Rigging the Price of Money on a Grand Scale

Some people earn their money by honest means.  Others do so at the expense of one another.  If you borrowed money from a bank between 2005 and 2009 to buy a house or car, to pay for school, or if you happened to use a credit card during that time, you’ve likely been duped by a collaborative price rigging scheme courtesy of the big banks.

No doubt, this is quite a revelation.  In short, what it means is that nearly everyone – including businesses and investors – who used credit between 2005 and 2009 was swindled.  What’s more, they were swindled in a major way.

“This dwarfs by orders of magnitude any financial scams in the history of markets,” said Andrew Lo, a professor of finance at the Massachusetts Institute of Technology.

Charles Ponzi, Bernie Madoff, Kenneth Lay, Bernie Ebbers, Dennis Kozlowski, can’t hold a candle to the price fixing scheme the big banks orchestrated.  What Ponzi and the like did were small potatoes by comparison…they just scammed their clients and customers.  The big banks, on the other hand, scammed everyone.

Obviously, we wish we were making this up…but, alas, we are not.  What follows is a brief review of this insulting racket…

Manipulating Rates to Benefit Trading Positions

The LIBOR – London Interbank Offered Rate – represents the interest rates that banks borrow from each other at.  The LIBOR is based on data reported daily by up to 18 large banks.  Thomson Reuters collects the data, removes the highest and lowest figures, and calculates the averages to create the LIBOR.

According to the Commodity Futures Trading Commission (CFTC), more than $800 trillion in securities and loans are linked to the LIBOR, including $350 trillion in swaps and $10 trillion in loans, including car loans, home loans, student loans, and credit card rates.  As you can see, a lot of debt is priced by this benchmark.  Moreover, just the slightest movement in the Libor affects investment returns and borrowing costs the world over.

“Between 2005 and 2008, Barclays traders repeatedly requested that colleagues in charge of the LIBOR process tailor the bank’s submissions to benefit their trading positions,” reports CNNMoney.  “Barclays staffers also colluded with counterparts from other banks to manipulate rates.

“In addition, between late 2007 and early 2009, Barclays made artificially low LIBOR submissions.  This was during the height of the financial crisis, and the bank was afraid that if its submissions were too high, it would get punished in the markets as investors questioned its health.”

But it’s likely Barclays isn’t the only bank at fault…

“Suspicion has now fallen on all the banks that participate in the LIBOR process.  Deutsche Bank, Royal Bank of Scotland, Credit Suisse, Citigroup, and JPMorgan Chase are among the institutions that have acknowledged they are being investigated by regulators.”

Rigging the Price of Money on a Grand Scale

Methods of financial fraud are endless.  There’s stealing, misrepresentation, and lying.  There are also practices that are less obvious but equally deceitful.  For instance, insider trading, diverting funds from their specified use, paying dividends with borrowed money, selling securities without full disclosure of new information (i.e. the Facebook IPO), taking securities orders but not executing them, cooking the books, and on and on.

Last week, Barclays settled with the CFTC, U.S. Justice Department, and Britain’s Financial Services Authority for $453 million…mere peanuts for manipulating an $800 trillion market.  This week, Barclays CEO Bob Diamond resigned.

While more penalties and punishments may come it won’t right the colossal wrongs that have been done.  People are sent to the hoosegow every day for petty theft, yet the big banks get away with rigging the price of money on a grand scale.  Something about this doesn’t seem quite right.

Of course, this is what happens when a small group of select individuals are given the power to stand the world up on end for their advantage.  When the time comes, and push comes to shove, they yield.  After that they yield some more.

This also makes a mockery of the notion we live in a free market economy.  In this respect, the price of the economy’s most important commodity – its money – has been fixed by bankers.  On top of that the federal funds rate – the price banks pay to borrow money from the Federal Reserve – is fixed by the Federal Open Market Committee.  After that every other good and service in the economy must adjust and distort accordingly.


MN Gordon
for Economic Prism

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