If it wasn’t clear in 2008 that something is fundamentally wrong with the operations of global finance, then surely it is now, four years later as the titanic Libor fraud perpetrated by Barclays Bank (and others to come) is added to the scale. You can read the details of the fraud and fine here, though not so much in the North American press which has been almost shamefully slow to pick up on this unprecedented scandal. But what concerns me less are those sordid details and more what this crime reveals about history: global finance hasn’t learned any lessons. Of course, that’s because it hasn’t been taught any.
There are two elements to this problem: the corrosive effects both of deception and the lack of effective punishment.
The Economist’s Schumpeter blog (for example) has made a kind of back-handed defence of Barclays by further spreading Bob Diamond’s seed that the Bank of England is in fact at least partially at fault. Crucially, Schumpeter goes on to say about Barclays that “… lowering its LIBOR quotes to calm fears about Barclays’ own financial health might be considered more forgivable: why tell the whole truth about your borrowing costs if others are lying about theirs?” But even in making this defence Schumpeter misses the larger point: If everyone is lying to everyone else, how is capitalism supposed to work?
The fact is trade and commerce requires a minimum level of trust to function, completely apart from whatever contracts might be signed between parties. (Diamond has said as much in testimony before the U.K. parliament where he has averred that values and integrity are important.) How can we account for the level of fraud we may believe inherent in every deal given that we can’t trust each other? Add a basis point or three to each deal? And how do we know the fraud isn’t in fact greater than that allowance? We don’t. So I guess we’ll just have to add a few more basis points. And then a few more, and maybe a few more on top of that because, well, who knows how much they’re ripping us off?
You might already see where this is going: seizure in the markets. In fact, we’ve seen this before. In 2008 credit markets froze in the wake of Lehman’s collapse when no bank could trust any other bank’s balance sheet. That was “solved” only via the injection of massive liquidity from central banks.
The second problem is that bankers seem to inhabit a completely different legal reality from the rest of us. There appear to be few if any consequences for criminal behavior. The banks themselves may be fined but usually don’t have to admit to guilt. Barclays “deal” with the U.S. Department of Justice prevents prosecution beyond the US$450 million fine. Even when a particular banker “loses” and is, say, forced to resign, he wins. Diamond is reportedly in line to exit the company with a pay package of as much as US$34 million on top of the $156 million he earned over the last six years. (He’ll almost certainly be rehired somewhere else for millions, or else go on speaking tours for yet more princely sums and be hailed as some kind of genius.)
This is usually the place where defenders of the status quo point out that these contracts were agreed to in advance and so must be honoured, that it’s the absence of personal liability built into the very structure of the corporation that allows for risk-taking business to survive, that the pay is necessary to attract the best talent, etc. But have we lost sight that crime was committed? And not small stuff either, but massive, world-spanning crime affecting other businesses, individuals, and countries.
Current front-page news from the U.S. DoJ’s web site gives us a view of how the non-banker class is treated. Apparently, an Alabama woman by the name of Wanda Davis has been convicted of filing false tax returns to the tune of over US$200,000. For her crime, she “faces a maximum potential sentence of three years in prison, up to three years of supervised release, mandatory restitution and a fine of up to $250,000 or twice the loss caused by her offenses.”
Wow, a whole $200,000. Barclays’ fraud (remember that it is soon to include as many as 15 additional banks) took an as yet unknown cut of, or otherwise unfairly benefitted from, a US$350 trillion swaps market, among other markets. Whatever the final number might be—and it may yet be summed in the avalanche of lawsuits to be filed against the bank—it is surely orders of magnitude higher than $200,000 and affects millions, if not billions, of people. (As for the Barclays decision, it has already fallen off the DoJ’s front page.)
The point is, the fraud we’re seeing from key players in global finance is so great that simply chirping about contracts, talent and the like is no longer an acceptable defence. The operations of global finance have become like weapons of mass destruction and they should be regulated as such. (Joseph Stiglitz is suggesting bankers get the same treatment as Ms. Davis.) Otherwise, there is no real reason for banks to stop behaving as they do.
The most pernicious effect of all this fraud and the gross double standard in punishment and censure, is that it undermines the common person’s faith in the institutions and legitimacy of the state. The justifiably cynical chatter on the street and at the water cooler is about how “everyone is cheating” and they’re all (whomever “they” are) crooks, etc. No , that’s not a scientific poll, but neither does the observation need to be in order to have merit. The evidence is rather overwhelming these days.
Going back just to 2008 we have had: a worldwide, massively unpopular, bailout of banks that was rammed through with little or no public debate and which has since been the trigger for ruinous austerity policies across the planet; risk for big banks being all but eliminated by public guarantee, additionally giving those banks a funding advantage of as much as 80 basis points; mortgage and foreclosure fraud in the U.S. committed by banks on a scale with no historical precedent and for which they have hastily settled in order to sweep the crimes under the rug; MF Global’s collapse and the apparent disappearance of investor money; systematic fraud, again by big banks, of municipalities across the U.S. via municipal bond rigging; serial gambling with, and losses of, publicly backed funds by JPMorgan Chase; the Libor rate-fixing conspiracy (can we call it that now, because that’s sure what the disclosed e-mails look like) covering trillions of dollars; and, with a cherry on top, folks like ex Goldman Sachs executive director Mike Smith who have come clean to tell the world, yes, the bankers really are screwing you.
So if these people won’t behave, the suggestion is, why should you? Get some while the getting is good, right? Do we really want to go there? But if you do, a word of advice: make sure to incorporate first.