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July 14, 2012 9:44 PM   Subscribe

Banksters this story stretches far beyond Britain. Barclays is the first bank in the spotlight because it offered to co-operate fully with regulators. It will not be the last. Investigations into the fixing of LIBOR and other rates are also under way in America, Canada and the EU. Between them, these probes cover many of the biggest names in finance: the likes of Citigroup, JPMorgan Chase, UBS, Deutsche Bank and HSBC. Employees, from New York to Tokyo, are implicated.
The rotten heart of finance. A scandal over key interest rates is about to go global.
Naomi Wolf: The media's 'bad apple' thesis no longer works. This global financial fraud and its gatekeepers.
posted by adamvasco (127 comments total) 63 users marked this as a favorite

 
Capitalism is literally eating itself.
posted by bardic at 10:13 PM on July 14, 2012


I'm waiting for someone in the Big Finance Talks To The Media league to go, "what can we replace it with?"

Well, first we replace it with a complete re-up for Glass-Steagall, and then we send in a legion of forensic accountants, and then we send the bad actors to prison for fraud.

Which will probably happen about the time we genetically engineer members of the genus Sus with the extra limbs required for flight.
posted by mephron at 10:16 PM on July 14, 2012 [15 favorites]


Eh, one more headline; nothing changes.
posted by BlueHorse at 10:24 PM on July 14, 2012 [1 favorite]


Nothing has come out to calm my suspicions that if financial fraud had NOT been spreading steadily over the last decade, the banking system would have already collapsed. Because ever since I had the fortune/misfortune of a job in the late 80s that gave me a front row seat for the Junk Bond Bubble, it has appeared to me that America's (and maybe the world's) economy has been dependent on a series of ever-larger market bubbles and not much genuine growth.
posted by oneswellfoop at 10:31 PM on July 14, 2012 [6 favorites]




LIBOR busts could be a big deal. I've given up on a revolution in this country, but there is no way these things are going unnoticed. I keep thinking the Barclay's Center they are building down the street is going to be the next Enron field.

How about this story though? I just finished and its fascinating. I am sure there are some people on MeFi that know DragonNaturallySpeaking.

Goldman Sachs and the $580 Million Black Hole
posted by lslelel at 10:40 PM on July 14, 2012 [17 favorites]


Wow, that Dragon article is worth a read. Technoweenies eschew venture capital and get screwed on the sellout by Goldman.
posted by mwhybark at 11:15 PM on July 14, 2012


Honestly, I think the only people that can help us are the lawyers when they dive in and go hunting for someone to sue. Yes, I'm hoping for the lawyers to save us from the bankers. God help us all.
posted by Ghostride The Whip at 11:24 PM on July 14, 2012 [13 favorites]


That Dragon article is great. I was just looking at the software for a client a few weeks ago, and I had no idea they'd been bought out screwed over.
posted by figurant at 11:26 PM on July 14, 2012 [1 favorite]


Capitalism is literally eating itself.
posted by bardic at 1:13 AM on July 15 [+] [!]


That's the perfect metaphor. Like a snake with a tail in it's mouth, or a tumorous cancer feeding off of healthy tissue and itself, ultimately.

That whole "bad apple" theory was always such a Goddamned crock of Free MArket Cultist bullshit.

2008 was about something much more profound and intrinsic and pervasive, than simply a couple of "bad apples."

Now, finally will this LIBOR insanity really sway anyone to the need for real regulation and oversight? Will it even be possible for this to be truly fixed? Is this another harbinger of an even greater collapse than 2008??

Perhaps we should leave banking to the German's or Swedes, and perhaps the Canadians, and the Americans and Brits should simply get out of banking altogether, eh?
posted by Skygazer at 11:26 PM on July 14, 2012 [3 favorites]


Dear lord. That Dragon article is tragic, and horrifying. I think the moment where I freaked was when they listed the ages of the Goldman Four, and one of them was 21. I teach at a pretty good liberal arts college, and even among the best and brightest of the graduating seniors, there are none that I'd trust with $500, let alone $5mil. They just don't have the cognitive ability to understand the consequences when you're working with money at that magnitude.
posted by Saxon Kane at 11:31 PM on July 14, 2012 [3 favorites]


Again, none of this would be possible without the explicit backing of the Federal Reserve. Without the Fed's ability to invent cash from nothing, and give it their buddies in the banking system whenever their frauds get too noticeable, many of these financial entities would have failed in the 2001 timeframe, and the rest would have come out scorched and far, far more prudent.

We have a disease, but the disease isn't the bankers, it's the ability to generate wealth tokens from nothing to suit political and banking whims. In that kind of an enviroment, what we're seeing is absolutely inevitable. Both power and money corrupt, and being able to print money may be the most corrupting force humanity has yet devised.

The Federal Reserve should never have had the power to bail these people out. They haven't had to face the consequences of their own actions for decades. In years they did well, they kept huge amounts of money for themselves, and in years they did poorly, they could just stick their hands out and get wads of cash for free, from nothing.

How could we reasonably expect any other outcome?
posted by Malor at 11:50 PM on July 14, 2012 [14 favorites]




c'mon, let's see some real news. How about a "man-bites-dog" treatment of some part of the financial industry that might possibly be on the level?
posted by telstar at 11:58 PM on July 14, 2012


[Comment deleted, and a reminder for everyone: we don't do the wishing / fantasizing / advocating violent death/torture thing here. Thanks.]
posted by taz at 11:59 PM on July 14, 2012 [5 favorites]


This is horrifying, but I don't think the answer is gold. Frankly, I don't think there is an answer.
posted by maxwelton at 12:02 AM on July 15, 2012 [3 favorites]


Malor, fractional reserve banking is not the root of financial fraud. We had severe depressions in this country and others which lasted much longer (as well as serious financial fraud at the highest levels) long before the fractional reserve system. Precious metals backed currency is far more volatile and never prevented any of these types of problems. Currency bonds have been sold for centuries under very dubious conditions, and interest rates have been manipulated. You keep repeating this speech over and over at any opportunity, no matter how unrelated, but to me it only displays your ignorance.
posted by krinklyfig at 12:07 AM on July 15, 2012 [41 favorites]


"Without the Fed's ability to invent cash from nothing, and give it their buddies in the banking system whenever their frauds get too noticeable, many of these financial entities would have failed in the 2001 timeframe, and the rest would have come out scorched and far, far more prudent. "

Yes Mr. Goldbug, we should go back to the Stone Age. The invention of currency was the first step towards the inevitable dark ages.

I mean, once we stopped trading seashells for jerky we were doomed -- DOOMED!

So tiresome having to shoot you down every time these issues come up. Well-regulated finance can bring wealth to many and demonstrably improve lives/bring people out of poverty. What happened in 2008 was perfectly preventable. What's happening now is more of the same.
posted by bardic at 12:10 AM on July 15, 2012 [6 favorites]


(Which isn't to say there aren't major institutional problems with the status quo -- quite the opposite. But literally advocating for a return to a precious metal standard is beyond stupid. Kind of adorable though.)
posted by bardic at 12:12 AM on July 15, 2012


I think the most fundamental mistake is to conceive of contemporary finance as something capable of having basic integrity but subject to corruption. That exposes us to the fallacy of believing it to be capable of reform: "treat the corruption". A better approach is to recognise that corruption is an irreducible property of the rule set of an interest based debt finance system subject to moral hazard.

Scrap interest based debt finance systems, don't pile on more regulation. And to hell with whether the banks think that's a good idea. (Moderator: can we say "hell" in a post on Sunday?)
posted by falcon at 12:12 AM on July 15, 2012


Scrap interest based debt finance systems, don't pile on more regulation. And to hell with whether the banks think that's a good idea.

Yeah, the idea of return on investment (which is what interest on debt is) is at the center of global economic activity. Not sure what the Glorious Revolution will replace it with, but open to your ideas.
posted by downing street memo at 12:17 AM on July 15, 2012 [1 favorite]


Yeah, the idea of return on investment (which is what interest on debt is) is at the center of global economic activity

And the growth that is the stability criterion of global economic activity that is required by that idea is the driver of the converging crises of climate instability, resource depletion, failure of the industrial agriculture system, and systemic tendency towards domestic and international militarisation.

So glad you are open to ideas. There's plenty.
posted by falcon at 12:21 AM on July 15, 2012 [1 favorite]


"Scrap interest based debt finance systems"

In other words go back, literally, to the dark ages.

