Libor Fixing Scandal in the Grand Scheme of Things

“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?

David Frum on Austrian Economists

I like David Frum more and more. He’s a great example of a thinking conservative.

Why Conservatives Dumped Milton Friedman.

There are two big reasons today’s right loves the Austrians. One is that Austrian economists reject empirical analysis, and instead believe that you can reach conclusions about correct economic policies from a priori principles. It’s philosophy dressed up as economics; with the Austrians, there is never any risk that real-world events will interfere with your ideology.

In other words, if you adhere to Austrian experience-prone economic thinking, you’ll never be proven wrong and thus you’ll never have to defend your flawed theory, even when faced with the failure of free-market economics leading up to 2008 crisis.

Republican true nature comes to light in this video

http://www.youtube.com/watch?v=2XsiiGqgjjs

Have you seen this video of Republican representative having a near orgazmic experience while receiving incomplete information on Supreme Court’s decision? What could better describe the Republican nature? Celebrating because kids and sick people will be denied health care.

Big Win for Obama and for the American public.

http://www.huffingtonpost.com/2012/06/28/supreme-court-health-care-decision_n_1585131.html

Obamacare survives! No more personal bankruptcies due to health care bills, no more denials of coverage for pre-existing conditions, no more use of my dollars for treatment of emergency room walk-ins – everybody should pay for their own insurance. Personal responsibility, mofos! To me that’s justice.

And that’s that!

Perfect Chance for Democrats to blow a Congressional Seat.

For a long time I have been nursing a theory that that the political spectrum is not a straight line but a circle where extreme left and extreme right converge at some point. Imagine a circle where moderate center is at the top, traditional left is at -1 and traditional right is at +1 (or at 9:00 and 3:00 respectively) and then the extreme left and right converge at the bottom. What is the most common unifying issue that brings both extreme left and extreme right together? Alas, nothing original, anti-Semitism.

Next Tuesday Democrats in Brooklyn will vote in the primaries for one of the two candidates: Hakeem Jeffries and Charles Barron. Charles Barron is former Black Panther, a friend of Moammar Quaddafi and Robert Mugabe, who called Thomas Jefferson a “pedophile”, and who thinks that Israel is a “terrorist state”. Somehow he managed to get endorsement of the congressman whose seat is at play, Ed Towns. In addition to that endorsement he also received support from none other than David Duke, the Grand Wizard of Ku Klux Klan. My theory is being confirmed.

“In a race for Congress between an anti-Zionist black activist and a black activist who is a bought and paid for Zionist Uncle Tom, I’ll take the anti-Zionist any day,” Duke explains — the “Zionist Uncle Tom” being Barron’s opponent Hakeem Jeffries, the establishment favorite.

I am a progressive, a lefty, yes, but nothing pisses me off more than the liberal community’s unwarranted tendency to tolerate all sorts of fringe elements. How the hell can an anti-Semite pose a serious challenge to a mainstream candidate, in Brooklyn, of all places?
The right, of course, has been entirely consumed by the fringe elements, which can serve as an Exhibit A of what not to do. But we’re talking about the left now. Have you heard the ubiquitous joke about a liberal at a gun point, who’s trying to figure out why the thug is pointing a gun at him rather than shooting him back? Left with Balls would not bother with such rituals. And did I mention that Left with Balls supports gun rights? You fight force with force – there’s no other way, not today. Not a time to be a Gandhi. And that’s that.

Btw, it’s a safe bet that if Charles Barron wins, the seat will go Republican in November.

Jamie Dimon wins this round.

After listening to Jamie Dimon’s testimony before Congress the other day I became less enthusiastic about Volcker Rule. No, I didn’t suddenly turn into a laissez faire supply-sider, I simply became more convinced that if such matter is entrusted into the hands of regulators we would have to be dependent on these regulators struggling with definitions, like what a hedge is. That would be too painful to watch.

I have to admit that, perhaps, capital requirements and other Basel III rules   can be more effective than outright ban on certain kinds of trades.

My comrades on the left might disagree. But think about it: banning something outright will simply ban it on paper but in reality such ban will not prevent smart and resourceful Street guys from finding ways around it. Even potheads could for years find ways around the drug laws. Moreover, a sweeping ban will make a great excuse for the ever-complacent or complicit regulators to fall asleep again while giving the public the illusion of things being under control. Besides, show me any ban that has prevented people from obtaining/providing the illegal goods or services. What would prevent various exceptions and exemptions from being forced quietly into the legislation that renders the entire brick wall between deposits and trading desks useless?

