For those of you who don’t follow banking industry news, we are about to enter another banking related shitstorm. The short version is that a large group of banks colluded to steal very small amounts of money from basically every person on Earth for about five years. The money siphoned off from consumers is estimated to be in the billions of dollars. This latest in a long line of banking and finance scandals is not anticipated to send the “Global” Economy (which mostly means the OCED economies) into a downward spiral, but I think there are good reasons why USians (among others) should still care.
First by way of background for those unfamiliar with how interest rates are set, LIBOR is the London InterBank Offer Rate. [Wiki] Its the interest rate banks charge one another typically for short term borrowing. LIBOR is relevant to the rest of us because its rate is used as the “base rate” in many other types of loans. The idea is that the rate that banks would charge each other is a cheapest market rate because banks are so creditworthy (HA!), so the rates of all other borrowers can be adjusted based this lowest market rate. For a example a floating rate mortgage may require that the homeowner pay LIBOR plus 2 percent or a credit card may charge LIBOR plus 8 percent. If banks lend to one another at 1 percent then the homeowner pays 3 percent and the credit card borrower pays 9 percent.
Something like $800 trillion – no that is not a typo, I do mean *T*rillion – dollars in assets are affected by LIBOR. [The Economist]
So what happened? Well, what always happens when you give a small number of people unfettered control over the reins of our economy? COLLUSION! A bunch of traders allegedly got together and said…Hey! If we knew what the LIBOR rate was going to be tomorrow we could trade on that information and make enormous amounts of money! And then they realized…oh wait…our friends over there at the other table are the ones who tell the people who calculate LIBOR what the rates are. Hey, you guys want a cup of coffee?
Seriously, they bribed them with coffee. [UK Government's Complaint - PDF]
(Okay, there was probably more than coffee involved, but I like the hyperbole.)
The full consequences of this fraud may never really be known. But as economist Robert Shapiro explains:
Early analysis suggests that for several years, the LIBOR was off by an average of 30 to 40 basis points. (A hundred basis points equal one percentage point in an interest rate.) That is enough, for example, to add $50 to $100 to the monthly cost of a $100,000 loan. In 2007 and 2008, Americans held $11.1 trillion in outstanding residential mortgage debt. At the time, between 30 percent and 40 percent of that debt carried adjustable rates. If the bankers’ manipulations of the LIBOR was responsible for raising LIBOR rates by just 20 basis points in that period, their shenanigans added between $1.1 billion and $2.2 billion to the yearly interest paid by American homeowners.
[Shapiro's Blog via an MSNBC article]
Given that consumers will likely never see that money again why should we care? Because there is something we can do to protect consumers going forward. While many of us would prefer wholesale change to our political and economic solutions, I think incremental change is still worth pursuing. In the US, I think that means we need to defend (politically) the financial regulation we have in place from attempts by “free-market” asshats to undermine its effectiveness and we need to work to extend oversight of financial institutions. One thing we’ve learned from recent history is that financial institutions have extraordinary reach, the ability to defraud substantial numbers of people, and no real fear that their fraud will ever be detected.
To be completely partisan for a second, the Republican party seems determined to keep it that way. Recently, the House voted to “defund” implementation of Dodd-Frank. [The Hill.] Since the Republicans regained the House in 2010, they have systematically reduced the ability of our regulatory agencies to police the financial markets by repeatedly cutting their budgets [New York Times Editorial]. Now Romney is running on a platform that includes the repeal of Dodd-Frank - or at least parts of it…which parts he’s not ready to talk about yet…but it will include the parts that are “unnecessary.” [Bloomberg]
Can you guess whose interests he’ll be considering when making the determination of what parts are “necessary”?