That's not throwing the baby out with the bathwater, that's throwing out the baby, smashing the basin, and burning down the house.
posted by Grimgrin at 12:22 AM on July 15, 2012 [2 favorites]


In other words go back, literally, to the dark ages.

Hilarious. I take it you aren't terribly familiar with the domain of alternatives to the current (arbitrary) financial system?
posted by falcon at 12:26 AM on July 15, 2012 [1 favorite]


More and more, I'm thinking that the problem of corruption in finance - since it, for better and for worse, won't be seriously resolved in a court of law - will be resolved by a combination of policy and legal muddle-throughs and, more importantly, growing elite disapproval of the financial world.

What does that mean? I wouldn't be surprised to see some lower-level actors go to jail for this, either here or in the UK (more or less equivalent, I think, for the purposes of discouraging future behavior like this). But more importantly I'm noticing a really sharp shift on attitudes towards finance in the business world. I'm a consultant and work primarily with managers outside the financial world: people with brand-name MBAs that didn't enter the world of finance. There's real, serious anger over the LIBOR-fixing, in part because it may have cost them lots of money, but I'm also getting the sense that they're tired of the shenanigans. Lots of my colleagues, past and present, are in MBA programs and all of them - to a man/woman - have said that they will not go into finance. When the debt rubber meets the road they might change their minds, but it's notable that no one is vocally aspiring to enter that industry.

That kind of opprobrium might take some time to ultimately have any effect on the size of the financial industry or its ability to do shit like this, but I do think it ultimately will.
posted by downing street memo at 12:29 AM on July 15, 2012 [4 favorites]


Hilarious. I take it you aren't terribly familiar with the domain of alternatives to the current (arbitrary) financial system?

I am! None of them have ever been shown to actually meet the needs of human populations at any serious scale. (Also, the profit motive is not exactly "arbitrary".)
posted by downing street memo at 12:30 AM on July 15, 2012 [2 favorites]


at any serious scale

Fallacy: "begging the question".
posted by falcon at 12:32 AM on July 15, 2012 [1 favorite]


A couple of scapegoats will be punished, governments will claim that 'mistakes' were made, more convoluted regulation will be slapped down and the key players will shift gears and quietly go on using the perverted system they created to take as much as they can.

Nothing will change.
posted by dazed_one at 12:32 AM on July 15, 2012 [1 favorite]


The idea that people will stop going into finance is ludicrous. 21 year old Ivy graduates are about making money first. Their morals might fully develop about a decade too late.
posted by bardic at 12:33 AM on July 15, 2012


Fallacy: "begging the question".

Uh...so scale is unimportant?
posted by downing street memo at 12:35 AM on July 15, 2012 [3 favorites]


The idea that people will stop going into finance is ludicrous. 21 year old Ivy graduates are about making money first. Their morals might fully develop about a decade too late.

It's quite admittedly my own anecdotal experience. But would you have seen something like this in the Harvard Crimson in 2007?
posted by downing street memo at 12:37 AM on July 15, 2012


Uh...so scale is unimportant? On the contrary - scale is precisely the problem. The contemporary system is of such a scale that it is uncontrollable (I need hardly make this point, given the OP).

None of them have ever been shown to actually meet the needs of human populations at any serious scale

In fact, the consistent pattern is that, as soon as they start to meet the needs of human populations at scale, they get shut down by the incumbent central bank. See, for example, the The Wörgl Experiment: Austria (1932-1933). Demurrage (negative interest) accelerated the velocity of money in the economy so much they got shut down by the Austrian bank, and outlawed by the Supreme Court.
posted by falcon at 12:43 AM on July 15, 2012 [6 favorites]


So you guys are arguing, in essence, that everything is just fine, when our financial system is riddled with corruption, the government, by GAAP standards, is at least $60 trillion in debt, we're running a trade deficit of $550 billion a year, foreign governments have dollar holdings measured in trillions, and our states are so impoverished that fixing the damn roads is a Herculean task for many. All this, in a country that was able to go to the moon, a little more than a generation ago, practically from change it found in the couch. Any of these problems would be huge and hard to deal with, but we have all of them.

And then you've got Europe!

Commodity-backed money is not perfect, because no commodity can really encapsulate wealth, which is energy, stuff, knowledge, and the ability to produce more of those. But it's a lot better than what we're using, which is fundamentally a total lie.... "this token has value". Being able to trick the economy into thinking we're giving it wealth, when no real wealth is actually being generated, allows us to dig holes of nearly unlimited size, to dig so far we can't see sunlight anymore. All it takes is a few bad ideas, and the absolutely unlimited backing possible by an entity that can create money from nothing, and your economy will eventually die.

It wasn't like this in 1971. Within living memory, things have gotten incredibly unstable and unbalanced. It's not normal for whole countries to be collapsing on all sides. It's not normal for banks to be claiming enormous profits one year, be begging for handouts from the Federal Reserve a year later, and then be declaring enormous profits the year following. This is pathologic behavior. This should not be happening.

It's like watching climate change denialists in action -- no matter how bad the damage gets, there's always some excuse why it's not the money system that's fucking everything up and making the entire world go haywire. It's always something else. Spitting out fictitious money into the global system is amazingly like carbon pollution -- the damage is slow and hard to see, but then starts to become visible in freakish, bizarre events that just get more and more and more common, and eventually the whole system starts to get unstable.

The parallels are striking, and I challenge you, if you're a believer that carbon can change the climate, to consider that the basis for money can change the economy.... and that doing well today, and that doing well twenty or fifty or a hundred years from today, are not the same thing.
posted by Malor at 12:54 AM on July 15, 2012 [22 favorites]


a country that was able to go to the moon, a little more than a generation ago, practically from change it found in the couch

Not with change it found in the couch. With the high EROEI hydrocarbons it found in the ground. Money merely acted as a proxy for that.

The growth of the financial system has paralleled the growth of the matter/energy system so closely that we have grown accustomed to forgetting the matter/energy system entirely.

Unfortunate, the matter/energy system went into permanent exponential contraction around 2005 (the uninvested depletion rate of the global hydrocarbon system is up around 10% per annum, a halving rate of 7 years). The financial system (under its current arbitrary rule set) is compelled to expand exponentially in order to service its interest burden. The divergence is ripping it apart.

The increasingly tortured efforts to explain the financial system's apparently inexplicable behaviour in terms of its own arbitrary and abstract rule set, while ignoring the behaviour of the matter/energy system it is the emergent property of, are remarkable to behold.
posted by falcon at 1:05 AM on July 15, 2012 [16 favorites]


"So you guys are arguing, in essence, that everything is just fine"

Nobody said this Mr. Paul. Quite the opposite.
posted by bardic at 1:08 AM on July 15, 2012


So you guys are arguing, in essence, that everything is just fine

Nobody is saying that.

It wasn't like this in 1971.

We haven't had an extended recession - in other words depression - since the 1930s. No, things weren't like this in 1971. But there were times before 1971 when it was far worse. Have you ever studied The Long Depression? One view is that shortages of gold due to recent gold rushes caused it.

Currencies with backing are no less a "lie" than any other currencies. They are placeholders for value and not valuable in themselves. Gold is highly speculative, as is silver, and this has long been the case - this is a major problem with gold- and silver-backed currency. Governments have no qualms with manipulating currency and confiscating precious metals held by the public when necessary or when not - the backing of currency with precious metals has never prevented this from happening. There is no guarantee against corruption, particularly in economies which deregulate financial activity.

It's like watching climate change denialists in action

Er ... except the broad consensus is your view is fringe and is not taken seriously by the vast majority of people who study economics and finance. You are in the conspiracy theory camp. In other words, by your analogy, you're the unscientific view - you're the denialist.

The consensus view by economists is that fractional reserve banking and Keynesian economics works. Corruption is a different issue and is not a product unique to fractional reserve banking nor the Fed.
posted by krinklyfig at 1:17 AM on July 15, 2012 [13 favorites]


I'll support a commodity-backed financial system as long as the commodity is energy (or some appropriate proxy for energy). Burning oil = burning cash. Installing a solar panel would be like buying an annuity. If you dug up fossil fuels you'd have to record the depletion as a capital loss. So many problems solved! which is why it will never happen
posted by A Thousand Baited Hooks at 1:20 AM on July 15, 2012 [4 favorites]


The consensus view by economists is that fractional reserve banking and Keynesian economics works

Otherwise known as "fallacy by consensus". I refer you to the time when the consensus view was that the earth occupied the centre of the universe.