Jamie Dimon and many others on Wall Street want regulations to be simple and effective. So do I. And so do regulators, I suspect, who are helpless in the face of complexity. Having capital requirements will be hard not to enforce simply because it’s quantifiable. All they have to do is build a spreadsheet where column B is needed capital and column C is actual capital, subtract one from the other and voila, there’s the list of those who meet the criteria and those who don’t. I’m being slightly facetious and simplistic, but you get the idea. Much easier than wrestle over definitions of what is a “directional trade” or a “macro hedge” with those who made a career out of twisting the terminology. Arguing over a definition of a “hedge” is a battle that the regulators, in their current state, can’t win.

It was almost comical to see senators asking Jamie Dimon his opinion on how to regulate the financial system. Here’s Jamie Dimon’s idea of sensible regulations: Proper capital requirements, proper liquidity, proper risk management and risk controls. It does not sound unreasonable at all. I could almost sense the slight disappointment among some (mostly Republican) Senators as they haven’t received anything less of “let the market take care of it”. The whole Senate testimony was worthy of a Monty Python’s skit in its absurdity, as the only voice of reason was coming from a Master of the Universe (Tom Wolfe accurately described this dynamic almost 25 years ago in his Bonfire of the Vanities). I wonder what was going on in Jamie Dimon’s mind at that point, but if I had to speculate I’d say disbelief, amusement mixed with a breathtaking realization that he’s the sole de-facto arbiter of a system that affects millions of people and trillions of dollars.

Meanwhile, capital requirements under current Basel III rules would have prevented Goldman from buying CDS contracts from AIG, for example. Or at least they would require Goldman to post higher capital in these kinds of trades to account for the risk of AIG becoming insolvent. While we can’t be sure such a trade would not have been done, we can be sure it would have been much smaller in size.

If OTC derivatives have been cleared through the exchange, there would be no high-stakes “who has what” poker game going on between the biggest financial institutions, trying to figure out who has what in ‘Assets available for Sale’ section of the balance sheet or other hard to decipher nicknames given to toxic assets. These holdings would have been more transparent. Thus, as Jamie Dimon rightly pointed out in his testimony, JP Morgan would not have been asked to take the bailout package, as everyone would see their minimal exposure to the crappy assets, compared to other firms. Thus, it is quite possible, that the bailout could have been smaller and more targeted (to Citi and BofA) and not sweeping and imposing.

Look, I’d love to have regulators who are smart and capable of doing their job, but the truth is, they will always be at least one step behind, because they don’t have the capacity and the wits to anticipate what is the next product to be invented on the Street. Regulators are a reactive force, not proactive. Lawmakers proved to be no better at understanding the complexities of the current financial system and dealing with the repercussions. Good intentions are a poor excuse. What we care for are the results.

We also would like to offer some advice to Jamie Dimon and other Wall Street alpha dogs – be a mensch, stop being offended at being called names. It’s not Obama’s job to become friends with Wall Street. He plays his game – you play yours. At this point of their careers neither Jamie Dimon, nor Lloyd Blankfein nor many of others on top of the Wall Street hierarchy care about money – they care about their legacy. Right now none of them look like socially conscious tycoons of the 1900s, no strangers to consolidation and market manipulation, sure, but who nonetheless understood the long-term dynamics of the society and came to rescue the system with their own money when the circumstances called for it. And yet, the bar has been set so low, and in part by our own public servants, that even Jamie Dimon, a fox guarding the hen house, looks as having more integrity than the subservient watchdogs. As evidenced by ingratiating senators who are on Wall Street’s payroll, asking Dimon for advice on how to run things, all Wall Street’s powerful men’s grievances about unfair treatment look nothing more than a simple disingenuous posturing. Guys, let me break it to you: You run the freaking game! You don’t have to have a TV show (like Ace Rothstein in the Casino), or bring attention to yourself by verbal sparring with various politicians; you have to have the whole thing to be quiet. Please, no more displays of victimhood and defensive language. And I’d like to conclude by posing a question to Mr. Dimon to ponder: imagine a less sharp and more reckless man inheriting your job one day. Wouldn’t it be a fitting legacy for a man in your position to help build a system that is less dependent on someone having both superhuman qualities and spotless integrity and more dependent on built-in levers of control that work regardless of someone’s pedigree and ambitions?

Bernanke was right, inflation hawks were wrong.

Heavy news day today. Turns out inflation is kind of low, which vindicates Ben Bernanke’s view.

And for those inflation hawks out there, you guys are in the world of wishful thinking. I kind of knew that all along, and I’m just an amateur.