Will the continuing scandal over LIBOR insure Barack Obama’s
re-election in November? It’s a distinct possibility.
There is considerable irony in the controversy over the
benchmark London Interbank Offered Rate, which cost Barclays Bank a
$450 million fine for rigging between 2005 and 2008.
Not the least of that irony is that regulators on both sides of
the Atlantic have just begun to wonder how widespread the practice
became after 2008 when international banking plunged into its
greatest turmoil and when the Obama presidency began. Not to
mention the role that the U.S. Federal Reserve and the Bank of
England played in abetting the fraud both before and after Mr.
Obama took office.
But the fact remains that the LIBOR scandal plays directly into
the narrative that President Obama and his campaign strategists are
trying to foster in this summer’s run-up to the November referendum
on his stewardship of the last four years. The Obama argument, in
its essence, is that while he may not have successfully turned the
American economy back onto the path of prosperity, turning the
government over to Republican nominee Mitt Romney would be
infinitely worse.
The very qualities that former governor Romney would bring to
office — long experience as a financial investor, business
executive, and state governor — are being turned against him.
Romney’s time at the investment firm Bain Capital is the focus of
Obama’s portrayal of his rival as a corporate vulture who sends
American jobs abroad and puts American firms into debt-laden
bankruptcy in order to extract immoral profits for himself and his
shareholders.
Romney, to the dismay of his supporters, has seemed unable to
rebut these accusations which are part of a broader Obama argument
that free capital markets are tainted by greed and dishonesty and
that only government run by dispassionate experts can provide the
policy-driven programs that will create jobs and restore
prosperity.
In the meantime, as far as the general public is concerned, the
LIBOR debacle simply confirms what their President has been telling
them all along; Wall Street and the world of international finance
is a corrupt place in desperate need of much more aggressive
government oversight and, and this is important, more guidance in
directing its capital flows to socially-approved economic
stimulus.
Key Obama aides have been quick to seize on the scandal to
advance their agenda. Federal Reserve Chairman Ben Bernanke just
recently began to prepare the ground in the U.S. Congress by
telling the lawmakers that LIBOR was “structurally flawed” and that
a new mechanism to determine international interest rates was
needed. This call was promptly echoed by neighboring Bank of Canada
governor Mark Carney who called for “radical reform” of LIBOR.
It is almost certain that LIBOR restructuring will be the
central question faced by a gathering of the major central bank
chiefs in September. But then they will face a most difficult
problem: replace LIBOR, but with what?
If it were simply a case of replacing a single interest rate
from, say, what is “offered” to one that reports what is actually
being accepted by all bank borrowers, then a reform might be
feasible. But the LIBOR in fact is many rates, involving the
lending and borrowing needs of a large number of banks which have
different capital structures and purposes.
LIBOR, of course, is actually a set of indexes. There are
separate LIBOR rates reported for fifteen different maturities for
each of ten currencies. The shortest maturity is the best known one
for overnight borrowing, but the longest one is for a year. And
that is just the rate for the dollar.
In all, eighteen global banks participate in the aggregation of
data on the dollar rate that goes into the calculation, but only
three of them are strictly U.S. banks — Bank of America, Citibank,
JP Morgan Chase — while the others range from BNP Paribas,
Deutsche Bank, Credit Agricole, HSBC, UBS, and, of course,
Barclays.
Meanwhile, there are similar complex calculations going on daily
to reach rates for EURIBOR for European currencies and TIBOR for
Tokyo and Asia. But just to stay with the LIBOR dollar rate, that
daily rate alone by itself is the starting point for a even more
ornate U.S. financial network that determines interest rates on
mortgages, credit card fees, student loans, and loans for motor car
and other consumer purchases. In addition, the huge financial
derivatives market for interest rate swaps as well as the U.S.
Treasury’s own dealings to support the Euro all depend on
LIBOR.
But beyond the question of complexity there is the problem of
complicity. How can the major central banks “fix” LIBOR when they
may have, either by neglect or even by “nod-and-wink” assent, stood
by while Barclays and who knows who else jiggered the LIBOR rate
around to keep interest rates artificially low?
Both Federal Reserve Chairman Bernanke and Bank of England
Governor Mervyn King claim to have been unaware of Barclay’s
maneuvering. Yet Timothy Geithner, now U.S. Treasury Secretary,
when he was still the president of the New York Federal Reserve
Bank began to write to everyone — Mervyn King included — from
early 2008 onwards about his concerns for “enhancing the
credibility of LIBOR.”
But once he got into the Obama Cabinet he signed on to the
President’s policy of trying to spark economic growth through
massive injections of capital and artificially lower interest
rates.
So before the central bankers start to dismantle the admittedly
flawed LIBOR system, they should address the more pressing problem
of ensuring that government regulators who already have wide
oversight over the international banking marketplace do their jobs
properly with the rules they have before any more powers are handed
over to them.
However, it is more likely that will prove too difficult so
another round of rule making and power grabbing is in the works.
It’s an ill wind that blows nobody good.
