Before we get on our high horses over LIBOR and accuse banks of screwing us again, just consider these words reported in the ‘Financial Times’ over the weekend. It was quoting the tweet from Zero Hedge as follows: “The thing about attempts to quantify the damages from LIBOR manipulation is that nobody has the faintest clue.”
And exactly how much were interest rates at banks artificially boosted by LIBOR manipulation and what was the cost of the resulting damage? Sticking with the ‘FT’, it also quoted Charles MacKinnon, who is the chief investment officer at Thurleigh Investment Managers, as saying: “The consequences are a big fat zero, less than noise.”
And that is the snag. We have found banks guilty of costing us dear, without really having any idea whether they did cost us that much at all.
Trawl the blogosphere and one number that was cited as to the value of derivatives that are in some way affected by LIBOR is $800 trillion. That may sound like quite a lot of money, but the ‘FT’ has good news. It estimated that actually the figure was more like $360 trillion, so that’s a relief.
What we do know, however, is that Barclays was not alone, other banks were at it. We also know that in 2008 the man who is now US Treasury Secretary – Timothy Geithner – raised concerns about the way LIBOR was set, and the Bank of England had meetings discussing the subject. What we don’t know is whether banks other than Barclays that were caught up in the sorry saga were involved through staff formally employed at Barclays, or whether LIBOR manipulation was widespread. Neither do we know whether the manipulation was designed purely to disguise the extent of a bank’s problems borrowing, whether it was an attempt to stack the odds in favour of a few traders, or whether banks were shamefully fleecing customers. Fleecing customers does not seem that probable, since the margins involved were so tiny. If it was case of a few traders cheating to net themselves profits, that is clearly illegal, and for those few people involved the punishment should be severe. If it was a case of banks trying to disguise the seriousness of their woes, it could be argued that the public befitted from LIBOR manipulation.
But the US is the land of litigation. When it comes to suing, Americans are never shy about coming forward. Morgan Stanley has estimated that total fines penalties and damages dished out to banks relating to LIBOR manipulation may eventually be around $22 billion. But it admits that its estimate is crude; in other words, it really doesn’t know.
But what we can say without any doubt is that, regardless of whether it is justified, banker bashing has become the favourite hobby of many people on both sides of the pond. When the public backlash is so vast, it would take a brave judge to stand against it.
This one is hard to call because no one can know the extent of public outrage.
As ever, there is a danger of things going too far. Madness of the crowds led to greed in the boom years, which in turn led to activities that simply did not create wealth, and yet these activities were welcomed by politicians, the media, and the electorate.
Is there a danger that in the backlash we will see another form of the madness of crowds, a bit like a witch-hunt – one in which bankers are tied up and thrown into ponds, and if they drown we know they are innocent.
When law suits against banks are put before US judges the prosecutors may well find they are pushing against an open door.
But if you push too hard against an open door, you may stumble and fall, leaving little more than broken bones and a door that has fallen off its hinges.
©2012 Investment and Business News.
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© Investment & Business News 2013