In fact, neoclassical economics (the theoretical economic foundation of neoliberal capitalism) is undergoing wholesale destruction by people who understand its foundational literature better than the incumbents, and are using it both to demonstrate the fallacies of the axioms that underpin them and contradictions they set up, and to propose radical alternatives. Keen offers a great summary.
posted by falcon at 1:24 AM on July 15, 2012 [1 favorite]


Falcon: You do understand that Demmurage is just imposing a cost on holding money, and that the existing system of reserve banking does that via inflation?

A Thousand Baited Hooks: Morganite scum! Cede one of your bases to me or I'll crush you like a bug!
posted by Grimgrin at 1:24 AM on July 15, 2012 [4 favorites]


Grimgrin: Of course. And you understand that inflation reduces the rate of expansion, where demurrage explicitly imposes contraction?
posted by falcon at 1:28 AM on July 15, 2012


I'll support a commodity-backed financial system as long as the commodity is energy

The nickname for the US Dollar for a decades has been "petrodollar," in large part because the trade of oil is dominated by the USD (meaning other oil importers have to stockpile USD to pay for oil, allowing the US to run deficits and import cheaply), and because of this oil prices in the US have been relatively stable. The idea is that we're basically backed by oil, whether we formalize it that way or not.
posted by krinklyfig at 1:28 AM on July 15, 2012 [1 favorite]


Our first challenge is to create an entire economic infrastructure, from top to bottom, out of whole cloth. No gradual evolution from previous economic systems is possible, because there is no previous economic system. Each interdependent piece must be materialized simultaneously and in perfect working order; otherwise the system will crash out before it ever gets off the ground.
posted by A Thousand Baited Hooks at 1:29 AM on July 15, 2012 [3 favorites]


This global financial fraud and its gatekeepers.

crime. well organized.
posted by philip-random at 1:31 AM on July 15, 2012 [6 favorites]


Otherwise known as "fallacy by consensus". I refer you to the time when the consensus view was that the earth occupied the centre of the universe.

I was responding specifically to Malor's assertion that proponents of fractional reserve banking are akin to climate change denialists. In his analogy, the consensus view by academia is that climate change is happening, but he is wrong in suggesting the same is true of economics. The consensus view in economics doesn't support his view at all, and the analogy in fact argues against his assertion.
posted by krinklyfig at 1:31 AM on July 15, 2012 [1 favorite]


Moreover, there has been no shift in this view by economists since the crash. The problem is fraud and the deregulation of the financial markets which allowed it to flourish and fester into something very serious. This is not about the Fed, no matter how much Ron Paul insists it is.
posted by krinklyfig at 1:36 AM on July 15, 2012 [1 favorite]


Malor, the problem is not the way in which our financial system is organized. The problem is that a subset of society has decided that they will not operate within the rules of the system and has gained enough power in/over the government that they are not prosecuted for their pervasive tax evasion and fraud. Between the tailor-made loopholes and the basic evasion, we have Greece level tax compliance. But only among those who aren't paid on a W-2, of course.

Despite this, the IRS spends more time examining tax returns for EITC compliance than they do cross checking partnership returns against the individual returns of the partners. They hassle the people they have the least to gain from. Thank you, Republicans, for your assault on law enforcement. Fuck you, Democrats, for going along with it. This is all ancient history, of course, like Bush Jr. evading tax on $80 million in the 90s by misclassifying wage income as capital gains.

It's a goddamned testament to the resilience and hard work of the rest of us that there's anything still here despite the vampires sucking the blood from this country for the last 40 years.
posted by wierdo at 1:39 AM on July 15, 2012 [16 favorites]


Krinklyfig: Just so we are clear: on climate, the "consensus" - the body constituting decision making authority i.e. vested interest - maintains a view which is not informed by any recognition of physical reality. In finance, the "consensus" - the body constituting decision making authority i.e. vested interest - maintains a view which is not informed by any recognition of physical reality. To that extent, watching finance collapse denial is similar to watching climate change denial.

Moreover, to the extent that "consensus" economics i.e. neoclassical economics - has grasped the latest straw that fraud somehow accounts for their inability to foresee the biggest failure in financial history which their theories explicitly asserted was impossible - it is true that there has been no shift since the crash.

It not true to say there has not been a shift in the view that the consensus is wrong and in need of reform that goes beyond tidying up fraud.
posted by falcon at 1:49 AM on July 15, 2012 [1 favorite]


Guys LIBOR is an atavism, a throwback to before the 1980s when finance was a much more moral field. The expression "my word is my bond" arose in London and for, literally centuries, was the moral code bankers operated by.

Things changed once the old partnerships were eliminated and these firms became publicly held. Then the concept of "the shareholder" and "value" became predominant and nature just took it's course. Because when we (humans, not just bankers) operate in large groups we tend to lose our moral values and sense of intelligence, as so eloquently captured by George Carlin (RIP) -- "Never underestimate the power of stupid people in large groups.”

You see the old style banking partnerships - Salomon Brothers or Lehman Brothers (New York) or Morgan Grenfell or The East India Trading company (London) - back in the day were incredibly moral and upstanding for one simple reason: they were limited to the number of partners they could have. In the UK the original joint stock banks were limited to six, and the firm's total capital was limited to what each partner could contribute. It was the partners money at risk.

Think of the difference: if your firm did something that would lose money, the partners would lose money. Those places - back in the day - were incredibly well run businesses by comparison to what we have now on Wall Street (New York) or The City (London). Of course we're comparing apples and oranges since modern business (e.g., Citi) operate at a scale unimaginable back then (Citi has a balance sheet that is measured not in billions but trillions, and runs over 2,000 subsidiaries).

But LIBOR - back in the day nobody would even think of manipulating it. Bankruptcy and something worse - censure - would result. You'd never work in that field again as nobody would trust you. Nowadays its not your money at stake, its the shareholders and the worse that could happen is you'll lose your job. No big deal if you've got a reputation as a rainmaker as there is always another firm hiring, somewhere. In banking we've got an expression - "Its a big industry but a small circuit" - meaning somewhere, someone will know about you when you take a new job. Trouble is, nobody really seems to care these days about why you left your old firm and what wreckage you left behind.


However with this scandal I'm amazed this has taken so long to emerge. We knew there was something rotten going on back in 2008 and in fact I did an FPP on the subject. I closed the thread perhaps six weeks later with a story that effectively claimed BBA had "learned it's lesson" and was making necessary changes. Guess not much has really changed except folks forget. Right around that time many of my clients refused to use LIBOR and instead worked with OIS which is market driven.

The fundamental problem here is LIBOR, unlike the impression most news stories give, isn't a single interest rate. As you can see from April's quotes [ complete history is here ], there are multiple currencies and multiple maturities being quoted, which make the task of obtaining fair, market driven quotes from a small number of banks difficult - not all institutions will be as active in all currency / maturity combinations. This relative ill liquidity will manifest itself as wide bid / ask spreads.

However as London is the global centre of finance there is urgency now to change the way its quoted, since rumour has it New York is making a play for the business of setting LIBOR. It will be interesting to watch but I've often thought that ANY LIBOR stakeholder should be able to quote. So not banks offering to lend at LIBOR but also multinationals who wish to borrow should be able to quote. Wouldn't be so easy rig a market structured like that, for starters.

But I'm in The City five days a week and hear all sorts of crazy. This LIBOR fraud isn't the biggest thing that could have come out of the woodwork but it indeed is pretty damn bad. Here is something I'm concerned about and we're starting to talk about a fair amount, trying to figure out how to trade it: I recently did a blog post on the excessive amount of debt The United States has to refinance in the next five years, some 74% of the Treasuries currently in existence mature.

Why are we financing our deficit on the short end? Of course it is cheaper as short term rates are (currently at least) lower than long term, but hardly prudent.
posted by Mutant at 2:12 AM on July 15, 2012 [74 favorites]


But more importantly I'm noticing a really sharp shift on attitudes towards finance in the business world.

I've been unemployed for two years, and have been told outright by some places that my experience at Citigroup was grounds for tossing my resume right into the trashcan, both from direct-hire and agency recruiters.

