With the four-year anniversary of the financial crisis approaching, Wall Street thought it had dodged a bullet. Now comes the Libor scandal.
The esoteric practice of banks “fixing” the price of the London Interbank Offered Rate (more on Libor in a bit) may have heads rolling — and hard time being served — unlike “sexier” bubble-era improprieties like selling toxic debt to the unsuspecting.
Since the 2008 collapse, not a single major US bank CEO has been removed from his job, much less charged with a civil infraction over these activities. (Ken Lewis left Bank of America over other issues.) We’ve had one failed prosecution of two Bear Stearns managers and lots of wrist slaps such as the one to Goldman Sachs a couple years ago for selling some lousy mortgage debt to clients. And that was about it.
But Barclays last week announced a $453 million settlement with US and British authorities over charges that it manipulated Libor — a benchmark interest rate that trillions of dollars in financial contracts are priced off of. In a manner of days, senior executives were ousted, including flamboyant CEO Robert Diamond — who until now was largely known for having one of the largest salaries in the banking world.
The reason Diamond stepped down so fast speaks to several things, including his uneasy relations with his UK bank regulators, but also the seriousness of the activities under criminal and civil investigation by the Justice Department, the Commodity Futures Trading Commission and the UK’s Financial Services Authority.
Libor is set by authorities at a UK banking trade group, who take the average of the borrowing costs of major global banks to compute a single interest rate — one of the most widely used benchmarks in global finance. Like similar barometers, Libor reflects market and economic conditions. So when banks’ borrowing costs rise — as they did during the crisis, as investors grew concerned over the big banks’ health and demanded higher returns to compensate for the added risk — Libor will rise.
Here’s the scandal: Regulators say Barclays submitted false borrowing costs during the runup to the 2008 meltdown — ones much lower than its true costs. Barclays, it is alleged, did this to hide the fact that investors were fearful of its financial condition and to make money (if Libor could be driven lower, its borrowing costs would fall when they should be rising).
All pretty sleazy, even by Wall Street standards.
And it doesn’t appear to be contained. Law-enforcement authorities say the investigation is spreading beyond Barclays, where senior execs could still face criminal charges. JP Morgan, Citigroup and other global banks are targets.
So far, no other bank has been charged — but the mood at these places suggests that senior people believe it’s just a matter of time. US prosecutors, I’m told, see enormous potential with the Libor scandal to charge individuals and (at the very least) to prod high-level management changes.
“This won’t just end with Barclays,” a JP Morgan executive told me.
One problem with prosecutions over the financial crisis was the lack of evidence to show actual criminal fraud. People do stupid things during bubbles, and stupidity doesn’t always equal criminality.
But there is evidence in the Libor probe: Barclays handed over e-mails that are damning for the bank and others, because they suggest both intent to break the law and collusion among different banks to rig the system.
Plus, authorities finally have cooperating witnesses: UBS AG has reached a deal with the Justice Department for immunity from prosecution in exchange for its help in the probe. And Barclays has its own immunity deal in exchange for cooperating with US and UK authorities.
This is how prosecutors get cooperation on big white-collar cases. The Feds may still charge individuals at Barclays, but they told the bank and its new management that the firm itself can avoid criminal charges (a death sentence for any financial institution) if they help finger others.
The potential for criminal prosecutions and huge fines is enormous. It’s one thing to sell a toxic debt on a “buyer beware” basis; it’s quite another to intentionally submit false borrowing rates to regulators, and do so in concert with traders at other banks.
Libor is huge in the financial world — hundreds of trillions of dollars in contracts are priced off it. So manipulation of Libor could mean vast Wall Street liability in the form of monetary damages, and prison for those at fault.
This includes those at the top of the pyramid — the CEOs and the CFOs who almost glided through the financial crisis. And who wound up running even larger institutions — despite a growing body of evidence these places are too big to either manage or regulate.
The vast majority of the world’s financial assets are housed in the large US and UK banks. Guys like JP Morgan CEO Jamie Dimon still insist that bigger is better, but if this probe gets big enough, he may soon be the last man on earth making that claim.
Charles Gasparino is a Fox Business Network senior correspondent.