Matt Taibbi has released yet another feature outlining the fraud of a huge scale that large banks have engaged in. Rather than charge excessive fees or provide unrealistic mortgage terms, they engage in collusion to manipulate parts of the world economy so basic that most don’t know they exist.
First was the LIBOR scandal. LIBOR is an important interest rate, set daily, that determines what banks charge each other for short-term credit. Each large bank submits a bid on what the rate should be, and the middle 50% of bids are averaged out to become the rate of the day. Since banks lend vast amounts of money to each other, colluding to adjust the rate (usually downwards) means billions of dollars in revenue for a bank’s currency and derivatives traders.
Now, a firm called ICAP is being investigated for fixing an important rate used in interest-swaps. This has similarities to municipal bond-rigging (outlined previous by Taibbi here). Say you want to pass a large bond measure to build a hospital. Because you spend the money gradually over time, the money you haven’t spent yet gets invested through a broker, who sets up a public auction. The banks divvied up these bond projects among themselves before the auctions, then bid low interest rates. Billions of dollars were skimmed from the accounts of small towns and counties.
The last five years are a swollen river of fraud- when the latest scandal is disposed with another, bigger one comes up. Banks haven’t just been stupid, they’ve engaged in old-school trust activity straight out of the Gilded Age.
A friend did raise a point that I think is important. Did we really think that LIBOR, something set by a banking firm with the help of large financial institutions, was going to be competitive? Having such important things set by a private agreement is just asking to be disappointed. While it doesn’t detract from the terrible things these interest-fixing schemes have done to regular people and businesses looking for a loan, it also is a reminder that one shouldn’t assume that corporations are acting fairly when they deal amongst themselves.