by Michael Roberts
The taxpayer-owned UK bank, the Royal Bank of Scotland (RBS),
has been fined £390m for its role in the illegal fixing of the interbank
interest rate, Libor. This is in addition to the fine being imposed by
US regulators for the same offence.
As I explained in previous posts
(http://thenextrecession.wordpress.com/2013/02/01/the-never-ending-banking-story/), Libor
sets the floor for many other borrowing rates that affect you and me,
like mortgage rates, bank deposit rates and short-term corporate
borrowing. It is supposed to emerge from the process of the ‘free
market’ in the demand and supply of loans. But now we know that for
years, the major international banks (up to 20 banks) rigged the market
by fixing the rate by secret negotiation between traders, and especially
within each bank.
So the Libor each day was more a product of football match fixing
than due to the ‘free flow of market agents’. As a result, the interest
rates for borrowers across the world were distorted and lenders and
borrowers alike were defrauded.
As Costas Lapavitsas and Alexis Stenfors put it in the FT (http://www.ft.com/cms/s/0/1054054a-7052-11e2-85d0-00144feab49a.html#axzz2K455wHkY):
“manipulation results in a wealth transfer across society in favour
of banks. Equally serious is the impact on monetary policy. As long as
Libor undershoots the actual money market rate, the central bank – where
it uses Libor as a signal – is conducting policy on the wrong basis,
with significant costs. It is reasonable to surmise, for instance, that
central banks’ response to the 2008 liquidity crisis was too slow
because the rates at which banks transacted were by 2007 probably
substantially higher than Libor.”
Originally, the scandal came out from the activities of another UK
bank, Barclays, which eventually led to sacking of its ‘dynamic’ chief
executive, Bob Diamond and for which it was fined $450m. But now the
rigging activities of RBS appear to have been even worse. And this is
the shocking point – this Libor rigging went on under the ‘watchful’ eye
of the current chief, Stephen Heston, appointed when the bank was
nationalised by the UK government after it was brought to its knees by
the previous management under the notorious Fred Goodwin. It is now
revealed that for two years after Heston got the job, the Libor traders
in this publicly-owned bank carried on rigging the rate knowing it was
illegal and the current management of the bank did nothing for a year
and then took another year to dig out what was going on.
Stephen Hester says:“We condemn the behaviour of the individuals who sought to influence some LIBOR currency settings at our bank from 2006-10.” But the regulator cites RBS for a breach in 2011: “RBS did not begin to put such systems and controls in place until March 2011
and its initial measures were inadequate because they did not address
the risk that Derivatives Traders would make requests to Primary
Submitters…”
The head of the trading department has been sacked, but needless to
say, Heston, his senior management and most of these traders have got
off without a single sacking, let alone a criminal charge or
conviction. Indeed, the government prefers to carry on with ‘business
as usual’, in the hope that as soon as possible, the bank’s share price
can get back to the level that the taxpayer paid for its shares, in
order to re-privatise the bank. Based on this policy, the government
will allow these criminals to get off Royal scot-free!
Sure, £390m goes into the taxpayers’ purse in fines, maybe. But that
money comes out of the profits of RBS and thus out of the dividends due
to the state. So it is Peter to pay Paul. It repeats the main lesson
(http://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/).
The nationalisation of RBS and Lloyds Bank was carried through just to
bail out the banks. It was not to give control to the electorate. The
former Labour government and this coalition government continued with
the policy of ‘arms-length’ control. That means the banks were left to
continue with their criminal activities and their executives were
excused any wrongdoing. Rather than use public control to provide a
proper banking service to the economy, the banks are to be readied for
their return to private ownership for profit.
As Lapavitsas and Stenfors say: “Libor-fixing is an
institutionalised private meeting of banks that ends up serving their
interests. The answer is public intervention in the rate-setting
process, whether through the central bank or otherwise. That is the real
policy solution.” Unfortunately, nothing will change.
SOME QUOTES
“Britain is very good at banking. Recently there have been some
ghastly mistakes – yes, we buggered up – but the percentage of bankers
who have misbehaved is tiny. The City is moving towards a healthier
capitalism… We’re now prepared to criticise ourselves and are becoming
more open about the fallacies in our system… We need a more moral
approach to capitalism. A healthier capitalism – not tighter regulation,
which hinders banks’ ability to lend and support society in the way it
is meant to. A strict legal approach – essentially box-ticking – is not
the best way to regulate a bank. We need to find a commonsense approach,
a way of introducing the moral over the legal.” Roger Gifford, Lord Mayor of the City of London, FT 1 February 2013.
“Banker bashing is a bad thing – if you wake up every morning to
be lambasted in the headlines, it is less likely that you will want to
work in the field and that reaction will hurt the economy. The UK must
stop attacking the industry if it wants to remain a good place for
global finance” , Bill Winters, ex-head of JP Morgan investment banking, 6 February 2013, City AM
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