Monday, July 16, 2012

Not Frank Ocean or Love And Hip Hop Atlanta, It’s LIBOR Stupid

What I attempt to tackle in this tractate is very important. No it is not about Love and Hip Hop Atlanta, Frank Ocean being Gay or his new release, it pertains to the LIBOR banking scandal. Now I know many may not care because it is not on the prior topics, but believe me it is more impactful and important on your daily lives than any of the scolisims listed as direct objects in the second sentence of this paragraph.

My interest in global economics began rather gratuitously, when I was given a book to read by one of my dormitory mates some three decades ago while an undergraduate at Morehouse College called “Tragedy and Hope” by Caroll Quigley. Since that time I have been well served, in particular given the saving and Loans crisis, Enron, financial crisis of 2008, the Lehman Brothers and AIG crises, and recently with loss of funds in MF Global and what have occurred with respect to PFGBest. Now there is the LIBOR scandal, which I think will be even more than or at least as disastrous as the massive amount of US debt held by foreign nations and the Eurozone crisis. Never had I imagined corruption would be so visible albeit I wrote and predicted such several times in 2008.

I attempted to find out the pulse of this from the African American perspective; however, after reading The Root, The Loop 21, The Grio, and a few other supposedly mainstream African American political and economic news outlets, I was astonished to find they had not written about LIBOR at all. Maybe I expected too much. Maybe their writers could not move beyond writing about Republicans, President Obama, or Mitt Romney, or worse that what they considered important and news worthy was frequently limited to Frank Ocean coming out of the closet, Reality TV and the mishaps of Celebrities ad nausea. Maybe they did not or have not studied global finances historically or read books like Ahmed Piquant “Lords of Finance” or Michael Panzer’s “When Giants Fail.”

LIBOR (the London Inter-Bank Offered Rate) is a benchmark off which to price commercial loans, mortgages, and other forms of lending. It has been a staple in the news as of late due to the admission by Barclays bank admitting that it deliberately understated the interest rates at which it could borrow between September 2007 and May 2009. So astonishing was this revelation that Barclays Chairman Robert E. Diamond Jr. resigned although he informed the British Parliament that he did not know that his bank was manipulating the index on which a major portion of international trade is based, in particular the rate at which banks loan money to other banks. Strange since the Wall Street Journal reported these occurrences four years ago.

Now most, or at least some who are well read are knowledgeable tacitly of Bernie Madoff and Enron’s Ken Lay, however the Libor interest rate scandal is even bigger because it not only involving hundreds of trillions in international derivatives trade, it impacts each of us directly in our pockets daily. For if the banks submitted artificially low Libor rates during the financial crisis in 2008, as Barclays has admitted, it would have led cities and states to receive smaller payments from financial contracts they had entered with their banks. Moreover, if such is the case, then by bankers’ manipulation of this major interest rate linked to hundreds of millions of dollars, then cities, states and municipal agencies nationwide, may have lost money in their public pension system and budget short falls as a consequence may have let to layoffs and even the loss of services due to closing parks, swimming pools, fire stations or other public sector offerings. Especiallly given the current economic conditions across the country and given that municipalities had borrowed based on rates derived via the manipulating the Libor rate of an estimated a $800 trillion derivatives market. The rate manipulation was occurring at a time in which the money was needed it the most – during a recession.

A coterie of banks are involved in setting Libor each day, including Bank of America, JPMorgan Chase, Deutsche Bank, Citigroup, and HSBC and Barclays. The Federal Reserve Bank of New York learned in April 2008 (Timothy F. Geithner served as the head of the New York Fed during this period), that some banks were reporting false interest rates.

All of the aforementioned is fact. We know about LIBOR because last month, Barclays admitted to regulators that it tried to manipulate Libor before and during the financial crisis in 2008, and paid $450 million to settle and also noted that other banks were doing the same, but none of them have been accused of wrongdoing. This even with a corpus of E-mail records of market manipulation so lucid that if the top executives were unaware it was simply because they did not want to.

