Is LIBOR the Straw that Broke the Banker’s Back?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“A banker need not be popular. Indeed, a good banker in a healthy capitalist society should probably be much disliked.” – John Kenneth Galbraith
If renowned liberal (yep, you read that right) economist John Kenneth Galbraith were alive today, he would apparently comment on the robust state of the “healthy capitalist society.” After all, besides Congress and, ironically, Occupy Wall Street, bankers might consist of the least popular cohort in the country right now. This is for good reason. The last several years have given America full exposure to a wide range of financial scandals. Banks benefit from the fact that the details of most of these are arcane and esoteric. Aside from these guys, the mass public only understands phrases like “insider trading” and “SEC investigation,“ as the details around financial scandals usually go well beyond the phraseology involved in everyday parlance.
The recent weeks have borne the possibility for change. These are the days of LIBOR, an abstruse concept that has taken up its fair share of press. It has taken down top executives in Barclays (NYSE: BCS), and may permeate across the Atlantic to implicate those at Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Bank of America (NYSE: BAC).
LIBOR has now become fairly recognizable as the watermark of one of the most serious financial scandals in recent memory, despite its nature as a relatively complex subject. The infamous acronym stands for London Interbank Offered Rate. As its name implies, the published rate reflects the amount banks pay each other to borrow for a given period of time. It is published everyday by Thomson Reuters, which calculates the number based off information given to it by various financial institutions. The result is then used in the valuations of several financial instruments, including those that touch the mortgages and credit card statements of the general public. Barclays lied to Reuters about this rate, a fix that the Federal Reserve seems to have known about since 2007.
Perhaps this is when public opinion turns on bankers, or perhaps not. Either way, further examination of other banking scandals does show that the industry has been rather resilient in recent years. Here are some details about the dramatics.
The brain trust at JPMorgan Chase really hopes the LIBOR scandal does not take any American victims, considering the terrible publicity the bank attracted as recently as two months ago. The notorious “London Whale” trader cost the bank $5.8 billion, which brought top execs in front of the Senate to explain themselves. The current estimation of losses is already three times the initial figure, but the company’s stock price has largely stabilized since the scandal in early May, these issues notwithstanding. As it turns out, risky trades do not look nearly as bad as misrepresentations about the state of the economy. The bank is currently in a precarious position in which it hopes the LIBOR scandal gradually abates without the press again shifting to new revelations about the magnitude of its hazardous endeavors.
Odds are you’re not looking at the page to consider purchasing MF Global stock. The brokerage firm actually went bankrupt, although it did not fade quietly into Chapter 11. It is currently undergoing investigation by the Securities Investor Protection Corporation, which is entrusted with helping investors restore funds that no longer exist. MF Global lost over a billion dollars while under the leadership of former New Jersey Senator and Governor Jon Corzine, an unfortunate occurrence no one is quite able to explain. Apparently, the company took its investors’ cash and traded it for European government bonds, not the safest bet in these economic times. MF Global was the largest Wall Street firm to collapse since the Lehman Brothers, another example of malfeasance amongst the nation’s banking class.
UBS (NYSE: UBS)
While MF Global lost about $1.3 billion, the Swiss bank UBS lost over $2 billion in late 2011. In this case, the institutional problem was the enabling of a single rogue trader, who was able to gamble money without proper authority to do so. He was able to cloak his risks in Exchange Trading Funds that did not settle until far after the trades were made. This resulted in calls to ban ETFs, one of the most popular financial innovations found in investor portfolios. The UBS CEO was forced to resign as a result of the scandal, and its stock price has been cut in half since the information was made public.
While the UBS rogue trading scandal is universally known due to the bank’s international prominence, it is only the third largest scandal of its kind in recent memory. The largest example of unauthorized trading occurred at France’s second largest bank, Société Générale. The bank revealed a loss of over $7 billion in 2008 and blamed the misfortune on a trader who bet against the market. While the man claims he is merely a scapegoat for the bank’s poor decision-making skills, he was eventually convicted, and the bank was forced to overhaul its entire business. It spent 2008-2010 reforming its investment structure, but still lost over half of its value in 2011. The year was particularly difficult for the firm, as Société Générale had to deal with reports of its impending bankruptcy in addition to the complexity of the European financial crisis.
Though each of these aforementioned scandals has had its fair share of criticism, the banking industry as a whole has retained its core culture. The most recent Barclays watershed, though, begs the question: Is the LIBOR saga the straw that finally broke Wall Street’s back? If recent history is any indication, this event will likely come to pass, but it is a question that must be asked. Let us know in the comment section below, or take your opinions to WealthLift INSIDER today.
This article is written by John Kocsis and edited by Jake Mann. They don't own shares in any of the companies mentioned above.The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.