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I'm shocked, SHOCKED I tell you!
Jun. 30th, 2012 11:26 amRick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here! [a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much. [aloud] Everybody out at once!
The last couple of days have been exciting ones in the world of banking and finance. Barclays Bank, led by the American transplant Bob Diamond, was fined by the American and British banking regulators for manipulating the LIBOR to make the bank money.
What is LIBOR, you ask? It's the consolidated rate at which banks think they will pay to borrow overnight to other banks, and is determined each day at around 11:30 am British time in London. Each major bank makes a prediction and those are averaged and then published. It's a broad measure of how much risk banks expect in the banking system as a whole. So if a banking liquidity crisis looms, the LIBOR goes up as banks try to hedge against bank failures. If banks are well capitalised and unlikely to fail, the LIBOR goes down, and there are situations where the banks desired LIBOR to fall, as well, and manipulated it downward.
Now why does this matter, and what should be done about it?
It matters because interest rates on variable loans are set using LIBOR. It matters because foreign exchange rates are set, in part, with reference to LIBOR. When LIBOR is higher, banks receive more interest on their overnight loans. So manipulating LIBOR to be higher is lucrative for banks in general and their investment banking arms in particular.
Mr. Diamond, who already forwent last year's bonus, now is forgoing this year's bonus as contrition for the activity and the fine. He refuses to resign, as he did not know about this activity. I expect that sooner or later he will resign.
Other banks are about to be exposed as gaming LIBOR as well, as this activity was not limited to Barclays.
Listening to Radio 4's breakfast news and comment program Today this morning, I was struck by the number of times that Ken Clarke (former Chancellor of the Exchequer in John Major's government) and Lord Lamont (ditto) said that they were "shocked" at this news. Captain Renault in Casablanca immediately came to mind.
I have read news stories about LIBOR gaming in various periodicals. The timing of placing loans can change the rate quite spectacularly, depending on how large the loan is. I really wonder how shocked anyone who knows anything about banking really can be.
In years past, bankers settled their deals with a handshake and a word—their word was their bond. A story going the rounds recently concerned a banker who, years ago, discovered that he had made an error in an agreement with another bank. He called his counterpart at the other institution and asked that the error be corrected. The other banker agreed, but added, "I will never do any business with you again." Nowadays it seems that the word is "Bollingers" (a bottle of which was a reward for a banker who successfully influenced the rate).
I believe that these revelations seriously impugn the decision to allow commercial and investment banking to go on in the same institutions. Commercial banking is easily understood: a bank takes deposits, lends them out for interest, and then applies some of that interest to the deposits and uses the rest for dividends to its shareholders and operational costs of the bank.
Investment banking increasingly seems like a shell game, where the depositors are the suckers and the bankers (through their large salaries and huge bonuses) are the shills. When their investments are not so successful, they endanger the entire bank and we, the taxpayers, fork out money to save both halves of the bank.
I am not an economist, nor do I play one on the Internet, but I feel that the Glass-Steagall act needs to be relegislated quickly. The commercial bank can form the bedrock of economic recovery in that it prudently assesses risks, lends according to that assessment, and charges a fair amount of interest on the loan. The money it lends out serves to stimulate the economy. The investment bank seems to exist to make money for the bank itself, and for its staff. When it loses, it raids the rest of the bank to make up the losses. There is thus less money to invest in loans to productive businesses. The two activities of lending to business and investing in financial instruments need to be separated, so that the dangerous and risky activities of the latter do not endanger the prudent and productive activities of the former.
There has also been a lot of comment on the place for morality and ethics in banking and in taxation. Is it immoral to seek to limit your tax liability by means that are not straightforward? Is it ethical to game the LIBOR simply to make a few hundred thousand pounds for your bank and perhaps increase your bonus?
The free market is not free if information about the market is not available to everyone who invests in it. Insider trading is illegal because those who have access to it can increase their profits or decrease their losses therefrom, while those who do not have information blindly lose whichever way the market goes. Similarly, if the LIBOR is gamed to benefit the bankers, those who trade in foreign exchange or who simply need to convert money from one currency into another lose out. Those who have loans whose interest is set to LIBOR lose out to the bankers.
As for morality in taxation (see Jimmy Carr and K2 for more details on that), is it right that those with a large amount of money can shelter it from taxation? The tax system's fairness depends on everyone being completely upfront with their income information and having taxation assessed on that information. When it's gamed like it has been, the only people who benefit are rich people (who, after all, ride on the same roads as we do, often use public healthcare facilities with us, and have gone to schools that were paid for and supported by taxation) and the bankers who devise these avoidance schemes.
I can't fix these things, of course. But there needs to be informed public debate about morality and ethics in business and finance, and if necessary public regulation to ensure that the market operates as it should, that commercial banking becomes boring again, investment banking shoulders all the risk of its activities, and taxation is fair to everyone.
