Matt Taibbi talking:
Libor is basically the rate at which banks borrow from each other. Its a benchmark that setsthat a lot of international investment products are pegged to. When Libor is low, that means that the banks feel confident in each other; and when Libor is high, that means there is generally instability. And what weve been dealing with in this scandal are really two different types of manipulation: one in which the banks manipulated Libor downward so as to create the appearance of good health generally, and then, more specifically, a much more insidious kind of corruption where they were manipulating it both up and down in order to capitalize on particular trades, depending on what the banks were holding that day. So this is an explosive, gigantic financial scandal.
Basically, every city and town in America, to say nothing of the rest of the world, has investments that are pegged to Libor. Most of them are holding investment accounts that actually will decrease in value as Libor goes down.
most individuals think of it in terms of their own mortgages or their own credit cards. And its true, most of those people probably benefited when they were manipulating Libor down. But now, remember, they also manipulated it upwards at times. But when it was downward, those individuals did benefit. But on the whole, overall, ordinary people actually suffered when Libor was manipulated downward, mainly because local governments, municipal governments tended to lose money. So if you live in a town that had a budget crisis, that had to lay off firemen or teachers or policemen, or couldnt provide services or textbooks in their schools, you know, that might be due to this. And remember, even the tiniest manipulation downward, when youre talking about a thing of this scale, would result in tens of trillions of dollars of losses. So its an enormous scandal. It eclipses anything weve seen since 2008.
the Bank of England chief, Mervyn King, says that the memo that he sent to the British actually didnt outline any specific regulatory concerns. It didnt give them any information but only proposed steps that they might take in the future. And those steps were actually just more recommendations for more self-regulation for the banks. My question is, if the Bank of England and the Fed knew about this activity dating back to 2008, why was nothing done? Why were there no criminal investigations until now? Why did the rest of us not hear about it? This is information that should be pertinent to everybody who makes investments, but it was kept secret from everybody. Remember, the information that the Fed got was that some of the banks not only were manipulating Libor, but they were doing it because they felt they had no choice, because everybody else was doing it. And for the Fed to get that information and not immediately launch a massive criminal investigation, or help the Justice Department do that, speaks to the ineffectiveness of their response.
the Bank of England and the Fed knew about this in 2008, but they had an interest, perhaps, in seeing Libor artificially suppressed, because in that panic of 2008, when everything in the markets was going haywire, it actually benefited governments by creating the image of financial soundness in the markets. But, A, thats an irrational response, because its a terrible precedent to set for the government to allow manipulation of the markets in any way, and, B, the banks werent doing this just to make themselves look healthier, they were also doing this just to make money. They were trading against this information in what essentially was the biggest kind of insider trading you could possibly imagine. So, I dont think that argument is going to hold water.
there hasnt been enough coverage in the United States, and thats probably because the scandal has not yet spread to our shores. And it will, because this startsit probably starts with Barclays and UBS and the Royal Bank of Scotland. These are the three banks that we know of already that have admitted to this conduct. But its eventually going to involve big American banks, as well. And we know who they are; we dont have to mention them. But theyre the otherthe American banks in the survey are also going to be involved in this.
But I think the American media generally has been slow to realize the gravity of the scandal. I think theres a lot of fatigue out there among people with all of the financial corruption. I think news editors generally are reluctant to go there, especially with something as complicated as Libor. But what were going to see is a lot of coverage like what you just heard from the Wall Street Journal, where theres going to be a suggestion that this was done in sort of a patriotic manner, in order to create an appearance of soundness in the markets during a period of crisis, that this was done at the behest of governments. And I would suspect that thats going to be the first line of defense for these banks.
the recent revelations that HSBC, one ofthe biggest bank in Europe, admitted that it was laundering tens of millions of dollars in drug money from the Mexican drug cartels, forcing one of its chief officers to resign publicly in a hearing.
