Tuesday, July 10, 2012

Why The Business World Is Fucked Up

A full 25% of businessmen and women surveyed believed that it is not only acceptable but necessary to break laws and ethical codes in order to succeed in business.
One inference we may draw from this rather remarkable set of data is that the more successful any random group of executives is, the more likely there are skeletons in the closet.
Which brings me to the LIBOR scandal.

"A cesspit." That's how the usually measured Paul Tucker, deputy governor of the Bank of England, described banks' attempts to manipulate the London interbank offered rate, or Libor.

Faced by a throng of sound-bite-hungry British Parlamentarians, on Monday Mr. Tucker did a convincing job of rebuffing allegations that the authorities had put pressure on Barclays PLC to manipulate Libor, the world's most important interest rate.

There's a hint in that last paragraph as to why you should be paying more attention to this story. LIBOR is the rate that is the basis of the interest rate you pay on everything, from your mortgage and credit cards to student and auto loans.

Not the Fed rate, LIBOR. LIBOR (London InterBank Offered Rate) is set by a panel of lenders each night, and therefore is removed from the political pressures of the Federal funds rate (the rate at which banks lend money overnight to other banks in America.) Ostensibly, it should be a fairer and truer benchmark of, to put it in layman's terms, the cost of borrowing money.

Which is fine. Free markets, no social structural rate, no incentive for a government to raise or lower, yadayadayada. It makes sense for the markets to use this rate to set all other rates.


The investigation found that Barclays's traders communicated with colleagues at some of the 16 banks involved in Libor setting. As one Barclays trader explained to another one at a rival lender, "the trick is you must not do this alone." This kind of evidence should help regulators prove that others were in on the fix.

Given [Barclay's CEO Robert] Diamond's resignation, the question is whether CEOs of other firms will follow suit once their companies settle. While some will argue they weren't there at the time, those with long tenure and an investment-banking past will come under pressure.

"CEOs of other banks should be worried, especially those who rose through the ranks of the fixed-income and rate businesses" says Michael Karp, managing partner of Options Group, an executive search and consulting firm.

Ay, there's the rub. And also the rationale behind strict government oversight of the financial markets.
This crisis will make the subprime bubble look like a bump in the road. See, this means that not only were a handful of bankers in England making out like bandits, pumping up their bottom lines at the expense of, well, the entire fucking population of the planet, but likely it means that the US banks who issued those cards and mortgages and loans had foreknowledge of the rip-off.
And so now we get back to the original point of this post: the tendency towards rule- and law-breaking the higher up the financial food chain one gets.
Evidence suggests that this crisis was covered up furiously when the story began to break, back in April 2008.
After all, would TARP have ever happened if the American public had focused on the fact that the underlying structure of bank lending was rubble and sand? Is it any wonder now why banks, after receiving their injections of steroids, went about not lending to anyone? If it got out that they were scamming people, even as they were being scammed themselves, there might have been full-scale class warfare.
And as George W. Bush was still President at the time, that would not have boded well for the long-term electability of Republicans. Or for that matter, a certain wealthy Presidential candidate who banks most of his money overseas and reaps the benefits of investments that likely took advantage of these same scams.
Too, the entire sordid affair puts paid to yet another Republican talking point: that markets will fix themselves.
They might, but it takes time and in the interim, billions-- if not trillions-- of dollars will be illegally skimmed off an already struggling global economy.
Make no mistake about this: this incident could be the crack in the dam where the entire reservoir pours out onto the valley below. This one might actually put capitalism as we know it out of business.