PAUL JAY: Welcome to The Real News Network.
I'm Paul Jay in Baltimore.
LIBOR, the London interbank offering, as people might know by now, is at the center of a scandal.
That's the place every morning where the biggest banks in the U.K. and U.S., and I guess some
others, get together and set the rate that they will loan to each other.
And they are now accused of having manipulated that rate.
And in England, Barclays has more or less admitted to it and paid hundreds of millions
of dollars in penalty, although they still say they did nothing wrong, and American banks
were up to their eyeballs in it and are now being sued by, amongst others, the City of
Baltimore and other American cities, who claim they have lost millions of dollars as a result
of this manipulation.
Now joining us to talk about all of this is Michael Greenberger.
He's currently a professor at the University of Maryland School of Law, where he teaches
financial law, and he's a former division director at the U.S. Commodity Futures Trading
Commission.
Thanks very much for joining us again, Michael.
MICHAEL GREENBERGER: Nice to be here.
JAY: So some people are suggesting what's gone on here is tantamount to a criminal conspiracy.
Do you think that's true?
And maybe in answering that, you can explain again what was going on here.
GREENBERGER: Well, maybe I can give the latter first.
Practically every interest rate benchmark on loans that are made to the tune of about
$10 trillion worldwide were for derivative financial instruments called interest rate
swaps, which [incompr.]
$350 trillion notional worldwide.
The measurement of the interest rate to be paid is established by something called LIBOR,
or a sister benchmark, which could be EURIBOR, TIBOR for the Japanese.
LIBOR is the benchmark at issue here.
As you said, going back many years, every morning at 11 a.m. a panel of banks, sometimes
16, sometimes 18, submit the amount they estimate--and I underline the word estimate--that they will
be charged by their fellow banks to borrow money from them.
That benchmark is submitted to the organizer of LIBOR, which is the British Banking Association.
And the BBA, in conjunction with Thomson Reuters, eliminates the top 25 percent interest rate
settings and the lowest 25, then averages out the middle--say, if there's 16, you eliminate
four at the top, eliminate four at the bottom, get eight in the middle, and that is the LIBOR
rate for the day.
Now, that LIBOR rate could be settling trillions of dollars of transactions for that day until
the next LIBOR rate is set.
The problem here is there are two sets of problems in terms of manipulating that rate.
One set of problems--and this emanates from the Barclays disclosure--is that from 2005
to 2009, traders that had an interest in setting the rate at a level which would benefit their
trades, bring them more money, were telling the members of the panel in their bank what
to, quote, "estimate," for that day so that the bank [unintel.]
fashion would come out ahead.
A second problem is, during the 2007-2008 period, the rate that banks were saying they
were being charged by each other was an indicator of the financial health of the bank.
If the bank was saying it was costing them a higher interest rate to survive from day
to day, they were (especially in United Kingdom) candidates for possible nationalization by
the U.K. government.
Barclays was on the hook as a possible candidate for nationalization, so they entered into
some form of discussions with the U.K. regulators and said, look, if we come in very high, we're
worried you're going to want to nationalize us, and by the way, we know that other panel
members are not giving the proper interest rate they expect to be charged for the lower
rate.
So as an end result of these two different kinds of manipulation, the benchmark for determining
the settlement of trillions of dollars of transactions was essentially rigged.
Now, you asked the question: is this a criminal conspiracy?
Well, let's take the word criminal first.
There's no dispute this is a criminal problem.
How do we know that?
Because the United States Department of Justice entered into an agreement with Barclays and
agreed that Barclays would not be prosecuted for criminal conduct if Barclays would pay
$160 million to the United States and agree to a set of facts which clearly lays out criminal
conduct.
In other words, they are on the hook for criminal activity.
But the United States has said because Barclays was cooperative and paid $150 million, they
would be--prosecutorial discretion would be exercised and Barclays would not be prosecuted.
So we have a criminal problem here.
By the way, Barclays is probably the first in a row of settlements for prosecutions to
be made.
They've essentially agreed to [unintel.] to talk about what the other panel members were
doing in terms of participating in this manipulative activity.
And that's where you may begin to see a criminal conspiracy.
