Libor: A Tale Of 2 Scandals

by: CFA Institute Contributors

By Kurt Schacht, CFA

Along the range of scandalous behaviors by the banking industry, is the latest episode - the LIBOR-rate-fixing scandal - one of the most vulgar or merely trifling? So far it is officially only Barclays that has been fingered. We will have a ring-side seat as various other banks, and their level of LIBOR complicity, is revealed over the next several weeks.

If you listen to some, we can expect a scandal of epic proportions. In his typically lofty elocution, former U.S. Labor Secretary Robert Reich sees it as the mother of all banking transgressions. As if we need any more reasons to hate banks. His take is that, by purposely fixing LIBOR - often the key determinant of the interest rate we receive for our bank deposits and, conversely, the interest rate we pay on borrowed money in the form of mortgages or other bank loans - we the consumers have been fully fleeced and skinned at the same time.

Is this another harsh reminder of the "profit at all costs" mantra banks pursue as their only true religion? We are left feeling that "customers be damned" is the real mission statement for these institutions.

Consider this, however: If rates are fixed artificially low to avoid paying higher interest on deposits or money funds products, you might think you would correspondingly pay less on money borrowed at this manipulated, but lower, LIBOR setting. Details are sketchy as to how many banks are involved and whether they could artfully fix LIBOR to their advantage in both directions, in any event. Meanwhile, there are reports that bank regulators themselves may have actually encouraged these banking firms on where to set LIBOR. Maybe it's not so bad after all?

Correspondingly, one of our favorite commentators on financial matters, Holman W. Jenkins, Jr., offered some valuable insights in his recent Wall Street Journal column, "Lies, Damn Lies and Libor." He points out that rates are manipulated by the government and institutions all the time. During the credit crisis, emergency circumstances led governments all over the world to manipulate rules and rates as needed to stem panic. "Their efforts would have been thwarted if Libor flew up on panic about the solvency of the major banks," he writes. It's true. Just like the government picked survivors and pushed details under the rug about which firms got special treatment in the crisis, regulators resorted to lots of "questionably legal" measures in the name of financial emergency, as Jenkins puts it. "Call it one more improvisation in too big to fail crisis management."

As you may have heard by now, CFA Institute and the Pew Charitable Trusts are concerned enough about such "improvisation" and the lack of progress on systemic risk oversight that they have convened a new council to spur progress. This group, the Systemic Risk Council, is calling for prompt and effective action to rein in systemic risk and too-big-to-fail institutions.

We're interested in hearing your views - is the LIBOR-rate-fixing scandal one of the most egregious examples of banks behaving badly, or is it merely trivial? Let us know what you think.