Philly Deals: How financial desperados faked the price of money

Former Barclays CEO Robert E. Diamond resigned after admitting to U.S. and British regulators that the bank submitted artificially low numbers used to set the Libor credit benchmark. VIRGINIA MAYO / Associated Press, file
Former Barclays CEO Robert E. Diamond resigned after admitting to U.S. and British regulators that the bank submitted artificially low numbers used to set the Libor credit benchmark. VIRGINIA MAYO / Associated Press, file
Posted: July 08, 2012

Federal prosecutors sent General Electric and Westinghouse executives to prison 50 years ago for conspiring to set higher-than-market prices for electrical generators built at their vast West Philly and Delaware County factories, sadly defunct.

Now we learn that millionaire bank traders have been artificially fixing the price of money, like those industrial desperados of old. But no one's talking about prison.

Last week the head of UK-based Barclays Bank resigned after admitting to U.S. and British regulators that his people for years sent phony data to the folks who calculate the London Interbank-Offered Rate (Libor), the credit benchmark used to fix the price of loans and bonds (like the old prime rate).

E-mails showed the Barclay traders sending, not honest prices, but numbers designed to distort Libor and make their trades more profitable.

There's "a cowboy mentality at work, driven by short-term profits on trades that were in turn likely influenced by the compensation and bonus schemes in place, with no regard for risk-adjusted returns," Bob Eisenbeis, economist for Vineland-based Cumberland Advisors, told clients.

"Disgusting," writes veteran bank analyst and frequent Wall Street defender Richard Bove'. "If the rate is false, all of the charges associated with Libor-based loans are wrong … tens of thousands of businesses are paying the wrong rate on their loans … all of the bank stock [prices] are wrong."

The feds thanked Barclays for also ratting on other banks, which now face criminal investigations. "The investigation has the potential to hurt Citigroup, JPMorgan and Bank of America," or at least their battered reputations, bank analyst Michael Mayo told clients of Calyon Securities in a report. Bank clients, including Baltimore, had earlier started lawsuits against those same big U.S. banks.

Is it payback time? "I think we are in line to collect from Libor settlements to come," Philadelphia city treasurer Nancy Winkler told me.

Up and down

There's a difference about this price-fixing that tells what has changed at our biggest banks since they financed the growth of real-economy companies like the old GE and Westinghouse long ago:

If you have a credit card or line of credit, your monthly bill likely rises and falls with Libor. So if the banks were going to cheat, you might think they would try to set rates artificially high.

But Barclays copped to manipulating rates so they were artificially low.

After the Clinton-Gramm-Greenspan bank deregulation at the end of the 1990s, big banks made a lot more profit selling and trading loan-backed bonds, interest-rate swaps and other financial products, and less from old-fashioned business lending.

Community banks that still finance local hiring and trade get crushed by low interest rates. But big banks, their millionaire executives, traders and investment bankers, profit most when money is cheap. Or at least looks cheap.

Traders need buyers. In the past 10 years they found customers in strange places — including municipal governments. Philadelphia, its schools and authorities, like other cities, bought billions worth of interest-rate swaps. They thought they were hedging against the threat of rising interest rates.

When interest rates — as falsely measured by Libor — kept falling instead, they owed hundreds of millions.

I've reported how reluctant past city and school treasury officials were to try to recover this money. They had better things to do (like closing schools and raising property taxes and getting the banks to sell new bonds) than trying to fight the markets and litigate swap refunds.

But now that it turns out their losses were artificially magnified, officials are starting to come around, as treasurer Winkler noted.

Had enough?

Britain's Conservative Party-led government is outraged by the Libor revelations. Our government, not so much.

President Obama beat up the banks and beefed up regulations back in 2010. But Republicans now blame those regulations for the slow economy. And both parties, facing November's election, are raising all the cash they can from bankers.

Contact Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com and @PhillyJoeD on Twitter.

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