JAY: Just let me jump in for a sec.
We hear a siren in the background, and I should just alert viewers to the fact that these
sirens are not police cars on the way to arrest bankers.
I don't even have to investigate to know that's true.
Go ahead, Michael.
GREENBERGER: So you have, by virtue of this settlement by Barclays with the United States
Justice Department, which has responsibility for prosecuting criminal manipulation, admissions
here of wrongdoing which the Justice Department believes is criminal in nature.
Barclays has, throughout, indicated that they are not alone in this venture, that other
panel members, many of them U.S. bank holding companies, are guilty of similar conduct.
So, yes, this is a criminal problem.
No, it does not stop with Barclays.
Yes, there will be further activity.
On the civil side, we can expect the United States Commodity Futures Trading Commission,
who settled with Barclays on the civil penalties side for $200 million, to be looking into
other wrongdoing by other banks in conjunction with Barclays, and we can expect the Justice
Department to be following suit on the criminal side.
In the United Kingdom, the United Kingdom regulators, including the U.K. government,
have said they are going to beef up their Serious Fraud Office and there will be criminal
investigations in the United Kingdom.
The Japanese are looking into this.
The European Union is looking into this.
The German government is looking into this.
This is a very big deal.
It affects the transactions of almost everyone in the world who borrow money from banks.
JAY: Michael, there is some sense that the British authorities knew about this fairly
early.
And we interviewed Bill Black.
He was saying there's some reporting that British authorities may have to some extent
even connived in this for the sake of not allowing the British banking system to look
too much in distress.
We also know now that (and The New York Times reports this on Friday) there's been some
earlier reports about this that Barclays--actually, an employee of Barclays informed the New York
Fed while it was headed by Tim Geithner in 2007, and again Barclays told the New York
Fed in 2008 that this was going on.
The Times reports that the Barclays employees told the Fed, you can only guess or you would
know why they want to lower these rates.
So is the Fed to some extent implicated here?
And what does it mean for Tim Geithner?
GREENBERGER: I think that story has not fully been told yet.
It's clear that Geithner wrote a letter to the sponsor of LIBOR, the British Banking
Association, to the chief British regulator and financial services [unintel.] and the
Bank of England and said all is not well here and recommended fixing it.
Now, that fix was never made.
But what we don't know is also the--as far as I'm concerned, and as history has now demonstrated
this last week, the two enforcement agencies, at least in the United States, who had to
do something about this were the Commodity Futures Trading Commission and the Department
of Justice.
What we do not know is whether--I do know, and it's being reported, that the CFTC opened
its investigation in 2008, and because it was a complicated investigation, it took this
time, from 2008 to last week, before they and the Department of Justice were able to
settle.
What I would hope has happened, at least within the United States, is that Geithner, in his
capacity as president of the New York Fed, was either alerting the CFTC and the Justice
Department or knew that the CFTC and the Justice Department were looking into this.
That would have been an appropriate way to act and, as far as I'm concerned, would--he
would have turned this over to the regulators, who we know from last week are responsible
for cleaning this mess up.
We don't know what Geithner said--at least, as I sit here, I don't know what he knew or
what he said.
JAY: And if he didn't do what you said--or even based on what we already know, some people
are calling for Geithner's resignation.
What do you think?
GREENBERGER: Well, again, I want--before I start calling for resignations, I want to
have the evidence in front of me.
There is a nuanced problem here, which, frankly, I think needs to be aired, but I find not
to be acceptable, is that the Bank of England, the Financial Services Authority in the United
Kingdom, and the New York Fed in United States, they have been saying themselves the world
is coming to an end, we have problem restoring confidence to the markets, now is not the
time to reveal the fact that a worldwide benchmark for hundreds of trillions of dollars of transactions
is being tinkered with, and by the way, this is actually helpful if we have reports that
may not be truthful but restore confidence and avoid a worldwide depression.
JAY: So a bit of convergence of interests between the banks who made money, whether
they've made it go up or down, and then the political authorities don't want to add to
the panic.
GREENBERGER: Yes.
I'm hoping that is not what the answer is going to be, because, you know, as history
has shown in so many scandals, trying to kick the can down the road only burns you more
severely than you would have been burned if you'd dealt with it immediately.