It probably has been overshadowed by the Libor revelations recently. Weve obviously heard things like this before, banks not asking enough questions about where the money is coming from: the Bank of New York scandal back in the late ’90s with the Russian mob money that was flowing there by the billion; you know, to a lesser degree, the scandal involving Jon Corzine and his company, and what questions did Chase ask or not ask when they were dealing with them. There’s clearly a laxity among all the banks in asking enough questions about where money is coming from. I suspect that the HSBC scandal will help spread awareness in that regard, as well.
the Libor scandal presents really the mother of all regulatory dilemmas, because this scandal could not have happened if it was just one or two or even three banks acting as rogue participants. The way Libor works is, they take a survey of 16 banks every day. They take the four highest numbers and the four lowest numbers, and they throw them out. They average out the remaining numbers. And what that means is that pretty much all the banks have to be in on it in order to move the needle in any one direction. So youre talking about 16 of the worlds biggest, most powerful financial institutions. And if theyre all cooperating in what essentially is a gigantic international price-fixing operation, what do regulators do? You know, fines are clearly not going to be sufficient. Even if they pursue criminal investigations and jail a few of the traders, thats really not going to be sufficient either. So, it really poses a tremendous question. What are theytheyre going to have to revoke some kind of privileges to all of these banks, and that will really result in a massive shake-up of the entire financial system.
Wall Street learned from the Mafia is actually somewhat similar to the Libor situation, because what we’re dealing with is a kind of a cartel-style corruption scheme. In Libor, it was 16 banks acting in concert to rig the international interest rates. What this one was was a number of the world’s biggest banks colluding to artificially suppress the amount of money that cities and towns earned on their municipal bond service. So this is—it’s very complicated inside baseball stuff, but when a town or city wants to borrow money, it goes to Wall Street. It issues a bond. Let’s say it borrows $50 million. It doesn’t spend all that money right away, so it doesn’t build the school right away, it doesn’t build the baseball field. It keeps that money in an account somewhere, and banks are supposed to compete with each other at auction for how much that money is going to earn. That money is going to be invested, and they’re supposed to out bids against each other for how much they’re going to pay the towns and the cities on that investment income. And what they’ve been doing is they’ve been getting together secretly and parceling out business. So the banks—one bank will say, you get to do the bond service for the school in this town, you get to do the bond service for the—you know, the hospital over here, a third gets to do the bridge or the highway in another state. And essentially, this was every state—every county in every state in the United States was affected by this scandal over a period of about 10 years. We just recently had a trial for a few of the participants here in New York, but it extends far beyond those individual defendants.
the particular defendants in that trial, which was two months ago here in New York City, they were three guys who worked for a subsidiary of GE Capital, but GE was really the fifth big bank to be caught up in this scandal. JPMorgan Chase has already paid a $228 million settlement. Bank of America, UBS, Wachovia, which is now Wells Fargo, they’ve all paid settlements in excess of $100 million. This all came out last year, although surprisingly there was no real coverage about it. It was also—this is actually the scandal that helped submarine the appointment of the New Mexico governor Bill Richardson who was nominated by Barack Obama.
His commerce secretary appointment was submarined by this scandal indirectly, because he was taking money from a middleman company called CDR, which was arranging these rigged auctions. So this—the conspiracy extends to probably a dozen or two dozen of the biggest banks in the world. And we have criminal cases now that are just wrapping up for 18 of the defendants in this conspirace, but it extends beyond that.
Jamie Dimon gets summoned before the Congress, and he’s there to answer questions about how it could possibly happen that a bank could suddenly have a $3 or $4 billion loss overnight. And the reason we ask these questions is that—because there’s an implicit federal guarantee. This is a—you know, a commercial bank like Chase is FDIC guaranteed. And so, when it gambles and it risks enormous sums of money, it’s essentially all of our problem because if JPMorgan Chase were to go under for any reason, then all of us would have to pay for it. Jamie Dimon and a lot of people on Wall Street don’t really see it that way. And so, when he was hauled up before Congress to answer questions about how this loss could possibly happen after everything that happened in 2008, why wasn’t there better risk assessment, how could there not be controls that prevented this sort of thing from happening, he really acted very put out that he even had to answer any questions. And most of the questions actually weren’t that tough, to begin with. They ended up really more asking him advice on how to better regulate the economy. It was a comical kind of situation where there’s sort of a widespread misunderstanding of what the dangers are here.
the key thing that people don’t understand, is that in the law enforcement community there’s an incredible amount of enthusiasm, for some reason, among people in law enforcement for doing things like catching undocumented aliens. You know, I was down in Georgia last week. I heard about a case where a guy was deported for fishing without a license. You know, it’s incredibly easy to start a criminal case everywhere outside of Wall Street, but in Wall Street, we’ve had one scandal after another involving enormous sums of money, you know, not just billions of dollars but, with the Libor thing, trillions of dollars, and not a single person has had to have any individual consequence. So you talk about all those settlements. Those are all paid by the company and by the shareholders. Not a single person since 2008 has gone to—has been indicted, has gone to jail, has spent a day in jail, or has paid any kind of money out of his own pocket. And until there’s any individual consequence, it’s really a license to steal. I think the Libor thing is really going to be a litmus test for all regulators, because if you can’t go to jail for rigging an $800 trillion market, what can you go to jail for?
