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Forum Post: The Wall Street Scandal of All Scandals

Posted 8 years ago on July 9, 2012, 4:34 p.m. EST by LeoYo (5909)
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The Wall Street Scandal of All Scandals


Monday, 09 July 2012 09:56 By Robert Reich, Robert Reich's Blog | News Analysis

Just when you thought Wall Street couldn't sink any lower – when its myriad abuses of public trust have already spread a miasma of cynicism over the entire economic system, giving birth to Tea Partiers and Occupiers and all manner of conspiracy theories; when its excesses have already wrought havoc with the lives of millions of Americans, causing taxpayers to shell out billions (of which only a portion has been repaid) even as its top executives are back to making more money than ever; when its vast political power (via campaign contributions) has already eviscerated much of the Dodd-Frank law that was supposed to rein it in, including the so-called "Volker" Rule that was sold as a milder version of the old Glass-Steagall Act that used to separate investment from commercial banking – yes, just when you thought the Street had hit bottom, an even deeper level of public-be-damned greed and corruption is revealed.

Sit down and hold on to your chair.

What's the most basic service banks provide? Borrow money and lend it out. You put your savings in a bank to hold in trust, and the bank agrees to pay you interest on it. Or you borrow money from the bank and you agree to pay the bank interest.

How is this interest rate determined? We trust that the banking system is setting today's rate based on its best guess about the future worth of the money. And we assume that guess is based, in turn, on the cumulative market predictions of countless lenders and borrowers all over the world about the future supply and demand for the dough.

But suppose our assumption is wrong. Suppose the bankers are manipulating the interest rate so they can place bets with the money you lend or repay them – bets that will pay off big for them because they have inside information on what the market is really predicting, which they're not sharing with you.

That would be a mammoth violation of public trust. And it would amount to a rip-off of almost cosmic proportion – trillions of dollars that you and I and other average people would otherwise have received or saved on our lending and borrowing that have been going instead to the bankers. It would make the other abuses of trust we've witnessed look like child's play by comparison.

Sad to say, there's reason to believe this has been going on, or something very much like it. This is what the emerging scandal over "Libor" (short for "London interbank offered rate") is all about.

Libor is the benchmark for trillions of dollars of loans worldwide – mortgage loans, small-business loans, personal loans. It's compiled by averaging the rates at which the major banks say they borrow.

So far, the scandal has been limited to Barclay's, a big London-based bank that just paid $453 million to U.S. and British bank regulators, whose top executives have been forced to resign, and whose traders' emails give a chilling picture of how easily they got their colleagues to rig interest rates in order to make big bucks. (Robert Diamond, Jr., the former Barclay CEO who was forced to resign, said the emails made him "physically ill" – perhaps because they so patently reveal the corruption.)

But Wall Street has almost surely been involved in the same practice, including the usual suspects — JPMorgan Chase, Citigroup, and Bank of America – because every major bank participates in setting the Libor rate, and Barclay's couldn't have rigged it without their witting involvement.

In fact, Barclay's defense has been that every major bank was fixing Libor in the same way, and for the same reason. And Barclays is "cooperating" (i.e., giving damning evidence about other big banks) with the Justice Department and other regulators in order to avoid steeper penalties or criminal prosecutions, so the fireworks have just begun.

There are really two different Libor scandals. One has to do with a period just before the financial crisis, around 2007, when Barclays and other banks submitted fake Libor rates lower than the banks' actual borrowing costs in order to disguise how much trouble they were in. This was bad enough. Had the world known then, action might have been taken earlier to diminish the impact of the near financial meltdown of 2008.

But the other scandal is even worse. It involves a more general practice, starting around 2005 and continuing until – who knows? it might still be going on — to rig the Libor in whatever way necessary to assure the banks' bets on derivatives would be profitable.

This is insider trading on a gigantic scale. It makes the bankers winners and the rest of us – whose money they've used for to make their bets – losers and chumps.

What to do about it, other than hope the Justice Department and other regulators impose stiff fines and even criminal penalties, and hold executives responsible?

