“Save me from these evil deeds before I get them done.” Fiona Apple

The Libor fixing scandal is really not a very entertaining story. It’s a boring scandal. There’s no evil masterminds, no clandestine operations. Calling it a sham would give real sham a bad name. Fixing the Libor is as simple as tweaking the golf ball closer to the hole. It comes down to this: Libor rates are what I say they are.

The traders who were fixing the Libor didn’t think they were doing something wrong. Everyone else was doing it, so why should they be any different? Why stick your neck out? In such a high-five, fratboy culture it’s a bad taste to stand out. They don’t even have to be scheming bad guys for participating in the fixing. There was simply no coherent alternative mechanism to report those rates independently. If they don’t play the game the way everyone is playing it then their book will take a hit and they won’t get a bonus. But there’s a family to feed, kids to send to college, mortgage to pay. The little tweak here and there, in the grand scheme of things, wouldn’t do much damage. The accounts skimmed of a few basis points won’t even notice it and if there’s no victim there’s no crime. Add to this the desire to “not look bad” and fear of being “out of the loop” and you have a perfect mix that makes otherwise good guys do bad things. And if fudging the numbers is rewarded the incentive becomes even stronger. The reward is personal and immediate and the results of your actions are tangible. The loss is borne by many customers who won’t even notice that they have been shortchanged. I mean what are the benefits to blow the whistle? The participants are like members of a small cult – if you’re in on it you get the benefits, if you speak out you’ll be ridiculed and ostracized, besides whom are you going to complain to – the Fed? The SEC? Nobody wants to be a martyr, especially for such an obscure and unsexy, to an average observer, matter. If there’s no upside in exposing the weakness of the system to the feds, one will find an upside in exploiting these same weaknesses to his advantage. And try to explain to the general public why they should care about a few corporate investors being scammed of a few basis points on their investments when people lose their homes and jobs left and right? It’s not like selling toxic securities to unsuspecting customers, for Christ’ sake!

The more interesting story here is how this sort of “enchantment” has spread to the regulatory quarters. After all it’s hard to blame bankers for this sort of behavior – that’s what bankers do, they are in business to exploit every opportunity to make money.

 The emerging story now is that the Fed and Bank of England might have known about the fixings. If Bob Diamond’s reasoning goes along the lines: I was just of many, we didn’t want to stick our neck out, then what is the reasoning for the Fed for not to have done anything? What was the risk for the Fed to get involved? I really don’t know why regulators didn’t do their job, or rather, I have many reasons that come to mind. The best analogy I would use to describe their actions is that of parents of a misbehaving child on the plane, careful not to take any drastic measures to rein him in and subject everyone to even more annoying cries. Sure, they have powers to discipline but it would create noise, and they just don’t want to face those disapproving passengers and would rather keep the whole thing as is. Child, of course, is perfectly aware of this kind of dynamics and is exploiting it with impunity.

But there’s some twisted beauty in the entire predicament. Everyone looks bad or at the very least disingenuous.  Republicans, no friends of regulations, are now going to investigate why the regulators weren’t tough enough. “Some news reports indicate that although Barclays raised concerns multiple times with American and British authorities about discrepancies over how Libor was set, the bank was not told to stop the practice,” Representative Randy Neugebauer, a Texas Republican and the head of the House oversight panel, wrote in the letter to the the NY Fed looking for transcripts of phone calls between Fed and Barlcays officials. Such tough stance is commendable but how can we be sure that there’s no politics involved in this sudden conversion, given his  and other Republican’s historical hostility towards regulations?

Wall Street is gleeful every time the public focus shifts onto regulators.  You know, we weren’t policed like we were supposed to, what did you expect us to do – follow the rules unsupervised? It’s reminiscent of last summer’s British hacking scandal where Rupert Murdock-controlled media defended the actions of those involved in the hacking along the lines: “Sure there were some misdeeds, but look at the police! Why didn’t they police us? How could they let us do this?” There was nobody there to “keep me from these evil deeds”. Got it? Now leave us alone, if you can’t even enforce your own rules.

That’s a tactical mistake. The fact that regulators have tacitly approved or simply decided not to intervene into business as usual does not let bankers off the hook. In fact it kills one of their major arguments about regulations being too aggressive. As soon as the public sees that regulators didn’t do their job it becomes harder to convince us of the Wall Street-peddled notion that regulations are an impediment to a normal flow of business. All the cries of heavy-handed regulators are a fantasy, simply because such regulators never existed. Bankers can’t have it both ways: they either suffer from too much regulation in which case they admit that regulators actually have some pull; or they proceed to do their business because regulators are too weak in which case their complaints about regulatory hurdles and heavy government oversight that harms business are a simple disingenuous posturing. You can’t claim to be a victim of watchdogs and at the same time blame watchdogs for being dumb, inept and disorganized. And if you claim to be a victim of dumb, inept and disorganized watchdogs then you are simply too stupid to be in this business.

Righteous indignation of the public has worn itself out at this point. While this scandal affects trillions of dollars of investments that are reliant on Libor rate, the headlines of wrongdoings on Wall Street fail to shock at this juncture. This is business as usual. The beauty of Wall Street crime is that there’s almost never a smoking gun, or a dead body. If a wrongdoing occurs the bosses blame the subordinates, the subordinates blame the bosses and the corporate lawyers find a technicality that absolves all parties.

The victims of this scandal are not average Joe Schmos who lost money on their mortgage, but major financial institutions and municipalities who invested in Libor-linked securities. If regulators, lawmakers and ordinary people can’t police the banks then those institutional investors are our last recourse. I wonder if some of them can find the will to engage with Wall Street in the following manner:  http://www.youtube.com/watch?v=mbwqeSV8Wc4

You think they’ll get the point?