Pierpont’s social conscience is a tiny shrivelled thing that has hardly stirred for decades. But even your hard-bitten old correspondent is starting to become perturbed at the behaviour of the world’s major investment banks.
They make zillions of dollars, rip off clients mercilessly and are above the law. Pierpont retains only a faint glimmer of the old Protestant ethic, but it keeps whispering in his ear that any corporation that is too big to fail must necessarily be too big to exist.
Well – okay. That anti-banker attitude has began to mainstream in the last few years. But what is Pierpont’s actual complaint (emphasis added)?
The rapacious behaviour of the big investment banks led directly to the global financial crisis. Worse, they are still manipulating markets. The same big banks that are proven to have been manipulating the Libor rate are alleged to have been manipulating the interest rate swaps market, and have probably (as Pierpont has mentioned previously) been manipulating the gold market.
Consider the Libor scandal, where the banks were found to have manipulated the interest rates but the case against them was thrown out last March by Federal judge Naomi Buchwald of New York’s southern district.
Of course it was thrown out – what the banks had been doing was not a crime. If only more judges would be so sensible.
So here is a description of what the banks had been up to:
Libor is the London Interbank Offered Rate, used as the benchmark in financial dealings for trillions of dollars around the world. Banks might lend money to each other, for instance, at Libor plus 50 basis points (0.5 per cent). The Libor rates are published daily at 11.30am GMT by Thomson Reuters for 10 currencies over terms ranging from overnight to one year.
The British Bankers’ Association (BBA) assembles a panel of 16 banks who predict each morning the rates at which they can borrow. Thomson Reuters receives the rates, eliminates the top and bottom four quotations, averages the middle eight and so produces the Libor rate for the day.
So the banks voluntarily disclose information and then allow everyone else to piggy back off that information to set prices in the market. So what happened next?
… a bunch of bank clients claimed banks had been submitting artificially low rates between August 2007 and May 2010. These dates cover the depths of the global financial crisis, when many of the world’s leading banks were arguably insolvent.
The clients said the banks understated their borrowing costs because they wanted to pretend to be sounder than they actually were. The same banks then sold Libor-based financial instruments to their clients at those artificially low rates. The City Council of Baltimore, for example, was claiming damages because it spent hundreds of millions of dollars buying interest rate swaps tied to artificially low Libor rates.
It is very hard to get excited about this. So what? Price takers engaged in voluntary transactions.
What is particularly interesting about all this is:
The clients must have thought they were on an easy win in the case because some of the banks had already paid fines after being accused of manipulating Libor. Barclays paid $US450 million ($479 million), UBS $US1.5 billion and the Royal Bank of Scotland $US615 million. Yet oddly, no senior figure from any of the banks has been prosecuted, or will be.
Buchwald was aware of these fines, but dismissed them airily. She said: “It might be unexpected that we are dismissing a substantial portion of the plaintiffs’ claims, given that several of the defendants here have already paid penalties to government regulatory agencies reaching into the billions of dollars.
“However, these results are not as incongruous as they might seem. Under the statutes invoked here, there are many requirements that private plaintiffs must satisfy, but which government agencies need not. The reason for these differing requirements if that the focuses of public enforcement and private enforcement, even of the same statutes, are not identical.”
Here the judge is exactly correct – just because government agencies had been successful in a regulatory shakedown doesn’t mean that any wrong-doing had actually occurred. Shame on Barclays and the Royal Bank of Scotland for succumbing to regulatory blackmail.