I worked in IT. I kept machines and networks going. But because I worked for Citigroup in any capacity they don't want me.
posted by mephron at 2:22 AM on July 15, 2012 [2 favorites]


Mutant: You see the old style banking partnerships - Salomon Brothers or Lehman Brothers (New York) or Morgan Grenfell or The East India Trading company (London) - back in the day were incredibly moral and upstanding

This is pretty a naive reading of history, if you'll excuse me. The East India Trading company oversaw the imperial gutting of the (then) wealthiest economy in the world (India) and its conversion to one of the poorest. The role of banking in war, and the unholy trinity constituted by the banks, big oil, and government is forensically analysed in Engdahl's "A Century of War" (amazon). Have a read (here) at some of the exploits of the incredibly moral and upstanding Morgan bank in orchestrating war finance.
posted by falcon at 2:55 AM on July 15, 2012 [6 favorites]


Dear lord. That Dragon article is tragic, and horrifying.

Quite frankly, to someone who has been peripherically involved in a M&A "due diligence", it is far from surprising. As much as the NYT tries to spin the article otherwise, it emerges from it that the Bakers clearly wanted a positive opinion on L&H (since all other potential deals had fallen through) and Goldman Sachs provided just that. Should the Goldman Four have shown a stiffer spine and told Dragon more clearly that L&H accounts were far too opaque to "speed up" their due diligence? Yes. Should they have immediately picked up the phone to tell them that changing the deal to an "all share" deal was a bad, bad idea? Of course. It remains that in this case, as in many others, the so-called "due diligence" was a mere comfort blanket for the management to hold on while it pushed through the deal it wanted. What's outrageous is that investment bankers still manage to charge ludicrous sums for telling people what they want to hear.

And apart from that, why is anybody still bothering to argue with the resident goldbug?
posted by Skeptic at 2:57 AM on July 15, 2012 [7 favorites]


The fundamental problem here is LIBOR
Oh come on Mutant, the fundamental problem isn't LIBOR it's that pretty much everyone conspired to fix the rate and nobody cared that it was wrong. Nobody.

The report on what happened at BARCAP was madness and I think they went first because they know there's always more and it's always worse. BARCAP miscalculated the political reaction, but when the sheepish looking CEO parade is entering it's 5th month and the record fine doled out by the FSA or SEC changes weekly then LIBOR is not going to be what everyone takes away from this.

You're a very clever man Mutant, surely you must see that this culture, this world simply cannot continue to act with impunity. I know you're wealth must inncolulate you a little to the Hoi Poloi but I thought you lived in London, surely you can feel the mood change as you move in and out of The City.

I joke about revolution and guillotines but seriously, have you ever seen anything like this? Previous scandals were single institutions or single traders but now it's like everything is BCCI and everyone is Leeson.
posted by fullerine at 2:58 AM on July 15, 2012 [7 favorites]


Seconding fullerine. Reading "The Economist" last week gave me a bad case of cognitive dissonance, that with the special report on the LIBOR scandal basically depicting the City as an organised crime racket, while opinion pieces, and Bagehot in particular, scolding politicians for scapegoating the oh-so-necessary bankers. Many eyebrows were repeatedly raised.
posted by Skeptic at 3:13 AM on July 15, 2012 [3 favorites]


fullerine: I joke about revolution and guillotines

I had a post deleted above for a throw away line in the same vein, but (and?) there is a deadly serious point. What we interpret as civil society is really only a veneer, and that veneer is currently being maintained through the unsustainable injection of synthetic money into a dead system - life support, if you will. There is enough of an illusion of continuity to maintain the veneer but, being a chaotic system, the phase change in the financial system, when it comes, will be as rapid is it is unanticipated.

Meanwhile, US and UK governments are enacting the most fundamental withdrawals of civil liberties, and strengthening martial law provisions and the apparatus of civil disorder control out of all proportion to the fig leaf of "terrorist threat". They are doing this largely through the mechanisms of the deep state i.e. beyond public institutional scrutiny and accountability.

I don't mind a banker having a bigger house than me. I do mind that his family is getting fed and mine isn't. Public disaffection is about to enter a different category, not degree.
posted by falcon at 3:19 AM on July 15, 2012 [12 favorites]


A question:
When did it become banksters? Is this an Americanism? An affectation of wankers mixed with bankers? I can't recall seeing if before the GFC, and mostly on the Blue.
posted by Mezentian at 4:08 AM on July 15, 2012


Bank gangsters.
posted by seanmpuckett at 4:30 AM on July 15, 2012 [2 favorites]


Bank gangsters was never on my radar.
It is fitting.


Hey JB Morgan, how much money did you lose today?
posted by Mezentian at 4:38 AM on July 15, 2012


A few points:
1. How many people know what LIBOR stands for? Probably 1% of the population (a guess). Even with wikipedia most folks won't get it. Studying for the CFA and not passing still has some rewards...
2. How many steps is it from "This is what LIBOR does..." to "Banksters rigged LIBOR" to "This is how it's negatively affected your life"? Many, many steps - I've tried.
3. Remember the 2007/8/9 sub-prime/housing market/financial crash? Leaving aside the CDO issues, this was billed as "there was a housing bubble, it popped, now we have to clean it up" and nothing more.

To Joe Six Pack, #3 was a lot easier to understand than 1&2. Therefore the odds of this becoming a huge scandal are slim in my mind - if we didn't have riots in the street then, we're not going to have them now. It's much more likely that everyone from the politicians to the bankers that own them to say,"Nothing to see here, we paid a 0.001% fine, please keep moving along..."

Although I do hope that I'm wrong and that at about September this is a HUGE issue and that Obama can basically say,"Hey, I don't get this stuff either, it's folks like Rmoney who've done this to us...." and that the 20% of the "moderates" who haven't already made up their minds will swing to Obama. Maybe an October surprise of perp-walking a bunch of banksters! Yes, YES! Whooops, I think I've wet myself...

But I know it's all just a dream...
posted by Farce_First at 5:00 AM on July 15, 2012 [3 favorites]


Bank gangsters

If asked what type of gangsters are they then I believe drug dealers is the closest. Pusherman get mellow now.
posted by yoHighness at 5:04 AM on July 15, 2012




I am not sure how, with the examples of the late 19th and early 20th C, anyone can buy the argument that regulation of business, and especially finance, is not a good thing for society. Of course, since there are many people who buy the idea that a liberal education is an unnecessary luxury, I guess the lesson is the old saw "those who don't know history are doomed to repeat it" is observably true.

Sadly, these same people are also ignorant of that saw.

Even more sadly, those of us who aren't also have to live in this world....
posted by GenjiandProust at 5:54 AM on July 15, 2012 [1 favorite]


All this, in a country that was able to go to the moon, a little more than a generation ago, practically from change it found in the couch.

NASA budgets, from 1962-1969. All money amount are in millions of US dollars.
Year    Amount  %Budget   Amount in 2007 dollars
1962    1,257   1.18%     12,221
1963    2,552   2.29%     24,342
1964    4,171   3.52%     33,241
1965    5,092   4.31%     33,514
1966    5,993   4.41%     32,106
1967    5,425   3.45%     29,696
1968    4,772   2.65%     26,139
1969    4,251   2.31%     21,376
Total: 33.5 billion in nominal dollars, 212.6 billion in 2007.

On what planet do you call roughly 235 billion of today's dollars "change we found in the couch?"

And in comparison? 2011: $18.4 billion, which in 2007 dollars, $17.0B, or 0.53% of the budget. The estimated 2012 budget is lower in every way -- $17.7B nominal, $16.0B 2007 dollars, and 0.48% of the budget.

Military budget, 1965 and 2010, in 2010 dollars

1965 $335.6 billion
2010 $692.0 billion.

You want to know why we haven't gone back to the moon? We want to fight two wars at once.
posted by eriko at 6:36 AM on July 15, 2012 [9 favorites]


I'm in the credit markets on the buy-side. LIBOR is the contractual baseline for literally every corporate credit transaction in existence.

Everyone knew that its utility as such a baseline was becoming more limited -- and possibly in need of a replacement -- but people did not know that the banks (or at least Barclays) were so specifically and venially manipulating it. I'd say it's not unlike the research scandals of the post-dot-com bust, except that the potential for fines and bans is much larger because the LIBOR quotes have a vastly greater impact (almost the entire global economy, vs. tech and telecom) on a vastly larger market (credit dwarfs equity).