On the personal level, the LIBOR rate influences what consumers, businesses and investors pay on a wide range of financial contracts from mortgages and interest rate swaps to credit cards and student loans. For the average monthly mortgage, I would estimate that it cast a family anywhere from $50 to $100 extra each month.  Umair Haque explained it the following way in a blog post for the Harvard Business Review: “Let me couch this for you in the pedestrian terms of financial hydraulics — the tawdry terms which seem to substitute for thinking in what's become of our thin, shallow economic and political discourse. The most basic function of a financial system is to price money. If a financial system can't undertake that simple task effectively — if the price of money is fixed like a roulette wheel stuck on red — all else must necessarily fail: investment must become malinvestment, speculation must precede creation, "profit" must become divorced from benefit, and wealth is effectively transferred from poor to rich, in a form of quiet but lethally effective institutionalized theft.”

Yep, it is on, and I do not even belive most of the world, especially my folk (African Americans) even care or want to understand this issue.  Sure it is about economics but it is not complex.  The problem is having the will and impetus to want to understand and know something. Again as I have stated many times before, Carter G. Woodson was correct: “If you can control a man's thinking you do not have to worry about his action. When you determine what a man shall think you do not have to concern yourself about what he will do. If you make a man feel that he is inferior, you do not have to compel him to accept an inferior status, for he will seek it himself. If you make a man think that he is justly an outcast, you do not have to order him to the back door. He will go without being told; and if there is no back door, his very nature will demand one.” 

11 comments:

nicki nicki tembo said...

As aslways, excellent coverage professor! You are a sentinel lamp post amidst darkness. Unfortuante that the adage ever rings of truth: there are none so blind as those who will not see.

But uh, loved the way Haque used the term "pedestrian" in that quote...

Kelso said...

Nice work, scholar.

Let's put this in even more pedestrian terms. LeBron James has a lot of money, right? 20 basis points (1/5 of 1%) in LIBOR worth more than 2 million LeBron Jameses.

As for "Tragedy And Hope," I understand that since MacMillan relinquished rights to the redacted portions when they realized what was actually in that book and broke the plates, that the redacted portions are in the public domain and the TRAGEDY AND HOPE SOCIETY will be coming out with a free add-on of the redacted pages.

Remember how frustrated I used to get because of the idiots, slaves and zombies and how I couldn't understand why 9-year old kids in Managua watch the same dopey American TV and listen to the same music as Americans do, but can still do complex interest rate and f/x problems -- FOR PLEASURE?

Well, I got my answer finally. This is a great video and not a bad way to spend five hours at all -- on the TragedyAndHopeChannel. Aside from explaining the idiots, slaves and zombies problem, Gatto also gets into "Tragedy And Hope" quite a bit and has a couple of unexpurgated copies.

http://youtu.be/YQiW_l848t8

Be well, my friend.

no slappz said...

torrance writes:

"Since that time I have been well served, in particular given the saving and Loans crisis, Enron, financial crisis of 2008, the Lehman Brothers and AIG crises, and recently with loss of funds in MF Global and what have occurred with respect to PFGBest."

Let's see. The Savings & Loan Crisis. Thank you, Jimmy Carter. By repealing Regulation Q, a banking regulation, Carter set the stage for the collapse of that segment of the financial world. Your government at work.

Enron? A largely functional corporation headed by a handful of crooks who sank an otherwise good ship by manipulating electricity sales, by creating a phony department and by the crooks in charge stealing some money. But 99% of the employees were engaged in honest work.

The Fiancial Crisis of 2008? Thanks again go to Jimmy Carter for the Community Reinvestment Act that mandated giving mortgages to people who, if they felt like it, would refuse to repay them.

Aided and abetted by Democrats who further liberalized mortgage-lending regulations, in part by allowing Freddie Mac and Fannie Mae to purchase mortgages of lower and lower quality. Once again, your government at work.

Lehman Brothers? It's gone, having died a death tied to the way it financed itself and how that practice one day failed in a catastrophic way. No big deal.

AIG? Received goverment LOANS to get it through the crisis. Those lonas have largely been repaid, and they will be totally repaid in a year or two. Nice recovery for a corporation suddenly on the ropes. Can't say things are likely to go as well for General Motors, however.

MF Global? Looks like weak internal controls and weak regulation are the two culprits. But it appears some of the money has been located and returned to those to whom it belonged. Still, it's a troubling situation.

PFG Best? Looks like an outright scam run by a once-decent guy who turned crook. The money appears to be gone.

Kelso? Wild. Still in Panama?

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