Friday, 20 July 2012

Guest post by Arthur Doohan: Don't complain - start repairing LIBOR

Arthur Doohan:LIBOR ‘structurally flawed’ says the ‘Fed’....

Power corrupts...even a little power corrupts quite a we have seen, down the millennia and at home and abroad. Expressing disgust at traders attempting to manipulate (and I stress the ‘attempting’) rates in their favour is as false and vacuous as expressing surprise at a shark attack or a pitbull bite.

The moral vacuum of having profit as an only goal and a highly linear and transparent process for achieving that target would affect anyone, and as the ‘Zimbardo prison experiment’ has shown most people are pliable in the appropriate environment. That the environment was as biased and extreme as having a cohort of young males of a very particular class and education only exacerbated the risks and tendencies for extreme behaviour. I am not condoning their behaviour. I am saying that it is a completely predictable byproduct of the system as it was designed.

LIBOR didn’t break,the market did and blaming LIBOR is very much like shooting the messenger. And ‘shooting the messenger’ and indulging in ‘distracting defenestrations’ of flamboyant CEOs is very much what the authorities and regulators are entirely about these days. They very much want you to believe that it was individual greed and corruption that is to blame for the mess we are in. What they don’t want you doing is questioning their ability and integrity. And above all, they don’t want you questioning the utility and value of the system that provides their ‘raison d’etre’.

If you need any further evidence, I would ask to you to witness the embarrassment of Charles Goodhart, formerly of the Bank of England, on the ‘Today’ programme on BBC R4 on Tuesday 17th July, 2012 admitting that the market was still dysfunctional and that when the crisis broke 'LIBOR fell between the cracks’. The regulators weren’t even looking at LIBOR, the flagship of liquidity and transparency in their ‘light touch’ dreamscape.

If there was no market during the height of the crisis (and there wasn’t and still now it is a shadow of its former self) then the regulators are as guilty for accepting ‘lies’ they knew to be such as the banks are for trying to tell those ‘lies’. But, in the same way the Catholic Church sought to cover up child sex abuse to protect its reputation, the financial regulators preferred to sought to hide the scale of the dysfunction to preserve the myth of ‘market capitalism’ and thereby the need for regulation of it.

We are quickly learning how easily we can live without the ‘universal church of Rome’. I think it is time to understand that ‘universal banking’ is as much an entirely predictable perversion of capitalism as ‘child abuse’ was a predictable outcome of the structures and strictures of Catholicism. Neither are good for the people they claim to serve, both have been perverted to suit the ‘operators’.The ‘Fed’ is the Federal Reserve Bank, the central bank of the USA. It and the Securities Exchange Commission and their UK counterparts, the Bank of England and the Financial Services Authority are the authorities charged by their governments to oversee and develop their national financial and capital markets.

Since the end of the Bretton Woods agreement and the subsequent lifting of capital controls this work has taken on greater levels of international coordination and cooperation.

Arising from the rigour of American tax law enforcement, in the 1970s the newly dollar-enriched oil exporting states found it more expedient to place their dollars on deposit in the Cayman Islands but to transact their business in London, due to a far greater extent to their trust in English courts than their admiration for London bankers. Thus was borne the original ‘Eurodollar’ and ‘Eurobond’ markets.

LIBOR predated this accidental flowering into a second coming for a post-imperial City of London as a major financial center. It had existed for a few decades by this stage. The volumes dependent on LIBOR settings went on an exponential growth binge, which accelerated even harder with the advent of the personal computer which allowed for the rapid and accurate pricing of derivatives.

Yet, despite all of the computerisation and all of the enhanced communications facilities and capablities that followed this boom in volumes and profitablity, LIBOR continued in its accustomed fashion as an honour-based voice-reported system with no formal legal standing, other than that which contracting parties chose to endow it with, and with no mechanism for appeal or redress.

Once again, it must be stressed that LIBOR is a private convention entered into by contracting parties utilising an unpaid-for voluntary service provided by a lobbying organisation. It is to the credit of the British Bankers Association that they did develop the system with expanded panels, greater outlier discounting and some level of historic transparency.

But for over sixty years the two globally most important sets of regulators looked at this private piece of ‘plumbing’ and decided on a daily basis that it was a suitable vehicle for pricing the underpinnings of all of the derivatives and the majority of the wholesale lending that they were charged with regulating.

And, now, they have the cheek to say that it is a “flawed mechanism”.

That the authorities are seeking to distract us from their failures with individual tales of venality and spectacular defenestrations is the true measure of their moral and practical failure and further proof that have no long term interest in reforming themselves or their systems
Arthur Doohan blogs here

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