Excerpted and reposted from: http://www.aflcio.org/Blog/Economy/LIBOR-The-Latest-in-Wall-Street-Tactics-to-Get-Rich-at-all-Costs
Scandals in the financial press don’t die. They are replaced by new ones. The latest in the ever-growing list of ways the Wall Street elite has found to make sure they get rich at all costs is the so-called “LIBOR scandal.”
LIBOR stands for “London InterBank Offered Rate.” The British Bankers Association defines LIBOR as “the average interest rate at which leading banks borrow funds of a sizeable amount from other banks in the London market.”
LIBOR impacts working people because it is one of the most commonly used references in setting the interest rates people pay on consumer loans such as mortgages, credit cards and student loans. This means that the interest rate banks charge on consumer loan products is often calculated as LIBOR plus an additional amount specified in the loan documents.
In fact, around $10 trillion in loans is indexed to LIBOR. When you add in all types of financial products including complex instruments like derivatives, LIBOR is the index for around $800 trillion in financial instruments.
Late last month, Barclays Bank and regulators in the U.S. and UK announced that they had reached a £290 million ($450 million) settlement to resolve claims that the bank had manipulated LIBOR. Barclays, one of the five largest banks in the world, regularly manipulated the rate in order to increase profits, minimize losses, and hide how weak it was during the financial crisis.
It appears that the Barclays settlement is just the beginning. According to press reports, other large banks including J.P. Morgan and Citigroup are also involved in the investigation.
In other words, the daily prices of $800 trillion in financial products around the world were manipulated to increase the bankers’ bottom lines. This is yet another item on the ever-growing list of ways the bankers’ have rigged the deck in their favor.
The big banks have squandered the public trust. Our skepticism is constantly reinforced by new reports of scandal within the industry.
One way to start to restore public confidence in the financial sector is to put in place strong rules implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act. There must be harsh penalties for people who break the rules. Also, Congress must give the regulators adequate funding, especially the Commodity Futures Trading Commission which took the lead in the U.S. on the LIBOR investigation.
This scandal also illustrates the power of the “too big to fail” banks and the dangers of allowing commercial banking and speculative trading to be conducted within the same financial institution. Strong rules implementing the Dodd-Frank provisions under the Volcker Rule, which prevents banks from engaging in excessively risky trading, and regulating derivatives are essential to prevent future scandals of this nature. And the too big to fail banks must be broken up once and for all by reinstituting the Glass-Steagall Act —the law that was in place from 1933 to 1999 which separated more stable commercial banking activities from riskier investment banking.
A final word on this as it relates to the upcoming presidential election. Former Massachusetts Governor Mitt Romney is attempting to sell himself to the American people as a man who knows how to fix the economy because of his experience in the financial services industry. Time and again, however, we see that the financial services industry does not help real businesses grow and create jobs. It is a place where there is no distinction between money and values. Instead of wanting to change this culture, Romney has vowed to “get rid of Dodd-Frank”, the law put in place to rein in Wall Street excess and protect consumers after the 2008 financial crisis.
We need a president with true values. Not someone who comes from a culture of greed, where anything goes as long as the top one percent keeps getting richer.