I think the markets, given the fact that they were already in a state of disarray, could
have handled that right.
It will be a big embarrassment to Geithner, and possibly the president in the middle of
a reelection campaign, to find out that this wasn't dealt with either on the civil side
or the criminal side as the law was being revealed as being broken.
Now, again I just want to say that the CFTC did begin to look at this in 2008.
The settlement they derived--and they're bringing in the Justice Department--began with an investigation
in 2008.
My hope is--for the rule of law, if for no other reason--that Geithner knew that that
was happening.
JAY: Now, is the underlying problem here bigger than a scandal or some of the names we're
talking about?
I mean, is what really going on here is the big banks and the whole finance sector of
the economy, in particular what people call the parasitical sector, have just become so
politically powerful that they really have nothing to fear, so even if they get caught,
they get a slap on the wrist, it's the cost of doing business, they pay a fine here and
there, and merrily carry on to the next adventure?
GREENBERGER: Again, I think you certainly can look at the Barclays situation as an isolated
matter.
And saying--for example, buying off prosecution that would put people in jail, for Barclays,
to the tune of $160 million, is akin to you and I paying a traffic ticket to avoid going
to jail.
That was a very cheap price for them.
Now, on the other hand, what this suggests to me is the--Barclays did do self-reporting
here.
They did come to the government and adduce this evidence.
I think, and what I'm hoping is, as is true of all criminal investigations, you get one
of the key actors to be on your side, given a grant of immunity, which effectively has
been done here, and they then become your lead evidentiary source for going up the ladder
and getting two others.
And that's certainly what the Department of Justice--.
JAY: So the theory is, Barclays turns on Goldman and JPMorgan and some of the others.
GREENBERGER: Yeah.
I think when you look at this and you understand the way complicated financial investigations
are carried out, that makes sense.
That's certainly what's being advertised here.
Many people have said Barclays made a terrific mistake, they shouldn't have admitted anything,
they shouldn't have settled.
I think if, and what I expect is, at the end of the day, there will be a dozen banks implicated
in this.
Barclays, by getting in early and effectively turning state's evidence, will have handled
this right.
JAY: Now, given that both presidential candidates, President Obama and Mitt Romney, are kind
of tripping over each other to try to get Wall Street money--and apparently Romney is
now winning--but how likely are we to see a real vigorous prosecution of this?
GREENBERGER: Frankly, I think, you know, whatever motivations President Obama may have had or
hoped that Wall Street would be neutral or equally supportive of him and presidential
candidate Romney have gone by the board.
I think any hope now that President Obama will get funding from Wall Street if he pulls
punches in this LIBOR scheme will be a double loss.
One, he'll get no funding from Wall Street.
They're fully committed to Republican agenda of no prosecution, no regulation.
And it will very badly disappoint not only his base, but the American public as they
are becoming understanding of this.
It's another shoe that has dropped among many different shoes (the JPMorgan "London Whale"
case and others) that the banking system is not one that should be supported.
Its social value to the economy is very limited, 'cause these big banks have no interest in
making loans to small businesses or individuals who are entrepreneurs.
They really in their best sense should be a utility: they take in money, they hold it
safely, invest it wisely, and make loans to businesses.
That's not a rocket science.
The banks don't want to do that.
They want to have very risky bets à la the London Whale--now we know $4.4 billion lost
to JPMorgan Chase.
That's how they want to survive.
Dodd-Frank has drawn the wagons around that.
I think the American public have had it up to here with that.
And it is instructive that in the United Kingdom both parties are now saying, we not only have
to regulate the banks, but they're saying, we've got to shrink these banks, we've got
to introduce new banks into the system, banks that will be focused on helping everyday citizens
getting the loans they need to start businesses, buy homes, and go to school.
There's no percentage anymore, I think, for politicians to be catering to the banks.
JAY: Yeah.
Well, we'll see whether President Obama listens to any of this, 'cause so far he certainly
has not adopted this argument.
But maybe things are changing.
We'll see.
Thanks very much for joining us, Michael.
And thank you for joining us on The Real News Network.