Thursday, July 12, 2012


Well...lend me a nickel & lend me a dime,
repossess my house any old time.
Financial institutions think they're so high faluting...
Just a bunch of fruits in three piece suits,
trying to steal all my loot.
-Mojo Nixon, "I Hate Banks"

JP Morgan
I'm no economist. Frankly the more I learn about the system and how economies work, particularly the modern mess that US economics is built around, the greater a headache I get. Its contradictory, insane, imaginary, brilliant, and absurd all at once. It long has been a joke in English law that the massive millennia-old pile of common law that has heaped up over the years is nearly incomprehensible and can directly contradict its self. America has some goofy laws, but England's set of laws is something only a madman could come up with and it got that way just by being slowly added to and agreed upon for century after century all across the country.

And that's what economics are like. Its just piled up over the years by practice and duct tape and now its this bizarre, hideous mangle of wires and pipes and bones and nightmares towering into the sky. Take LIBOR.

Libor is the "London Interbank Offered Rate," which is basically the interest rate that banks charge each other for loans and transactions. LIBOR is the base rate that most banks in the world use for their interactions, one of those things like Greenwich Mean Time that just ended up being commonly used for a variety of reasons.

A few weeks ago I started reading about LIBOR and a scandal involving it but didn't know enough about it to really comment on it, so I let it lie. This blog has never been about scooping everyone or being first with a story anyway, its more about analyzing and understanding what others are discussing already.

At the Ace of Spades HQ, Ace wrote a good overall study of the scandal including what Libor is and how it all fit together, so I began to understand it better. I know, I like Ace a lot but you really ought to be reading that blog if you aren't already. I'm serious.

So what the scandal was is this: it was revealed that many banks were under reporting the interest rates they were borrowing money at to seem more solvent and stable. They'd borrow money at, say 7% interest, and report that they were borrowing it at 4%. This made it seem like they weren't spending as much, were getting better returns, and were overall doing better as a financial institution.

Apparently just about everyone was doing this. They were doing it regularly and as a matter of course, sort of a gentleman's agreement, with a wink. It wasn't so much a deliberate attempt to deceive and trick the public as it was meant to protect the bank, prevent fears, and present greater strength to, say, stockholders. They knew it was wrong, but it was considered more jaywalking-wrong than fraud-wrong.

Well the problem is that apparently banking regulators knew what was going on, and let it happen. In fact, according to Tim Worstall at Forbes, they were encouraging the practice.
That’s the heart of it: during the Crash the authorities knew that everyone was lying through their teeth about what the real Libor rate was. The reason being that the rates being reported were not including the perceived credit worthiness of some, if not all of the participants. It absolutely was a false market and Barclays were by no means the only ones falsifying it.
Why didn't they act? Because it would undermine confidence in the financial system, resulting in a greater collapse. It was all a huge lie, propped up with the agreement of those meant to keep them from committing fraud. Oh but that's not a bug in the system, according to Charles Gasparino at the New York Post:
The New York Fed has two main functions: It handles the transactions whereby the overall Federal Reserve controls the nation’s money supply, and it’s supposed to be the chief regulator of the big banks in its region.

When Obama named him for Treasury, the banking industry hailed Geithner as a godsend. Shares shot up on his announcement, and CEOs called it a wise choice for a key job at a time of crisis.

But the dirty little secret on Wall Street is that the New York Fed is a horrible regulator: It sees its chief job as keeping the banking system intact. Since it needs its member banks to buy US government debt and to control the money supply, the last thing it wants to do is shed light on the banks’ shady practices.

Which is why the Wall Street power brokers loved Geithner so much: On his New York Fed watch, he basically let them get away with the financial equivalent of murder, letting them take on the astronomical amounts of risk that ultimately blew up the system in 2008.

And then, when they needed a bailout, he was there with a plan that made sure their banks and jobs were safe.
The financial system - set up in party by the financial companies themselves, and maintained carefully by former financial corporation workers and allies in the legislative bodies of various nations - is to keep these businesses going, not to protect the public or currencies.

The entire system is there to help these companies, all the laws are to help these corporations, and the regulators are in on the joke. They're not a business in just one nation, they are international, and in the efforts to make a unified system for international banking, they've rigged the entire system to win no matter what happens. This isn't about the local First Bank of Bumflop Arkansas, its about the mega corporations like CITI and Goldman-Sachs. These guys really are the bloated, chuckling pig lighting $1000 cigars with a corner of the Mona Lisa smeared in fat rendered from orphaned children.

SorosThat's the thing: these worries and angers at corporations aren't totally unfounded, there are really some incredibly powerful, evil bastards manipulating the system to help themselves get insanely rich. Its not new, there's been financiers like the Medicis and others for almost a thousand years now and they got incredibly powerful by the most underhanded and crooked ways imaginable. The original guys who built the intercontinental railroad across America played some financial games to get it done like Credit Mobilier, but it was monsters like Fisk and Gould who took them over and those guys were about as crooked and above the law as any Hollywood screenwriter could imagine.

The funny thing is, you never really see any movies about those evil guys. The bad guys they show in the movies are pikers compared to what these fiends pull off, the kind of scheme they do on an off day or have an intern handle while they're off manipulating currencies that crash an entire country so they can change its laws. Guys like Soros are the kind of men who do that these days, and they get a pass. Too big? Too scary? Perhaps their outrages and extremes are difficult for screenwriters to portray plausibly.

In the end, I have to go with Mojo Nixon about these mega banks:

One caveat: Mojo is ignorant enough to think these guys align themselves to any one political party.

1 comment:

Anonymous said...

It is truly bizarre. During the height of the crisis the fear was so extreme that interbank lending had seized up to the point it didn't exist. There weren't enough transactions to set a realistic rate and so there was collusion at all levels to set a lower sham LIROR rate to assuage the fear and stem the panic.
But who was most panicked? Why none other than those most intimately involved in manipulating the LIBOR rate. And even though they knew they were telling themselves a lie, it calmed them and soothed their fears; sort of a mental placebo.
The proper thing would have to suspended LIBOR until markets settled down, but presumably that would have created greater uncertainty and even a lie can alleviate uncertainty if you wish upon it hard enough.

But I guess what galls me the most, is that as an outsider, who is not an expert in these matters, if you offer up this critique, they dismiss you as if you are an ignorant imbecile. One of the great moral hazards in the financial services industry is that the outsize salary and bonus structure leads to the false belief that they are exceptionally intelligent.
So the more they pay themselves the more deluded they become.