All the Libor submitters all have to be indicted, clearly. But it has to go higher than that, because this can’t happen without the consent of the senior executives in the companies, so they all have to go, too. And I think the British acted appropriately in immediately, you know, making sure that the Barclays chief stepped down. But that’s just for starters. I think, you know, we have to do that. We have to remove all the executives who are responsible for this.
all the sports fans now who go to these stadiums, renamed after banks including now the new New York Nets in the Barclays Arena in Brooklyn are facing having to walk into these stadiums for these thieves, being named after them.
The Justice Department assigned 93 agents to the Rogers Clemens case. Think about that. Ninety-three guys assigned to the case of injecting Roger Clemens with steroids. How many people are investigating the mortgage-backed—or who are on the mortgage-backed task force that Obama allegedly started a few months ago? It’s less than that, from what I understand. So here you have this massive criminal conspiracy that involves all the biggest companies in America, and we’re spending less resources investigating that than we do on a single baseball player—who’s retired, incidentally.
President Obama going to speak in Bank of America Stadium, actually Panthers Stadium.
Bank of America, they were a—they’re sort of a poster child for everything that’s wrong with “too big to fail,” but most importantly, in 2008, they were really the most aggressive actor in the whole—in the sort of scheme to sell toxic, explosive mortgage-backed securities to public funds like pension funds and unions. And that was really just a gigantic fraud scheme. And Bank of America, along with its subsidiaries, Countrywide and the investment bank Merrill Lynch. they were all probably the most aggressive in their respective fields in pushing those toxic mortgage-backed securities. So, it would be, I think, bad for the Democrats to associate themselves with that company, heading into the campaign.
private equity is difficult to understand. I think what’s funny is, it’s really not that much different from what we saw in the 1980s when we—when corporate raiders and leverage buyout specialists like, you know, Carl Icahn became these sort of Gordon Gekko-style public villains. That’s really all that public equity—private equity is. It’s just that the mechanism has changed. Back in the ’80s, what these guys were doing is they were using junk bonds to create the financing they needed to take over companies. Nowadays they’re using securitization and what are called CLOs, collateralized loan obligations. It’s the same mechanism that banks used to create mortgage privatizations.
And so, what they’re doing is, you take a company like Bain. It has a small amount of cash. Let’s say it wants to acquire a company for $500 million. It might have $40 million. It will go to a big bank, like a Goldman or a JPMorgan Chase, and it will say, “We want to raise $300 million so that we can go in and buy a majority of the shares in this company.” The big bank will go out. It will issue a securitized bond, like the mortgage bonds that they were issuing, and raise a whole bunch of money. The Bain-like company then goes and buys a majority of the shares, and when they do that, when they take over the company, the critical thing is, all that debt, all that borrowed money, that when they borrowed all that money to take over the company, the company now, the taken-over company, now assumes that debt. So, when you take over the company, they now have this additional burden that they have to meet. And in order to meet that burden, they often have to streamline themselves and lay off people. The private equity firm will also typically charge a reorganization fee to the target company. So they’ll say, “We’ve come over. We’ve taken over your company. And in order to restructure, you have to pay us x amount of money.” So now the target company has two new obligations that it has to meet: it has to pay the reorganization fee, and it has to pay all that debt service, which is why they have to lay off people, because they don’t have as much money as they did before.
the biggest crime is that you’re taking functioning, healthy companies, and you’re larding them with debt, forcing them to lay people off. And it’s just a scheme to take a cash-rich company and move all that cash to a few actors—typically it’s the executives of the target company and the executives in the private equity firm—and then they—you force everybody else to pay. The workers pay by either losing their jobs or taking reductions in salary, and the guys at the top win. And that’s kind of the direction—that’s really what Mitt Romney represents. He represents this economics that sees massive compensation heading upward and tightening of the belt everywhere else. And we’ve seen this trend develop over two decades or so here in America, and a lot of it has to do with financial maneuvers like this.
– source democracynow.org, 2.
Matt Taibbi, contributing editor for Rolling Stone magazine. His most recent in-depth article is called “The Scam Wall Street Learned from the Mafia: How Americas Biggest Banks Took Part in a Nationwide Bid-Rigging Conspiracy Until They Were Caught on Tape.” Hes author of the book Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History.