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By Tom Cushing

Loans? LIBORs Loused

Uploaded: Jul 11, 2012

Mention the term LIBOR in almost any group, and half will assume a speech impediment, a third will change the subject and the remainder will excuse themselves, eyes a-glaze. To combat this problem, I will try to intersperse a few movie references in the material that follow, because this stuff is important.

To paraphrase the hapless manager of the Durham Bulls baseball team: "Banking is a simple game; you borrow the money, you pay the money back, and the bank charges you interest on it." Except it's not, as we are beginning to learn. Yet again.

To define terms, the LIBOR ("London InterBank Offered Rate") is the interest rate big banks pay to borrow money that they eventually lend to you. It is set as an average among rates reported from leading banks around the world. The numbers are crunched by the British Bankers' Association. On the borrowing side, a low LIBOR reported by a bank is a sign of its good health, as others are willing to lend to it with little risk of default. It also means that the reporting bank's "derivatives" securities go up in value (you'll have to trust me on that one, lest I lose you completely). On the lending side, however, higher LIBORs mean higher interest rates paid by borrowers.

Indeed, the LIBOR very often determines the interest rate you pay to your bank – world-wide, some $750 Trillion dollars of debt transactions are "pegged to" (based on) the LIBOR. That's 750 thousand billions, for those keeping score at home. Your mortgage, student loans, and car payments, to say nothing of business and government debt, are all based on it. So, it's important for each bank and the banking system that it be computed accurately, and honestly.

Except it's not. Barclay's Bank in London has just admitted that for much of the past decade, it has routinely submitted false numbers to fool government regulators on both sides of the pond as to the bank's health, and at the behest of their traders to boost profits in derivatives (low) or lending (high). Further, they claim to know of other leading banks that do the same thing. They have agreed to almost $½ Billion in fines, so far, and their top two officers have resigned. By the way, Barclay's head trader is one Rich Ricci, one of the great names in the annals of business buccaneering (but I digress).

Now, you don't have to manipulate the LIBOR very much to have a big impact on profits. Recall the movie Office Space, where the underlings conspired to rip-off their employer for a million bucks by extracting 1/10 cent from each transaction? It's like that, only writ very, very large. It is bad enough for the economy that between the mid-1980s and 2007, financial-sector earnings made up two-thirds of all the growth in incomes. Finance, after all, moves money around but does not add intrinsic value, or productive jobs – we are now learning that the financiers didn't even do it fairly, but by gaming the system.

No less a commentator than Robert Reich has already called this "Wall Street's Scandal of Scandals," so I hope you have some moral outrage left in you. Institutions are busy toting up their losses; the vast number of Benjamins involved nearly defies computation.

Beyond the strict financial damages, it is the gospel truth that our economic system depends on an implicit contract of trust among participants in it. Too many breaches of that covenant, and folks won't participate. Personally, I've withdrawn from the stock market in disgust because I simply can't stand the idea that I'm some billionaire's stooge. The financial system has so far survived my departure, but as these scandals widen and deepen -- and too many others also leave the game -- economic activity just has to suffer, precisely when it needs a good shot in the arm.

Since the repeal of the Glass-Steagall Act that separated lending from trading, the banking sector has become too clever by half, and now we learn that they've been ripping us off in ways we can't easily discern. I yearn for the palpable greed of A Wonderful Life's Mr. Potter – or even the version espoused by Gordon Gecko. It's said that you can steal more money with a pen than with a gun – that's true in spades if you're armed with a sophisticated trading system, an anything-goes corporate culture, poor oversight (at best) and exceptional ethical flexibility.

One last point: I've often railed in these missives against the 'Citizens United' decision of the US Supreme Court; this is why. The Wall Street lobby has all but gutted the so-called Dodd-Frank Act, intended to improve regulatory oversight in the wake of 2008. You may bet that some significant portion of these ill-gotten gains will find their way to campaign coffers as a tithe to ensure lax regulation, and insure against other financial system reforms. One more reference, from a brilliant 1970s movie whose time has now come: "Woe is us – we're in a LOT of Trouble!"