Jul 082012
 

In the latest economist, on the LIBOR

 The attempts to rig LIBOR (the London inter-bank offered rate), a benchmark interest rate…. betray a culture of casual dishonesty;

There seems to be a lot of culture of dishonesty. And i remember reading similar stuff when the American banking scandal broke.

The evidence that has emerged from the Barclays investigation reveals two types of bad behaviour. The first was designed to manipulate LIBOR to bolster traders’ profits.

apparently, they were working with other traders in other banks to fix the rates, leading the Economist to conclude that

This bit of the LIBOR scandal looks less like rogue trading, more like a cartel.

The second type was with the nod nod wink wink of the regulators and was ‘ethically’ (economist uses the word, not me) more complex

because there was a “public good” of sorts involved

Public Confidence, that was damaged by an earlier banking scandal,  being a Public good…

Asks the Eurasia Review

What’s the most basic service banks provide? Borrow money and lend it out. You put your savings in a bank to hold in trust, and the bank agrees to pay you interest on it. Or you borrow money from the bank and you agree to pay the bank interest.

How is this interest rate determined? We trust that the banking system is setting today’s rate based on its best guess about the future worth of the money. And we assume that guess is based, in turn, on the cumulative market predictions of countless lenders and borrowers all over the world about the future supply and demand for the dough.

But suppose our assumption is wrong. Suppose the bankers are manipulating the interest rate so they can place bets with the money you lend or repay them – bets that will pay off big for them because they have inside information on what the market is really predicting, which they’re not sharing with you.

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There are just too many banking scandals in the last 30 years. Banks have done everything from cleaning up drug money, to duping regulators in various countries, to selling junk bonds, to the sub prime crisis – essentially what you and I would call consistently deviant behaviour. Each time they are slapped on the wrist, fined and behave for a short period before they revert back to their normal market fixing mode. Bloomberg, not some left liberal organisation, but Bloomberg says

We don’t countenance bank bashing. Nor have we ever called on regulators to bust up big banks. But it’s difficult to defend an industry that defrauds the market with fake interest-rate figures, thereby stealing from other banks and customers.

But, the ground level reality as far as any regulation is different. Any attempt to regulate this behavior, internationally, is met with howls of protest on stymieing free markets. But, when you have fixing to this level, and cartelisation to this level – the market ain’t free. It is highly controlled by a few interests that loathe any form of transparency.  If you look at the cost levied by the  these institutions on ordinary tax payers and their impact on the world economy & its stability – it is astounding. Most of Europe, a lot of America, growth in developing economies have all been held to ransom by criminal activities of the formal financial sector. Development has come screeching to a halt and millions, if not billions, are going back into poverty. If that is a not a crime against humanity, i don’t know what is.

family portrait(the banking crisis – destabilising the development and aspirations of millions, if not billions)

This is not some abstract crime on collusion and a few getting rich and the rest not being impacted. It is a story with repurcussions for ordinary people. People who have lost homes because of LIBOR fixing, senior citizens whose pensions have disappeared after the sub prime crisis,  investments that have no value, lost jobs, shut down companies,  global recession have all been par for the course in the last decade or so – caused by the flagrant violation of rules by the international banking sector. Western Governments have tried to fix this, but it is like using band aid on a gushing wound.

The problem is  punishment. A few jail terms, a slap on the wrist vis-a-vis fines exist,  but it is not enough. What is the cost of ruining the lives of billions of people? The answer is quite simple – shut down the company. Transfer its accounts to someone else – prefrebly a nationalised bank and shut the damn thing down. Shareholder need to realise that with ownership comes responsibility. And part of that responsibility is to follow the law. That if they can partake in profits and extraordinary profits, they are also liable for losses. It can’t be a situation where they benefit all the time, and you and I (non share holders) pay for the losses. The losses cannot just be absence of dividend.

If a human being did this – it would be the death penalty or a life in strict confinement. No questions asked.

The entity concept of a business gives a business all the advantages of being a person, and none of the disadvantages. That needs to change. The way we fundamentally look at business practises needs to change. IF they enjoy the benefits that you and I do, it is time they started facing the penalties that you and I do. A 100 years ago a bank would be prudent because if it failed, its promoters carried the can and would have had to pay off liabilities personally. That system  had its own set of issues and associated instability. it needed to change, and it has. The current system is more stable vis-a-vis ordinary investors, has helped banking – as a system- grow. But, there is something fundamentally flawed about a system that allows its promoters all the financial benefits and very few of the financial repurcussions of their actions.

What exists today as punitive action  is ridiculous. it is the equivalent of asking a mass murderer to sit in the corner and contemplate his misdeeds. To ensure legal compliance there needs to countervailing action that acts as a deterrent. The problem exists because  there is isn’t punishment that is scary enough to prevent crime. Fines are a write off. Instability to the company  will be bailed out the tax payer. People get other jobs in  a few years. Life goes on till the next scandal. To stop this cycle – Shut down two large global businesses and see the rest fall in line. Ensure that every one down the line, in the chain of command, cannot work again except in a McD check out. Confiscate assets, and see the problem correct itself.

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Finally, before free market fundamentalists get on my case, let me state – i believe in free markets. But this particular market is a cartel. An oligopolistic cartel that fixes price to the detriment of the market at large. It needs to be punished. And publicly. (public flogging will be nice, but it is a bit futile flogging an ATM) ….

and finally, via Ashish Aima ( @ashishaima) on twitter