Captain Renault: I'm shocked, shocked to find that gambling is going on in here! [a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much. [aloud] Everybody out at once!
The last couple of days have been exciting ones in the world of banking and finance. Barclays Bank, led by the American transplant Bob Diamond, was fined by the American and British banking regulators for manipulating the LIBOR to make the bank money.
What is LIBOR, you ask? It's the consolidated rate at which banks think they will pay to borrow overnight to other banks, and is determined each day at around 11:30 am British time in London. Each major bank makes a prediction and those are averaged and then published. It's a broad measure of how much risk banks expect in the banking system as a whole. So if a banking liquidity crisis looms, the LIBOR goes up as banks try to hedge against bank failures. If banks are well capitalised and unlikely to fail, the LIBOR goes down, and there are situations where the banks desired LIBOR to fall, as well, and manipulated it downward.
Now why does this matter, and what should be done about it?
It matters because interest rates on variable loans are set using LIBOR. It matters because foreign exchange rates are set, in part, with reference to LIBOR. When LIBOR is higher, banks receive more interest on their overnight loans. So manipulating LIBOR to be higher is lucrative for banks in general and their investment banking arms in particular.
Mr. Diamond, who already forwent last year's bonus, now is forgoing this year's bonus as contrition for the activity and the fine. He refuses to resign, as he did not know about this activity. I expect that sooner or later he will resign.
Other banks are about to be exposed as gaming LIBOR as well, as this activity was not limited to Barclays.
Listening to Radio 4's breakfast news and comment program Today this morning, I was struck by the number of times that Ken Clarke (former Chancellor of the Exchequer in John Major's government) and Lord Lamont (ditto) said that they were "shocked" at this news. Captain Renault in Casablanca immediately came to mind.
I have read news stories about LIBOR gaming in various periodicals. The timing of placing loans can change the rate quite spectacularly, depending on how large the loan is. I really wonder how shocked anyone who knows anything about banking really can be.
In years past, bankers settled their deals with a handshake and a word—their word was their bond. A story going the rounds recently concerned a banker who, years ago, discovered that he had made an error in an agreement with another bank. He called his counterpart at the other institution and asked that the error be corrected. The other banker agreed, but added, "I will never do any business with you again." Nowadays it seems that the word is "Bollingers" (a bottle of which was a reward for a banker who successfully influenced the rate).
I believe that these revelations seriously impugn the decision to allow commercial and investment banking to go on in the same institutions. Commercial banking is easily understood: a bank takes deposits, lends them out for interest, and then applies some of that interest to the deposits and uses the rest for dividends to its shareholders and operational costs of the bank.
Investment banking increasingly seems like a shell game, where the depositors are the suckers and the bankers (through their large salaries and huge bonuses) are the shills. When their investments are not so successful, they endanger the entire bank and we, the taxpayers, fork out money to save both halves of the bank.
I am not an economist, nor do I play one on the Internet, but I feel that the Glass-Steagall act needs to be relegislated quickly. The commercial bank can form the bedrock of economic recovery in that it prudently assesses risks, lends according to that assessment, and charges a fair amount of interest on the loan. The money it lends out serves to stimulate the economy. The investment bank seems to exist to make money for the bank itself, and for its staff. When it loses, it raids the rest of the bank to make up the losses. There is thus less money to invest in loans to productive businesses. The two activities of lending to business and investing in financial instruments need to be separated, so that the dangerous and risky activities of the latter do not endanger the prudent and productive activities of the former.
There has also been a lot of comment on the place for morality and ethics in banking and in taxation. Is it immoral to seek to limit your tax liability by means that are not straightforward? Is it ethical to game the LIBOR simply to make a few hundred thousand pounds for your bank and perhaps increase your bonus?
The free market is not free if information about the market is not available to everyone who invests in it. Insider trading is illegal because those who have access to it can increase their profits or decrease their losses therefrom, while those who do not have information blindly lose whichever way the market goes. Similarly, if the LIBOR is gamed to benefit the bankers, those who trade in foreign exchange or who simply need to convert money from one currency into another lose out. Those who have loans whose interest is set to LIBOR lose out to the bankers.
As for morality in taxation (see Jimmy Carr and K2 for more details on that), is it right that those with a large amount of money can shelter it from taxation? The tax system's fairness depends on everyone being completely upfront with their income information and having taxation assessed on that information. When it's gamed like it has been, the only people who benefit are rich people (who, after all, ride on the same roads as we do, often use public healthcare facilities with us, and have gone to schools that were paid for and supported by taxation) and the bankers who devise these avoidance schemes.
I can't fix these things, of course. But there needs to be informed public debate about morality and ethics in business and finance, and if necessary public regulation to ensure that the market operates as it should, that commercial banking becomes boring again, investment banking shoulders all the risk of its activities, and taxation is fair to everyone.