It's not impossible we could see LIBOR go away as a rate baseline, substituted by some weighted average short-term sovereign function, or perhaps even the return to prominence of the old benchmark (prime rate) but modified to be based upon empirical observation of transactions (say weighted average cost of revolving credit facilities of A-rated industrials) rather than being based upon hypothetical quotes.
posted by MattD at 6:46 AM on July 15, 2012 [1 favorite]


(To clarify my comment about LIBOR being the benchmark, even fixed rate transactions derive from LIBOR-based swap rates at the time they are entered into.)
posted by MattD at 6:49 AM on July 15, 2012


Eh, one more headline; nothing changes.
posted by BlueHorse at 10:24 PM on July 14 [+] [!]


This was the main front cover story (with image) of the Economist's UK edition (I wish they'd done it for their global/ US edition too but they went with Higgs Boson instead)

In terms of the media coverage of banking, this is a watershed, an important moment in how the image of the normal banking system is perceived out loud by the rank-and-file (as it were) global elite - The Economist is using the Banksters word on its front cover (making it much more legitimate to use that word in elite circles) with a cartoon comparing bankers to gangsters planning a heist; and the Economist is also calling the LIBOR scandal banking's "Big Tobacco" moment (think about what changed for the tobacco industry as the serious health risk evidence became overwhelming). It's saying that this scandal, while much less dramatic and "sexy" than other scandals, has that Big Tobacco quality they lacked because of its systematic, normalized nature within global, not just British, banking , and the *very* wide range of parties it effects - just about everyone (the 1% and the 0.1% too, not just the 99% or whatever)
posted by Bwithh at 6:59 AM on July 15, 2012 [1 favorite]


Oh, girl, I'm just a bankster for your lo-o-ove.
posted by Ice Cream Socialist at 7:03 AM on July 15, 2012


Point of Language:

from the NYT Dragon article:

This, of course, was before the scandals of the subprime mortgage era. It was before the bailouts, before Occupy Wall Street, before ordinary Americans began complaining about “banksters” and “muppets” and “the vampire squid.”

Let's clear this up once and for all... it's not muppet, chaps, it's moppet. As used in current British, especially Northern English, slang - there may be popular confusion over its correct spelling due to the influence of Henson's entertainment brand, but the pronunciation of "moppet" is still distinct from "muppet" even when spelled in the same way (which is a corruption of the traditional term anyway)

(sidenote: the Goldman Sachs employee who brought this British term to the recent attention of the US media through his resignation letter was a South African with a US college education working in London)
posted by Bwithh at 8:15 AM on July 15, 2012 [1 favorite]


Another graphic from The Big Picture

What I'm still trying to figure out is how much state & local gov't lost in swaps because the reference rates went against them.
posted by Farce_First at 8:18 AM on July 15, 2012 [1 favorite]


[Folks, less "up against the wall" stuff here, please. Go to MetaTalk if this is a position you feel that you need to defend. Thank you.]
posted by jessamyn at 8:24 AM on July 15, 2012


The Economist is using the Banksters word on its front cover...

The economist is a good magazine, but I don't know that its front cover spread is say Cronkite saying we've lost the war. (Even Cronkite isn't Cronkite, according to the latest issue of the New Yorker.) I think the only thing that's getting through to most people on this is "bankers did another bad thing." And I think that's a shrug for most people. Relying on "the elite" to save us on this one...well, not the American elite, that's for sure. The election is sucking up all the oxygen there, and Obama aligned himself with the banks firmly.

It feels, to me, and this is merely instinct, that 2008 was the crisis moment when big things were possible, when the tectonic plates of power could have shifted. That crisis passed. Now it's just the same mud we've been wallowing in for four years. Another year and we'll just call it a spa treatment and be done...

Because where's the lever, in all this? Let's say the LIBOR scandal is as bad as you say on a moral, ethical, symbolic, spirit-of-the-law level. You still need a lever, some technical thingummy, that lets you pry the thing open and shove in some real reforms. Parading the bad guys before Congress/Parliment to get yelled at has lost all its punch; for one thing, two thirds of congress would rather butter 'em up than scorgify. What is the mechanim by which sufficient public attention could be focused? I don't see it...
posted by Diablevert at 8:26 AM on July 15, 2012 [1 favorite]


Lawsuits.
posted by snuffleupagus at 8:46 AM on July 15, 2012 [1 favorite]


At least, at the very least, we can stop talking about the sovereign debt crisis for a little while and reconcentrate on the people and practices which sparked this recession. Never forget the sub-prime crisis, even when they want you to think about Greece. Hear Greece, think Lehman Brothers. Always.
That whole "bad apple" theory was always such a Goddamned crock of Free MArket Cultist bullshit.

2008 was about something much more profound and intrinsic and pervasive, than simply a couple of "bad apples."
Bear in mind that one bad apple among the good rots the whole heap, and we can but cast away the year's crop.
posted by Jehan at 8:51 AM on July 15, 2012


Bwithh: In terms of the media coverage of banking, this is a watershed, an important moment in how the image of the normal banking system is perceived out loud by the rank-and-file (as it were) global elite

Hmm. From last week's "Mock the week (3'20''):

This is one of those scandals where everyone's *furious* and no-one knows what they are furious about. Absolutely nobody understands. All we know is that Barclays have done Something Bloody Awful, and That Man Should Go.
- What is it?
- I don't know. I don't like him and I think he should go.
- Who should go?
- I'm not even sure about that either, to be honest. I'm furious about the whole thing. They managed to drive LIBOR down. Drive it down! How dare they drive down the Inter bank rate!
- Well that means your interest rates were lower and your mortgage.
- Oh! Oh! Conflicted now! Errrrr....

posted by falcon at 8:55 AM on July 15, 2012


"signs of trouble seemingly missed for years" - "missed the red flags" - "oversight failure"

It is funny how the banks keep making accounting mistakes where they profit billions of dollars.
Is there one example anywhere of an oversight failure where they lost money?
posted by Flood at 9:39 AM on July 15, 2012 [3 favorites]


The first comment about Harvard protestors has disappeared but was valid.
Up against the Wall could soon be coming to a city near you.
Many people believe the present system is fucked
Not discussing it is having a slightly sheltered view on life ugly as it might turn out.
This. is. how. close. it. is. getting.
This is what happens when the mob gets it´s burn on and expresses it´s hatred of being continually shafted by their overlords.
I am not condoning or advocating violence but I cannot but see what is going down. ( oh and I remember this).
posted by adamvasco at 9:49 AM on July 15, 2012 [1 favorite]


Flood -- banks have lost money on virtually every oversight. JP Morgan might be down by $10 billion when the tally's donefor the Chief Investment Office (most notable for the "London whale."). By the end of 2008, hundreds of billions of dollars were destroyed in equity market capitalization alone in the major financial instituitons, with holders of corporate and structured bonds losing that and more. Some of that has been recovered, but much of it never will be.
posted by MattD at 9:53 AM on July 15, 2012


Let's clear this up once and for all... it's not muppet, chaps, it's moppet.

Maybe this is a north/south issue, but down here we do indeed say muppet and not moppet.

posted by Drexen at 9:54 AM on July 15, 2012




It feels, to me, and this is merely instinct, that 2008 was the crisis moment when big things were possible, when the tectonic plates of power could have shifted. That crisis passed. Now it's just the same mud we've been wallowing in for four years. Another year and we'll just call it a spa treatment and be done...

I read it differently. 2008 was the beginning of something, a wake up call. Many have taken issue with the too-big-to-fail notion but I've come to think of it as an apartment fire -- in your apartment, after many years of suspicion that the landlord etc was being a slime. Do you:

A. forget about the fire, getting everybody out of the building, making sure it doesn't spread to other buildings etc, and just lynch the pig-f***er on the spot?

(or)

B. call the fire department in (some of whom were in collusion with the landlord), deal with the immediate flames, mitigate their damage as much as possible, and then start building a case against those responsible?

The problem with A is maybe a whole bunch of people die, maybe the whole town goes up. The problem with B is you're so exhausted by putting out the fire (for the time being) that you don't really have the energy to go after the culprits.

And so on.

Now, it seems to me that the landlord has just fucked up again, and very publicly this time. With the big difference that:

A. everybody remembers him from last time (unfinished business)
B. so far, the fire itself doesn't seem to be raging as immediately hot as last time, so it's less full-on emergency measures, more "... let's root this f***ing vermin out."

