As go most recent scandals, the Libor scandal has shaken
investor’s confidence, outraged public officials and impacted financial
institutions across the globe. Libor,
also known as the London Interbank offered rate, is a key interest rate tied to
trilions of dollars of debt throughout the world. Typically speaking, the lower this rate is
the more difficult it is or banks to make money so with an artificially low
Libor rate, banks may be losing money on that immense amount of debt greatly
impacting their financial strength.
Although information is still streaming in, it appears the
initial culprit of the Libor rate fixing scandal was Barclays, an international
institutional money management firm based out of London. Barclays manipulated the rate so their balance
sheet appeared more robust and to show they were able to borrow money at a
lower rate than was true which would give off the perception of a lower risk
company. By keeping the perception of
low risk, financially strong, organization, Barclays cost of capital would
remain low and allow them to be more competitive in the market place. Interestingly enough, the issue with Libor
and how the rate is identified had been a concern as far back as 2008 when the
U.S. Government (in particularly the Fed) got in involved in telling the Bank
of England that they were concerned with the rate and the methods by which it
was produced. All of this came to head
on June 27th 2012 when Barclays admitted to Libor rate fixing and
was fined 290 million pounds by the UK and US collectively. Following that, the Chairman, CEO and COO
all resigned as the shake up continues to greatly impact this
organization. Now, there is a potential
class action lawsuit filed by The Community Bank & Trust of Sheboygan
alleging they lost revenue because of the artificially low rate as did
thousands of banks across the U.S.
What’s interesting from a leadership standpoint is this
entire debacle falls, again, into the “too big to fail” category as noted in
the below except from Paul Craig Roberts article “The Libor Interest Rate
Manipulation Scandal in Full Perspective.”:
The Federal reserve will reply:
“So, you want us to let interest rates go up? Are you prepared to come up with
the money to bail out the FDIC-insured depositors of JPMorganChase, Bank of
America, Citibank, Wells Fargo, etc.? Are you prepared for US Treasury prices
to collapse, wiping out bond funds and the remaining wealth in the US and
driving up interest rates, making the interest rate on new federal debt
necessary to finance the huge budget deficits impossible to pay, and finishing
off what is left of the real estate market? Are you prepared to take
responsibility, you who deregulated the financial system, for this economic
armageddon?
Roberts is referring to interest rates in general and in the
overwhelming impact they have on our national and global universe. Great leaders tend to do what is ethically
and morally right, regardless of the consequences. But what if the consequences included the end
of U.S. power, national bankruptcy and more?
I definitely don’t know the answer to this one, but insanely enough,
without the artificially low interest rates (Treasure rates included which the
Fed manipulates publicly by purchasing large quantities of to drive up prices
on the bonds and lower yields/rates) all of the above mention items become
reality and the government could truly falter.
Article Citations:
I like both Paul Craig Roberts and I'm definitely a fan of Nomi Prins. The paragraph you quoted is definitely though provoking (regarding the Fed letting interest rates truly float).
ReplyDeleteGreat leaders will follow ethics and morals, that's what earns them the title of a great leader. The reality is that great leaders are few and far between. We just have leaders, and thats being nice. If we're being honest, I would classify a fair amount as criminals.
Should the Fed let the treasury bubble pop? You bet. Get it over with. Only an idiot with gangrene in an extremity would argue that they should keep their infected limb. Any rational person knows it will infect the rest of the body. The same with the treasury bubble. Pop it, get it over with, and we can all move along. Right now, you're perpetuating the fall, and the fall is going to be even harder.
We all want leaders to do what is ethically and morally right, but in this case the consequences are frightning. Im in the same boat with you, who knows what the right answer is. At some point the bubble is bound to pop, and I'm positive that fall is going to hurt.
ReplyDeleteYes we all want leaders to do what is ethically and morally right, but time and time again we see that they do what is in their best interest. Pop the bubble well it will pop sooner than later so why not pop it sooner. The sooner the better, as things will start to fix on their own eventually.
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