The developing scandal involving years of price rigging of the London Interbank Offering Rate (LIBOR) should not be relegated to the financial pages alone. Instead, it should become a key element to counter the Republican’s incessant push towards deregulation as the most recent large scale example of abuses in the deregulated markets.
As recent news reports have shown,, LIBOR is an interest rate which affects an astounding $360 trillion in fixed income financing rates globally, ranging from mortgage and commercial loans to what the Fed uses to make policy decisions. For its part, Barclays stumbled along when the scandal broke and its ex-CEO Robert Diamond had no clear answers for British regulators who interviewed him about the ongoing scandal.
It is also no accident that the LIBOR scandal developed in London, the world’s center for OTC derivatives and the poster child for deregulation under the Conservative government of Margaret Thatcher, a political ally of Ronald Reagan. Since those heady days of deregulation, global markets have become more volatile and subjected to more exotic, leveraged and difficult-to-price instruments which are not designed for commercial hedging purposes. Instead, they are very specialized, complicated, speculative instruments designed for and sold to an expanding class of global speculators.
Of course, Republicans continue to hammer away at deregulation despite the fact that it has been the root of global scandals that have lost trillions, most of it from individual investors. Even with the current financial regulation system in place, it has been corrupted by service industry providers and lax government regulators. In the recent scandal, Barclay’s auditor PriceWaterhouseCoopers, “looks more like a public-relations firm than a skeptical watchdog,” according to a Bloomberg report, because the audit firm gave Barclays two awards in the category of “tax reporting,” according to the firm’s website. The LIBOR price fixing activity affected the fair market value of the bank’s loans being carried on its books.
Nor was this an isolated instance of professional malfeasance. Bloomberg also reported that Barclays had just named the ex-chairman of the global accounting firm KPMG International as the head of its audit committee. The ex-chairman headed the U.S. operation of KPMG, when it was caught selling fraudulent tax shelters to hundreds of wealthy Americans. The U.S. Justice Department fined the firm $456 million in 2005 and got them to admit to criminal wrongdoing.
While the ex-chairman was not named in the case, the fact that Barclay’s made him head of their audit committee at this delicate time “looks like an obvious case of the wrong person for the job at a time when appearances are everything,” according to Bloomberg.
It is also instructive for U.S investors to remember the NASDAQ price fixing scandal, where prices moved in high increments on what was, at the time, the largest stock market in the world. That scandal did not produce the deep structural changes needed to correct the system to benefit individual investors, which helps explain how individual investors were again victimized in the 2008 mortgage scandal and the resulting global recession. All of these were not one-of, isolated events, but examples of unfettered speculative activities.
A Great Case for the Democrats or Not
At first glance, all this is great material for the Democrats, who want to deflate Republican cries for more deregulation. But while this is obvious, too many Democrats are accepting money from hedge fund, VC firms and the financial services industry for them to make an authentic, impassioned plea for regulation, Instead, U.S. voters will have to look at the LIBOR scandal themselves, figure out how it corrupts their lives and makes it more expensive to borrow. They should also question the quality of a financial system which allows trillions in wealth to be destroyed, while simultaneously allowing price fixing on a global scale and executives to go unpunished.
So far, the Obama administration financial regulators, with the possible exception of CFTC Chairman Gary Ginter, have abandoned individual investors to their own fate. Since both parties have taken as many contributions from the financial services industry as possible, any public outrage about the LIBOR scandal should be considered posturing, Even Barney Frank, co-sponsor of Dodd-Frank, now seems to be backpedaling on some of his bill’s reforms. If more Democrats side with any efforts to push back any fiduciary standards, they too should not bother to criticize the LIBOR scandal.
So, as the Obama campaign develops its Romney critiques, the most powerful ones may have to be avoided for the simple reason that the Dems may be as close to the abusers as the Republicans. That may help explain why this election will be so close, and why Obama has lost so much support among independents and reform-minded, anti-Wall Street voters.