But maybe I'm being too optimistic.
posted by philip-random at 11:06 AM on July 15, 2012


Since diamonds can now be produced mechanically, and there seems to be evidence that the US doesn't have gold to back its currency, how about adopting a time-based currency, which, with a little alteration maybe fair to all.

The fiat model doesn't work, and cannot ever work, as it creates bubbles in every industry in the economy. That last link is my favorite because it explains the big picture.

FIAT: "Let it be so" - more like let it bubble and pop.
posted by Monkey0nCrack at 12:16 PM on July 15, 2012




Surely this...
posted by Afroblanco at 12:24 PM on July 15, 2012


Oo. Mutant has a blog? Subscribe!

Malor: I presume you're aware that very successful fractional reserve banking co-existed with gold-standard money for decades: a century or more in fact. Have you read Bagehot? I don't think a return to the gold standard is going to be a solution to the worlds problems personally.
posted by pharm at 12:28 PM on July 15, 2012


Although the focus so far has been on big banks driving LIBOR down in 2008 by reporting falsely low rates in order to look good, there is also evidence that, before that, they already colluded in order to manipulate LIBOR and drive it up as well as down, depending on their convenience. This is quite big, because it crushes the post-Reagan, post-Thatcher myth of popular capitalism, the idea that anybody, with enough acumen or a good enough fund manager, could profit from the markets, and that the high incomes earned by bankers and fund managers was more than justified by their talent in helping their clients' money grow. Now, all the babyboomers who bought into this idea are not just seeing their life savings and pension funds nuked by the crisis, but are now suddenly be made aware of the fact that the whole game was rigged from the outset.
posted by Skeptic at 12:33 PM on July 15, 2012 [1 favorite]


The Current (CBC radio) did a pretty graspable study of the going-back-to-the-gold-standard idea recently as part of "The Invisible Hand".

The conclusion, as I recall, was pretty dismissive of the idea. Simply put. Chickens would be a standard than gold. At least you can eat chickens.

GOLD VS CHICKENS
posted by philip-random at 1:11 PM on July 15, 2012


... and chickens lay eggs, and sometimes those eggs have new chickens in them. And so on.
posted by philip-random at 1:12 PM on July 15, 2012


Although the focus so far has been on big banks driving LIBOR down in 2008 by reporting falsely low rates in order to look good, there is also evidence that, before that, they already colluded in order to manipulate LIBOR and drive it up as well as down, depending on their convenience.

They absolutely fixed it high as well as low. Emails between the traders show that.

I've spent some time over the last week putting together an inforgraphic on this. Because it's a big deal and I think the reason that more attention isn't being paid to it is because people don't understand LIBOR and its significance. And I don't think it's really difficult to understand, on a basic level. WSJ estimates that it affects some $800 TRILLION of interest rates connected to, amoungst other things, student loans, credit cards and morgages. For reference, the GLOBAL GDP in 2011 was only $70 trillion. Robert Shapiro estimates that LIBOR was off by an average of 30-40 basis points over a period, which is insane. If it's true that they were manipulating it downward to make their balance sheets look healthier during the financial crisis, then that will have benefited people who had adjustable rate mortgages, but of course with interest rates one side benefits while the other side suffers and lower interest rates will have hurt savers and investors.

Anyway, this is a pretty incredible thing that really does make me wonder - surely THIS? I'm hoping that this time around, people will pay attention.
posted by triggerfinger at 1:33 PM on July 15, 2012 [1 favorite]


It doesn't seem like any metal is a safe basis for a currency just as we're crawling into the industrial space age and building the foundation of the ability to find deposits of metals that dwarf the terrestrial supply. The notion of a metal-backed currency ignores where the metals came from in the first place. We need a better system than that.
posted by feloniousmonk at 1:57 PM on July 15, 2012


I read it differently. 2008 was the beginning of something, a wake up call. Many have taken issue with the too-big-to-fail notion but I've come to think of it as an apartment fire -- in your apartment, after many years of suspicion that the landlord etc was being a slime. Do you:

I don't think that works, though, really. I think your "you" is too narrow. God knows what's going to happen in other countries --- I couldn't speak to the dynamic there --- but in the U.S. there is a substantial proportion of the country that blames the government for the state of the economy, for the housing crisis, for almost all of it, really. And at they control Congress, and have a 50-50 shot at the White House as well.

So in the sense that the "you" you're talking about who was suspicious of the landlord --- all the good little liberals --- I don't think they're a big enough chunk of the country. I think the most people have contempt and loathing for both the government and the banks, and trust neither. In the immediate aftermath of 2008, with the crash and the panic and Hank Paulson down on one knee, the best they got out of it was Dodd-Frank and the camel's nose was already under the tent when they passed that. The CFPB is spending all its time trying to rejigger forms. Hell, Warren's barely better than even odds to get elected even in true blue Mass, and most of the campaign in the tabs has been whether she ever said she was Native American or not.

So, no, I'm not seeing a big enough "you" out there who's gonna go to the barricades on the London interbank offered rate. The circus is back in town; the bread is being flung from the balconies. And the mob is fighting each other for crumbs, not forming into ranks and heading for the palace.

LIBOR is one of those scandals that's a big deal if you know understand what LIBOR is, and a duck fart if you don't, because it requires too much explaining.
posted by Diablevert at 2:03 PM on July 15, 2012 [3 favorites]


It seems no one is entertaining the perspective that both a gold standard and the fed are unsustainable systems. No one has yet responded to Malor's specific critiques of the current system. All responses have been along the line of: but the gold standard is worse. Not a good argument methinks. Any objective observer can see the current situation easily enough, it's just that most "monied folk" are by definition very subjective observers of things economic.
posted by AElfwine Evenstar at 2:26 PM on July 15, 2012


It seems no one is entertaining the perspective that both a gold standard and the fed are unsustainable systems.

Well, maybe global warming wouldn't be such a big deal if we could all grow gills, you know? Probably that reddit thread had the best succinct explanation, but all money is an IOU. An abstraction. There is no form of money that cannot be fucked with by people writing checks their butts can't cash. Even the Pacific islanders who used to use 50 ton wheels of granite as cash --- there was a planet money podcast ages ago that talked about how even there, the actual wheels became symbolic instruments. A couple of them sunk to the bottom of the Pacific and were still good money. If people can lie, money can be fucked with. Yet money is still a very useful thing. Un-fuck-with-able money is a pipe dream. Checks and balances to shore up trust in the system is not.
posted by Diablevert at 2:40 PM on July 15, 2012 [3 favorites]


It seems no one is entertaining the perspective that both a gold standard and the fed are unsustainable systems. No one has yet responded to Malor's specific critiques of the current system.

That's because the critiques are entirely off topic to this discussion (and, likely, they are also wrong). This is about people conspiring, colluding, committing fraud to enrich themselves. The money with which they enrich themselves could be backed by gold or not...it doesn't make a difference.
posted by patrick54 at 3:28 PM on July 15, 2012 [4 favorites]



Commodity-backed money is not perfect, because no commodity can really encapsulate wealth, which is energy, stuff, knowledge, and the ability to produce more of those. But it's a lot better than what we're using, which is fundamentally a total lie..


Ever hear of William Jennings Bryan?

Since he sided with the prosecution in the Scopes Monkey Trial, people think of him as the ultimate conservative fundamentalist Christian.

Except, of those three adjectives, only Christian is accurate.

He was a crusading progressive, and a liberal Protestant. He crusaded against Darwinism only because in his mind (and in that of many others) Darwinism was identical to Social Darwinism.

Then he decided on his own pet replacement for the gold-backed dollar: a dollar backed by a combination of silver and gold, in which the two were fixed at an exchange ratio of 16 to one. His scheme was beyond wrong headed (silver and gold were trading at 20 to 1, and he was being exploited by owners of Nevada silver mines), and it was what brought him down. He was completely discredited, and well, he not only was seen as a kook, he became one.

Good people can destroy themselves with pet theories on the currency. Let it go, man.
posted by ocschwar at 3:46 PM on July 15, 2012 [1 favorite]


we're starting to talk about a fair amount, trying to figure out how to trade it:

this is definitely how the finance industry should be spending its time.
posted by fightorflight at 4:29 PM on July 15, 2012


A "private proposal" (pdf) from the The Bank of England.