When it comes to Wall Street and the financial sector in general, most of us suffer outrage fatigue combined with an overwhelming cynicism that nothing will ever be done to stop these abuses because the Street is too powerful. But that fatigue and cynicism are self-fulfilling; nothing will be done if we succumb to them.

The alternative is to be unflagging and unflinching in our demand that Glass-Steagall be reinstituted and the biggest banks be broken up. The question is whether the unfolding Libor scandal will provide enough ammunition and energy to finally get the job done. This piece was reprinted by Truthout with permission or license.



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[-] 4 points by maserati2 (5) 8 years ago

Calling all Occupiers!

Fox News cannot bury this scandal from the whole country. This could be the spark that brings our people to the streets!

It is time to join in unity and teach the mob bosses and their cronies in government how the real Americans, the 99%, respond when their children go hungry, their finances have been confiscated and they have been forced into crisis by privileged brats that have never been told the word "NO".

We ARE the many, and they must never forget that they are the FEW!

[-] 2 points by shadz66 (19985) 8 years ago

Re. 'LIBOR' - The Clearly Conspiratorial Cartel Behaviour with respect to setting and manipulating this key International Benchmark Interest Rate - could become an extreme wedge issue between The Banksters and become an unstoppable force, as 'They' may well have irredeemably torpedoed themselves below the water line on this one & thus I append herewith :

radix omnium malorum est cupiditas ...

[-] 2 points by Nevada1 (5843) 8 years ago

Hi Leo,

Thank you for post. Everyone needs to see this.

[-] 2 points by shadz66 (19985) 8 years ago

"How America's Surveillance State Breeds Conformity and Fear", by Glenn Greenwald : http://www.informationclearinghouse.info/article31797.htm .

ad iudicium ...

[-] 1 points by Nevada1 (5843) 8 years ago

Hi shadz, Thank you for link. Yes, "we the people" are the enemy. And why?

[-] 1 points by JadedCitizen (4277) 8 years ago

Give a man a dollar and he will put aside a dime to save, give a man an unregulated financial market and he will use your dime to steal your dollar.

[-] 1 points by shadz66 (19985) 8 years ago

Very nice observation & to accompany LeoYo's excellent 'forum-post' & 'fyi' also by 'RR', I append :

alius et idem ...

[-] 1 points by JadedCitizen (4277) 8 years ago

The whole banking system is a scandal, it effects everyone.

[-] 1 points by shadz66 (19985) 8 years ago

Bang On The Button & the malaise runs deep !!! Please further reflect upon :

dura necessitas ...

[-] 1 points by JadedCitizen (4277) 8 years ago

I don't know if I'm down with hanging bankers, but they should certainly go to jail for a long, long, really long time.

[-] 1 points by shadz66 (19985) 8 years ago

Arguably The Banksters do far more aggregate damage and violence and bring far more misery to 'society at large', than mere murderers and you are a kindly and forgiving person. Also please see :

absit omen ...

[-] 1 points by JadedCitizen (4277) 8 years ago

Bankers are psychotic scum and probably deserve a whole lot worse than jail time, but I don't want to be dragged down to their level of morality. Now, if these bat-brained despots of the derivatives world cause another financial collapse......I might have to reconsider.

[-] 1 points by alterorabolish1 (569) 8 years ago

The biggest financial scandal ever and the media doesn't tell the people about it. Every person should know and be talking about this scandal.

Thankfully, Mr. Reich pointed out that the people that knew, (and their friends), were able to make investments ahead of time, with no risk! This point was frustrating to me watching Chris Hayes tv show this weekend, no one even mentioning this aspect of the rigging.

[-] 3 points by shadz66 (19985) 8 years ago

"What likely is most needed is a super-version of Occupy Wall Street, with the kind of persistent and disruptive street agitation that is vital to any campaign to restore the Bill of Rights. Whether this would come about is problematic. Nevertheless, without lobbying, without an informed populace, without street pressure, there will only be one direction for civil liberties in the current climate – and that is down. It is time, in Jefferson's words, to educate." ---

from "The Press Needs To Expose The Siege Of Democracy, Not Abet It", by John Hanrahan :

dum spiro, spero ...