will be bailed out by taxpayers.

And, yes, this affects the EU, too, whose banks didn’t have enough trouble. A “tobacco moment”? We shall see. Big Tobacco never had the political pull of the big banks. But the solution is simple: A 21st century Glass-Steagall and criminal prosecution of the top playerz.

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Today’s Econ Haiku:

How your garden grows

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Comments | More in Banking

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