Ask yourself: has the investment bankers’ fixation on double digit RoE achieved it over time? No. Has the annual emphasis on RoE produced attractive and sustainable shareholder returns? No. So does a short term focus on RoE equate to shareholder value? No. Why? Because it does not adjust for risk. The returns (and coincidentally the EPS-related bonuses) may come short term, but the risks come later. Later came recently...

So, the best solution is to set the minimum for loss absorbing capital at a level which discourages recklessness and protects the public purse when it happens. Many leading academics and economists, place the optimum level for such equity at 20 percent. In return we can pare back the rule book - drastically.
So let’s go back to where we started. Is banking regulation too tough? No. Is the demand for higher capital damaging? No. And are regulations too numerous? Maybe - but there is a potential solution, should the industry and body politic wish to pursue it.
Oh, and I forgot to mention: that opening quote about “remorseless rise in regulation” being a threat - it was taken from a major industry report published in 2005

posted by Jakey at 5:24 PM on July 15, 2012





In fact, the consistent pattern is that, as soon as they start to meet the needs of human populations at scale, they get shut down by the incumbent central bank. See, for example, the The Wörgl Experiment: Austria (1932-1933). Demurrage (negative interest) accelerated the velocity of money in the economy so much they got shut down by the Austrian bank, and outlawed by the Supreme Court.


Funny that. Regional scrips like Berkshares were used all over the US during the Depression. The federal government responded with the New Deal, not by shutting them down, which is why Berkshares are still in use.
posted by ocschwar at 7:26 PM on July 15, 2012


Got to say, having been in WOrgl, that it is one stunningly beautiful town.
posted by ocschwar at 7:26 PM on July 15, 2012


You want to bring this home? Make sure people remember, deep down, in their bones?

So you remember that scandal in England? Where the banks were manipulating rates, for their own profit? That rate is called LIBOR.

We of course know the student laons we are paying, looming over us - the main reason my cohort says they won't get married, buy a house, have children just yet - maybe in a few years...

Or that home loan you looked at getting? The one the bank turned you down for?

Yes, we'll remember.
posted by the man of twists and turns at 7:28 PM on July 15, 2012


Lots of my colleagues, past and present, are in MBA programs and all of them - to a man/woman - have said that they will not go into finance. When the debt rubber meets the road they might change their minds, but it's notable that no one is vocally aspiring to enter that industry.

There's also this small factor that things are bearish in the City and in Canary Wharf: I understand banks, at least their London offices, are quite reluctant to hire now. In fact, everyone I speak to working in London's financial industry is now scared of being laid off any moment and so on (or, if they're not EU citizens and haven't been grandfathered in with Tier 1 visas, are finding it difficult to switch companies)

But yes, seems to me the bigger trend this cycle is to get back into industry; I've known people who have even gotten back to their old jobs after getting shiny new MBA's from places like HEC and IESE (granted, there's perhaps a Euro-zone factor in there, but still)
posted by the cydonian at 8:19 PM on July 15, 2012


This is an anti-trust issue on perhaps the largest scale imaginable. Collusion to prevent competition in a market that affects the price of just about everything really can't be topped by any other anti-trust issue in history.
posted by Mental Wimp at 8:20 PM on July 15, 2012 [4 favorites]


Spitting out fictitious money into the global system is amazingly like carbon pollution -- the damage is slow and hard to see, but then starts to become visible in freakish, bizarre events that just get more and more and more common, and eventually the whole system starts to get unstable.

Strangely enough, I really do see where the Austrians are coming from but this naive faith in commodity-backed really demonstrates the limits and, ultimately, the shallowness of Austrian thinking. Having stumbled upon the problem -- yes, fundamentally, the problem is money -- Austrians then retreat into, literally, worshiping gold, insisting that as money is too strange, too magic, too extraordinarily complex for mere mortals to control, we must instead go back to the days of exchanging sea shells for sex. I can see the appeal but then most nonsense is appealing.

My own thinking is approaching the opposite conclusion: that fiat currencies aren't the problem but rather that there's not enough fiat currencies. Ultimately -- and this is where the Austrians really do get it -- nation states cannot support the monetary infrastructure required for a global economy. And so allowing only nation states to create money is not going to work because they will indeed fuck it up. But if we allowed others to get in on the money-game (and we already do this, in fact what's clear when you really examine things is that the the non-money economy is far greater is and far more stable than the money-economy will ever be) we would see the same kind of liberalization and growth as when nation states abandoned mercantilism and turned over the market to private actors.

As somebody working in finance I feel to some extent that the industry is now trying to squeeze blood from a stone. There's still money to be made in banking but it's rapidly becoming clear that there's very little value to be made in banking. There are no skilled bankers, no Van Goghs or superstars out there -- the name of the game is simply to figure out how to cheat, how to get that extra edge, and, hopefully, not go to jail. It is very much a criminal enterprise in the same way that, as Kant would understand, all criminal enterprises are non-universal ventures that can never work if everybody does them. I imagine that in the future the entire idea of private banks will be looked back upon as sheer stupidity, the same way we look back upon slave labor. These quasi-governmental public-private hybrid "intermediaries" where human beings are asked to price risk (something humans are truly and deeply terrible at) are doomed but they can't go away until we have some other way to store wealth and for that, I think, we really do need more money.

The loss of faith in the modern financial system is, I think, in the long run, a good thing. Like all such losses of faith it seems terrifying now but in the long run the wisdom and courage it will call forth are invaluable. People really do need to understand that modern money is broken -- in this, I agree with Malor 100% -- and only until they do will we as a society begin to really ask ourselves how we can capture the tremendous social wealth we're creating. The banks and ultimately nation-states have proved to be terrible stewards of money (and it's doubtful that they ever could accomplish this extraordinary task) so it really is time for somebody else to step up to the plate. What I would like to see is not so much a re-regulation of finance as a serious exploration of the alternatives. That's why when people ask me what to do with their money today I don't tell them to buy gold or land or any other "hard" asset. The problem is the monetary economy itself and no amount of asset allocation will help.
posted by nixerman at 8:30 PM on July 15, 2012 [6 favorites]


What I'm unclear about here is how British and American regulators started investigating this LIBOR mess, and how they've calcualted this $450m penalty on Barclays.
posted by the cydonian at 8:33 PM on July 15, 2012


To me, the LIBOR (and the WSJ Prime rate?) seems like a sociology methods failure on the part of the banking system. Claiming that the LIBOR scandal shows we need to dispense with markets is akin to saying the failure to reproduce the aging priming effect means experimental psychology should be dispensed with.

We know that surveys can't be fully trusted, and there are clear financial incentives for banks to lie. LIBOR has anti-cheating measures (discarding the outer 2 quartiles), but I suspect they're ineffective. From what I've read of Dan Arely's summaries of research on cheating, given the opportunity we tend to cheat a little, and that if we notice other people cheating, it's easier to start cheating ourselves. This shows up in the LIBOR case; they're moving their quotes only slightly, which does change the calculation a bit, and as Mutant points out, financiers were acutely aware that LIBOR was wrong. It's easy to see how one or two liars suddenly changes the dynamics.

So what can we do? One idea is to look for behaviors rather than surveys, and in this case it means market transactions, or at least the threat of one. My student loans are benchmarked by 91 day treasury auction rates (I have no idea why the US switched to fixed or LIBOR (apparently)). The OIS is an interesting approach that I should look into more. Another approach might be to call their bluff somehow; perhaps requiring them to lend to some entity at their stated rate plus a percentage. Kinda like how some economists have proposed replacing property tax appraisers with a quote system: you tell the county how much you think the property is worth and are required to honor that quote. Might not work for the average middle class home owner, but certainly large banks should be able to handle this.
posted by pwnguin at 9:19 PM on July 15, 2012


What I'm unclear about here is how British and American regulators started investigating this LIBOR mess, and how they've calcualted this $450m penalty on Barclays.

