In July 2013, it was announced that NYSE Euronext would be taking over LIBOR to restore its credibility. Since most people are unfamiliar with what this means, here is a quick primer:
LIBOR = London Interbank Offered Rate. LIBOR is the global benchmark for short-term interest rates. This rate is placed on an estimated $360 trillion of financial products worldwide, products such as mortgages and auto loans. Essentially, LIBOR is the interest rate used when banks lend money to each other. Offered rates differ depending on an institution’s creditworthiness. The lower the creditworthiness, the more percentage points are added to LIBOR, so a bank with questionable creditworthiness must pay more to borrow money than a more creditworthy bank. The higher LIBOR goes, the more it costs a bank to borrow money, which, in turn, means that the bank raises the interest rates on their loans to customers—borrowers like you and me.
Why should you care? There are two reasons. First, as I explained above, the short-term interest rates on the debt you and I have is directly affected by LIBOR. If you have an adjustable-rate mortgage, for example, it is probably directly indexed to LIBOR, meaning your payment amount is affected by the rise and fall of LIBOR. The second, more important reason you should care, is because we now know that LIBOR is rigged. The rate is ostensibly “derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year” (source: Investopedia). But it turns out, the British Banker’s Association, comprised of 16 international member banks, has been manipulating the rate to benefit traders at large financial institutions who can simply call London and ask that the rate be lowered or raised. This is important, because when LIBOR goes up, it makes it harder for little people like us to get a loan. LIBOR can even counter the effects of a rate cut by the Federal Reserve, making them non-effectual, so we are talking about a single interest rate that affects the entire global financial system and everyone caught in its web.
The predictable response to the exposure of the LIBOR rigging activity, which hit the news in July 2012, was to act as if this was a one-time, isolated incident perpetrated by a few rogue traders. Three banks were fined $2.5 billion, but think about it: banks make money by charging their customers interest, fees and collecting their deposits. So who really paid that fine?
Now, the next step in the public relations counterattack is to do what corporations always do when their product is tarnished: re-brand. That is what today’s news is about. In an attempt to restore integrity to the tarnished LIBOR image, they are moving the party to Wall Street. The NYSE Euronext will pay just $1 so that Wall Street can rig LIBOR directly, rather than having to go through the bother of picking up a phone and asking someone in London to do it for them.
A little background: Euronext is a stock exchange that was created when the Amsterdam, Brussels and Paris exchanges merged. Euronext purchased the London International Financial Futures and Options Exchange and the Portuguese stock exchange about ten years ago, making it one of the world’s largest exchanges before its merger with the NYSE in 2008.
Does anyone believe that New York has any credibility or integrity to lend? Hasn’t Wall Street become synonymous with corruption, greed and destruction of wealth for all but the 0.001%?
For me, the deeply troubling thing about the LIBOR scandal is that no revolution happened. If people truly understood the implications of LIBOR rigging, there would have been blood in the streets. At the very least, the regulators should have filed criminal charges, people should have been arrested, tried and sent to prison. But as long as the former doesn’t happen, neither will the latter.
Andrew Lo, Professor of Finance at MIT said the LIBOR scandal “dwarfs, by orders of magnitude, any financial scam in the history of markets.”
Wait a second, Dr. Lo. I’ve got an even bigger scam for you: rate-fixing in the foreign exchange market, perpetrated by (who else?) the world’s biggest banks.
What is the foreign exchange market, you ask? “The daily $4.7 trillion currency market is the largest in the financial system and is pegged to the value of trillions of funds, derivatives and financial products.” Financial product is a fancy industry term for fairly boring stuff like bonds (debt) and stocks (equity), but it also means credit cards, auto loans, mortgages and other stuff you and I pay for. So if your equity (stock) investments have taken a hit because of, say, exposure to currency exchange fluctuation, your loss was likely some trader’s deliberate gain.
In less than one year, the most massive financial scam in the history of the markets was eclipsed by an even more massive scandal. But this time, the corporate media made sure it didn’t get the same level of coverage as the LIBOR scandal. And if you have even heard of either of these scandals, like most of us, you didn’t probably understand what it meant or how it might affect you.
But these scandals do affect you. If you have debt, you are likely paying too much (in interest) because NYBOR (the new name for LIBOR) is rigged. And, if you have equity investments, you are likely earning less because foreign exchange market rates are fixed. These two scandals are incontrovertible evidence that there is no such thing as a free market, not in this country, nor anywhere in today’s global financial system. They prove the system is not based on fundamentals or the “invisible hand” or irrational exuberance. It is manipulated and controlled by a handful of powerful financial institutions, primarily in the U.S. and UK.
There is little discussion about the failure of regulators to identify, prevent or prosecute any of these crimes. So the idea that more rules will somehow solve all these problems is dangerously naive, particularly since the narrative in the corporate media is that we need less regulation. Since there is no hope, nor any change, on the horizon, we are presented with two stark alternatives: more loophole-ridden rules poorly enforced by ineffectual regulatory agencies that have been totally captured by the industries they are supposed to be keeping in check…or no rules at all.