Unfortunately, even IF you get some small reform into place, the relentless energy of the Wall Street lobby will chew it up like it was a small snack.
Interest Rate Manipulation Extends Far Beyond Libor, Secret Survey RevealsThe Huffington Post | By Mark Gongloff 09/20/2012
Interest rates all over the world are mostly made up.
That's the verdict of a new study by the International Organization of Securities Commissions, a copy of which was obtained by Bloomberg. It found that more than half of the benchmark lending rates in the U.S., Europe and Asia are "calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations." Less than half of all benchmark lending rates, in contrast, were based on actual market transactions.
In other words, the interest rates that affect personal and business loans, and hundreds of trillions of dollars in derivatives contracts around the world, are based on either guesses or lies: Not particularly comforting.
“The risk of manipulation will be greater where participants in the process have both incentive and opportunity to submit inaccurate data or apply a methodology inaccurately,” IOSCO wrote, according to Bloomberg. “Furthermore, where judgment is required in determining the data to be submitted, the problem is particularly acute.”
English translation: When banks can just make up these benchmark numbers, they're likely to cheat. Even when they can't just totally make up the numbers, they still try to find ways to cheat.
Recently the world has been focused on the rampant manipulation of one such interest rate, the London Interbank Offered Rate, or LIBOR. Barclays Capital has already paid $460 million in fines in that scandal, and more than a dozen other banks are under investigation, including JPMorgan Chase, Bank of America and Citigroup. Meanwhile, lawsuits and potential legal costs to the banks are piling up.
LIBOR is used in all sorts of financial transactions, from setting your adjustable-rate mortgage to interest-rate swaps bought by state and local governments to hedge against a jump in borrowing costs. LIBOR is supposed to be based on what a group of banks say is their daily cost of borrowing money from other banks for short periods of time.
The trouble is, these borrowing costs are self-reported, and it is pretty easy for the reporting banks to manipulatethe rates if they want to. Sure enough, they have often wanted to, either to make their borrowing costs look lower than reality, or to gain a small advantage in derivatives trades, or both.
And, as it turns out, most other benchmarks around the world have the same problem, according to the IOSCO study. more
Wall Street Rolling Back Another Key Piece of Financial ReformMatt Taibbi September 20, 9:33
Wall Street lobbyists are awesome. I’m beginning to develop a begrudging respect not just for their body of work as a whole, but also for their sense of humor. They always go right to the edge of outrageous, and then wittily take one baby-step beyond it. And they did so again last night, with the passage of a new House bill (HR 2827), which rolls back a portion of Dodd-Frank designed to protect cities and towns from the next Jefferson County disaster.
Jefferson County, Alabama was the most famous case – the city of Birmingham went bankrupt after being bribed and goaded into taking on billions of dollars of toxic swap deals – but in fact it was just one of hundreds of similar examples of localities being duped into suicidal financial deals by rapacious banks and financial companies. The Denver school system, for instance, got clobbered when it opted for an exotic swap deal pushed by J.P. Morgan Chase (the same villain in Jefferson County, incidentally) and then-school superintendent/future U.S. Senator Michael Bennet, that ended up costing the school system tens of millions of dollars. As was the case in Jefferson County, the only way out of the deal involved a massive termination fee that might have been even more destructive than the deal itself.
To deal with this problem, the Dodd-Frank Act among other things included a simple reform. It required the financial advisors of municipalities to do two things: register with the SEC, and accept a fiduciary duty to respect the best interests of the taxpayers they are advising.
Sounds simple, right? But Wall Street couldn’t have that. After all, if companies are required to have a fiduciary responsibility to cities and towns, how in the world can they screw cities and towns? The idea was a veritable axe-blow to the banks’ municipal advisory businesses.
So what did Wall Street lobbyists and trade groups like SIFMA (the Securities Industry and Financial Markets Association) do? Well, they did what they’ve been doing to Dodd-Frank generally: they Swiss-cheesed the law with a string of exemptions. The industry proposal that ended up being HR 2827 created several new loopholes for purveyors of swaps and other such financial products to cities and towns. Here’s how the pro-reform group Americans for Financial Reform described the loopholes (emphasis mine):
For example, any advice provided by a broker, dealer, bank, or accountant that is any way “related to or connected with” a municipal underwriting would be exempted from the fiduciary requirement. A similar exemption would be created for all advice provided by banks or swap dealers that is in any way “related to or connected with” the sale to municipalities of financial derivatives, loan participation agreements, deposit products, foreign exchange, or a variety of other financial products.So basically, if you’re underwriting a municipal bond for a city or a town, and you happen also to give the city or town advice about some deadly swap deal that will put the city into bankruptcy for the next thousand years, you don’t have a fiduciary responsibility to that city or town. The banks’ view is that being asked to perform the merely-technical function of underwriting a bond is very different from advising someone to take on an exotic swap deal – so if a bank is mainly an underwriter and happens to offhandedly recommend this or that swap deal, it just isn’t fair to drop this onerous financial responsibility, this weighty designation of municipal financial advisor, on its shoulders. more