A Barclays trader alerted the New York Fed in 2008 to Barclays underreporting rates and the Commodity Futures Trading Commission was the first regulator to start an investigation. The fine that Barclays has to pay has been levied by the DoJ, the CFTA and the FSA.
posted by triggerfinger at 9:29 PM on July 15, 2012


Buttonwood: The Golden Rules Of Banking

A speech, Let's Make A Deal, (PDF), Robert Jenkins, Member of the Financial Policy Committee, Bank of England
So let’s go back to where we started. Is banking regulation too tough? No. Is the demand for higher capital
damaging? No. And are regulations too numerous? Maybe - but there is a potential solution, should the
industry and body politic wish to pursue it.
posted by the man of twists and turns at 12:18 AM on July 16, 2012


You know all it would really take is a regulation that once you are on one side of the industry/regulatory aisle you can never take payment from the other, where the penalty is jail.
posted by seanmpuckett at 5:58 AM on July 16, 2012 [2 favorites]


Opened thread, CTRL-F'ed "by Mutant," pleasantly surprised.
posted by Aizkolari at 8:21 AM on July 16, 2012


Wait wait wait!

Sea shells can be exchanged for sex? Why wasn't I informed?
posted by vibrotronica at 9:45 AM on July 16, 2012


the entire idea of private banks will be looked back upon as sheer stupidity, the same way we look back upon slave labor.

We look back upon slave labor as stupid? It was incredibly profitable in the southern US until the yanks came down and stupidly messed it up.

Yes Mr. Goldbug, we should go back to the Stone Age. The invention of currency was the first step towards the inevitable dark ages.

I mean, once we stopped trading seashells for jerky we were doomed -- DOOMED!


Perhaps the conception of private property was the first step into the dark ages, and probably happened on day one. Maybe it actually would be possible to move forward towards no property, no money? As Zizek says, these days many "scientific" thinkers believe they will soon be able to upload their minds into computers, yet the very suggestion that we could implement a more ethical system than capitalism is scoffed at as impossible and ridiculous.

I like the idea of a government take over of the commercial and personal banking system. It seems this may not be completely unimaginable if 2008 happens a few more times. Government has essentially been backing it all along anyway.
posted by Golden Eternity at 11:35 AM on July 16, 2012


> Scrap interest based debt finance systems

This is my platform, for when nominations open up for World ruler. I will not ban lending at interest. I will, however, ban compound interest -- and simply accept that this would reduce world economic activity to a considerably lower level (with, at least, positive knock-on effects for the Global Warming problem.)
posted by jfuller at 11:57 AM on July 16, 2012


The LIBOR rate-fixing thing is coming right on the heels, at least here in the US, of the GE Cap / JPMC / BoA / etc. municipal bond bid-rigging scandal, about which Matt Taibbi just wrote yet another scathing Rolling Stone piece (MeFi thread) It's a pretty great piece of popular financial journalism and I'd recommend reading it.

It's not necessarily related to LIBOR, but when you look at them together it's pretty easy to see a contiguous culture of corruption.
posted by Kadin2048 at 12:56 PM on July 16, 2012


It was incredibly profitable in the southern US until the yanks came down and stupidly messed it up.

Wait. What?
posted by Mental Wimp at 1:05 PM on July 16, 2012


One idea is to look for behaviors rather than surveys, and in this case it means market transactions, or at least the threat of one. My student loans are benchmarked by 91 day treasury auction rates (I have no idea why the US switched to fixed or LIBOR (apparently)). The OIS is an interesting approach that I should look into more. Another approach might be to call their bluff somehow; perhaps requiring them to lend to some entity at their stated rate plus a percentage. Kinda like how some economists have proposed replacing property tax appraisers with a quote system: you tell the county how much you think the property is worth and are required to honor that quote.

That's a pretty interesting idea, but it seems like there are still possibilities for collusion between the biggest banks or other actors, though. E.g., let's say that instead of just taking a survey to determine LIBOR, we do it instead based on some sort of binding offer, such that a bank reporting a certain rate is obligated to lend money at that rate to anyone else. They could still collude with each other to just not take each others' offers if they're particularly low, or to make offers that are actually above the market's floor, if they wanted to raise the rate.

I think the only reasonable solution is to push the transactions through a centralized exchange and then have the exchange report on the actual terms. You could probably encourage this by saying that deals not processed through an exchange are legally non-enforceable. The entire banking system depends, when you really get down to it, on the underlying legal system and its enforcement of contract law. If you say that the legal system won't enforce a certain type of contract, then there won't be financial instruments based on it anymore. The banks might attempt to set up some sort of self-regulation, but their greed will always get the best of them, I think, in the absence of someone with a monopoly on violence to knock heads together when someone decides not to pay up.

And that leads to one other point, regarding currencies and why they tend to be issued by governments: currencies end up being rather naturally tied to governments because typically only a state, again with its monopoly-on-violence-backed court system, can mandate their negotiability. That negotiability problem has always been the problem with private currencies. "Legal tender for all debts, public and private" isn't something that a private currency can claim, and that's one of the more serious problems with moving away from a single state-sanctioned currency.
posted by Kadin2048 at 1:34 PM on July 16, 2012 [1 favorite]


It was incredibly profitable in the southern US until the yanks came down and stupidly messed it up.

Wait. What?


What I meant to say is slavery is obviously wrong and evil, but remained persisted well into the 19th century and probably well beyond that if not for the civil war because it was so profitable--perhaps an extreme case of the kind of exploitation that may be inherent in capitalism itself.
posted by Golden Eternity at 2:00 PM on July 16, 2012


"It's like watching climate change denialists in action"

Er ... except the broad consensus is your view is fringe and is not taken seriously by the vast majority of people who study economics and finance. You are in the conspiracy theory camp. In other words, by your analogy, you're the unscientific view - you're the denialist.

The consensus view by economists is that fractional reserve banking and Keynesian economics works. Corruption is a different issue and is not a product unique to fractional reserve banking nor the Fed.



Surprisingly, I trust scientists with PhD's in physical science far more than I do mainstream economic theory. I wonder why?
Oh, that's right, because the US property bubble popping, and the global financial crisis were apparently fringe theories, despite the evidence. I was discussing both of those things with non-economics scientists and hippies, in 2005, and they both happened bang on schedule.

There are dozens of reasons, but mainstream economics is too tied into mainstream banking practice. And money. And politics. And some pretty arbitrary theories that are not borne out by human psychology (another field that we are really, only a few steps past banging rocks together in).
posted by Elysum at 4:22 PM on July 16, 2012 [1 favorite]






let's say that instead of just taking a survey to determine LIBOR, we do it instead based on some sort of binding offer, such that a bank reporting a certain rate is obligated to lend money at that rate to anyone else

An op-ed in today's FT has the same idea.
posted by triggerfinger at 5:20 PM on July 16, 2012


jfuller: "I will not ban lending at interest. I will, however, ban compound interest -- and simply accept that this would reduce world economic activity to a considerably lower level (with, at least, positive knock-on effects for the Global Warming problem.)"

Good thing bankers haven't invented some kind of math to overcome your proposal.
posted by pwnguin at 7:21 PM on July 16, 2012 [1 favorite]


Al Jazeera - HSBC to apologise for money laundering: US senate probe found there were lax controls and a "pervasively polluted" culture at Europe's largest bank.

'Gosh, another oversight.'
posted by the man of twists and turns at 10:22 AM on July 17, 2012


CS Monitor: As bank scandals add up, a need for a culture of integrity in banks
A quarter of the 500 professionals surveyed said they may need to engage in unethical or illegal conduct in order to be successful. A similar percentage have seen wrongdoing in the workplace. Only about half say they would not commit the crime of insider trading if they could make $10 million and get away with it.
Al Jazeera: Ben Bernanke says Libor system flawed - Chairman of US Federal Reserve says the rate-fixing scandal undermines confidence in the financial system.

Also AJ : UK legislators grill former Barclays official
Jerry Del Missier says he was merely acting under orders when he asked his staff to manipulate interest rates.

It is like flipping a rotting log - all the bugs and creepy crawlies scatter everywhere.

The Daily Reckoning: How The Feds Feed The Rich
Let’s look at how the rich got so rich. Did they get a lot smarter in the last 30 years? Did they become a lot greedier? Nah…they were in the right place at the right time. They owned stocks just when the Fed was dumping beaucoup money into the financial system.
Bloomberg: Do Business Schools Incubate Criminals?
The recent scandals at Barclays Plc, JPMorgan Chase & Co., Goldman Sachs Group Inc. and other banks might give the impression that the financial sector has some serious morality problems. Unfortunately, it’s worse than that: We are dealing with a drop in ethical standards throughout the business world, and our graduate schools are partly to blame.
posted by the man of twists and turns at 10:06 PM on July 17, 2012 [1 favorite]












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