LIBOR – Dr. House may have been right: “Everybody Lies”
Lies and Libor: The rate-fixing scandal should destroy the credibility of banks once and for all.
by Matthew Yglesias. (some emphasis added).
The Libor malfeasance lays bare in an unusually clear way the basic fact that a modern bank is perfectly happy to lie when there’s money to be made. This has scandalized elements of the business establishment, especially in Britain, leading to a striking Economist cover image labeling the perpetrators “Banksters.”
So far the shock waves haven’t really hit on this side of the Atlantic, but one can only hope they will. The United States enacted a major change in its financial regulatory system in 2010, but it’s not clear that we’ve yet had an adequate change in regulatory attitude. The lesson of Libor is that regulators need to recognize that bankers have cast aside the clubby values of yore, and they need to respond in kind. Banks will try to abide by the letter of the law, but where loopholes exist, they’ll be ruthlessly exploited—through dishonest means if necessary—and the financial cops need to have a fundamentally suspicious attitude toward the regulated entities. Time and again, when tighter regulation of trading is proposed, the concern is raised that stringency will push activity to foreign centers. In the short run, that’s almost certainly true. Banks will want to move to wherever they’re most likely to be able to get away with more shady dealings. But an economic development strategy based on turning your country into an appealing location for dishonest banking is just going to get you a financial system that’s rotten with dishonesty. It’s time to stop being surprised and start realizing that these are the inevitable fruits of a regulatory system that’s weak by design.
“Diamond lied to the committee,” David Ruffley, a committee member from the U.K.’s ruling Conservative Party, said at today’s hearing. (read article here).
“When I read the e-mails from those traders, I got physically ill,” Robert Diamond said. “That behavior was reprehensible, it was wrong. I am sorry, I am disappointed and I am also angry.” (Read more here).
Did you catch this line from above: ”through dishonest means if necessary.” Dr. Gregory House famously said, over and over again, “Everybody lies.”
Is Dr. House right? No, not everybody lies. But this is right: there is corner-cutting, deception, and outright fraud in every arena. How many times have we read of a lawsuit settled when the “guilty party” admits to no wrongdoing? But, of course, if there were no wrongdoing, there would be no settlement.
The LIBOR scandal, in which some people, for very self-serving motives, set interest rates that were then passed through to over $350 Trillion (yes, that was “Trillion”) in loans, basically fixed the game for their own ends, the rest of the world be damned.
The LIBOR scandal is just…awful. Read the e-mails; grasp the selfish, self-serving decision making.
We really should learn the lesson by now. The lesson is not that Barclays Bank had some corrupt folks working for them. The lesson is not that banking is particularly ripe for such malfeasance. Though, both of these statements are true. And also, with banking, the ripple effects are really, really harmful for massive amounts of people.
The lesson is that “people are no damn good.” (That’s a quote from a Texas city manager from a few decades ago). And because it only takes a few “bad apples” to cause some pretty seriously harmful, even massively harmful, ripple effects, then we have to function as though there are these bad apples in every arena. We have to function as though “everybody lies,” and learn to, in the words of Ronald Reagan, “trust, but verify.”
Call it what you will: we need oversight; we need clearer laws; we need more and better regulations; we need oversight of the regulators. But we should be ready to acknowledge the obvious – we have simply got to function as though there are bad apples, out to do us all harm for their own ends, in every arena.
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