Just when you thought Wall Street couldn\u2019t sink any lower \u2013 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 \u201cVolker\u201d Rule that was sold as a milder version of the old Glass-Steagall Act that used to separate investment from commercial banking \u2013 yes, just when you thought the Street had hit bottom, an even deeper level of public-be-damned greed and corruption is revealed.<\/p>\n
Sit down and hold on to your chair.<\/p>\n
What\u2019s 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.<\/p>\n
How is this interest rate determined? We trust that the banking system is setting today\u2019s 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.<\/p>\n
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 \u2013 bets that will pay off big for them because they have inside information on what the market is really predicting, which they\u2019re not sharing with you.<\/p>\n
That would be a mammoth violation of public trust. And it would amount to a rip-off of almost cosmic proportion \u2013 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\u2019ve witnessed look like child\u2019s play by comparison.<\/p>\n
Sad to say, there\u2019s reason to believe this has been going on, or something very much like it. This is what the emerging scandal over \u201cLibor\u201d (short for \u201cLondon interbank offered rate\u201d) is all about.<\/p>\n
Libor is the benchmark for trillions of dollars of loans worldwide \u2013 mortgage loans, small-business loans, personal loans. It\u2019s compiled by averaging the rates at which the major banks say they borrow.<\/p>\n
So far, the scandal has been limited to Barclay\u2019s, 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\u2019 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 \u201cphysically ill\u201d \u2013 perhaps because they so patently reveal the corruption.)<\/p>\n
But Wall Street has almost surely been involved in the same practice, including the usual suspects \u2014 JPMorgan Chase, Citigroup, and Bank of America \u2013 because every major bank participates in setting the Libor rate, and Barclay\u2019s couldn\u2019t have rigged it without their witting involvement.<\/p>\n
In fact, Barclay\u2019s defense has been that every major bank was fixing Libor in the same way, and for the same reason. And Barclays is \u201ccooperating\u201d (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.<\/p>\n
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\u2019 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.<\/p>\n
But the other scandal is even worse. It involves a more general practice, starting around 2005 and continuing until \u2013 who knows? it might still be going on \u2014 to rig the Libor in whatever way necessary to assure the banks\u2019 bets on derivatives would be profitable.<\/p>\n
This is insider trading on a gigantic scale. It makes the bankers winners and the rest of us \u2013 whose money they\u2019ve used for to make their bets \u2013 losers and chumps.<\/p>\n
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?<\/p>\n
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.<\/p>\n
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.<\/p>\n
_________________________<\/p>\n
Robert B. Reich, Chancellor\u2019s Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers \u201cAftershock” and \u201cThe Work of Nations.” His latest is an e-book, \u201cBeyond Outrage.\u201d He is also a founding editor of the American Prospect magazine and chairman of Common Cause.<\/em><\/p>\n