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.
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