The banking scandal Wall Street fears
When did you stop believing Wall Street’s promises that the latest banking scandal was a one-off and would never happen again? For many who were still credulous, the tipping point may have come this week, with the London interbank offered rate (Libor) rigging scandal.Libor (and its European counterpart, Euribor) are benchmark interest rates, calculated each day after traders at leading banks estimate the rates at which their banks could borrow money. Libor is then used to “to set interest rates on $350 trillion of dollars and euros of loans and other obligations globally.” Yes, $350 trillion. If you have a credit card, a car loan, a student loan or a thousand other common loans, including an increasingly high percentage of mortgages, there’s a good chance your interest rate is indexed to Libor. (My Post colleague Dylan Matthews has a more extensive summary.)
The affair first hit the public spotlight last week, when Barclays Bank agreed to pay a $450 million fine to U.S. and U.K. regulators. But Barclays is only the first domino: Between 15 and 20 banks have been named in various Libor-rigging investigations or lawsuits throughout Europe and North America. “This is the banking industry’s tobacco moment,” the chief executive of a multinational bank told the Economist. “It’s that big.”
The Libor rigging came in two flavors, but rarely have two parts so well crystallized the problems in regulatory and banking culture. The less sinister of the two bouts of rigging is the later one, from 2008, when Barclays and a number of other banks allegedly kept their rates low to hide the poor state of their balance sheets. On its own, this is bad enough: Though keeping the interest rates low helped consumers in the short run, they disguised the extent to which the banks were in danger.
Worse, though, is emerging evidence suggesting that some regulators may have encouraged banks to keep those rates artificially low. As Noam Scheiber noted, the rigging shows once again that,
in order to get corruption in your banking system, you don’t need literal corruption of the Government Official X owns shares in Bank Y variety (or even Official X wants to work at Bank Y after he leaves government). You just need banks big enough so that the bureaucrats keeping an eye on them have nightmares about what happens if the banks fail. At that point the bureaucrats will dedicate themselves to keeping the megabanks afloat at all costs, even it requires methods that aren’t on the up and up.
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