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In Libor Scandal, Prosecutors Need to Think Criminal

People do what it pays them to do. In the Libor scandal that's taken out Barclays' (BCS) Chief Executive Robert Diamond in the past day, and will soon engulf other big banks, one thing's already clear: Traders at some of the world's largest financial institutions were of the view that it pays to manipulate the London interbank offered rate — the basis for trillions of dollars of commercial and consumer credit.

As emails revealed through the Barclays settlement illustrate, the bank's traders knew what they were doing was manipulation and that it was wrong:

Submitter: "Hi all, just as an FYI, I will be in noonish on Monday."

Trader: "Noonish? Who's going to put my low fixings in? hehehe."

It's akin to the old Enron-Merrill Lynch Nigerian barge scam that became a running joke during the tech bust a decade ago. It's also reminiscent of the insider trading that more recently has resulted in criminal convictions and prison time for several dozen conspirators, including former hedge fund billionaire Raj Rajaratnam and former McKinsey boss Rajat Gupta.

The Libor scandal likewise has all the markings of an insiders' game that calls for more than big fines for the perpetrators. Who's really on the hook for the $450 million settlement that Barclays agreed to pay and the hit to the bank's market cap? Shareholders, of course.

Justice will be far better served — and examples made — if prosecutors take an aggressive and creative look at whether they should try to put behind bars those responsible for manipulating what the world pays for credit and those above them who looked the other way.

In the wake of the tech bust a decade ago, prosecutors showed such initiative, including prosecutions for "failure to provide honest services." The result was that several senior executives behind colossal corporate losses were found guilty of criminal wrongdoing. That included Enron's Ken Lay, Andrew Fastow and Jeffrey Skilling, WorldCom's Bernard Ebbers and Scott Sullivan and Tyco's Dennis Kozlowski and Mark Swartz.

This time around, Lehman's infamous "Repo 105" scandal came and went without anyone responsible taking a hit. Likewise Bear Stearns, AIG, Countrywide and many other financial firms went under as law enforcers shrugged. Those responsible mostly went on with the gilded lives. Only in the egregious case of Taylor, Bean, & Whitaker did top management face criminal consequences.

This lack of accountability has convinced the public that Wall Street plays by a different set of rules than the rank-and-file. JPMorgan Chase's (JPM) recent loss and the kid-glove reception by the Senate in its wake for Chief Executive Jamie Dimon recently only reinforced that view. And now, perhaps the most craven and outrageous scandal of all: Liborgate.

Until the Justice Department, Securities and Exchange Commission and the UK's Financial Services Authority show the same aggressiveness and creativity in prosecuting financial wrongdoing as certain elements on Wall Street show in perpetrating it, the games will go on and the public's cynicism will continue to mount.

In a world where shareholders pick up the tabs for corrupt traders, and where the Federal Reserve's zero interest rate policy bails out debtors at the expense of savers, it's little wonder that Wall Street and capitalism itself are so out of favor. It's time our law enforcers get serious about flushing the crony capitalists out of the system so the good, wealth-creating capitalists — and the bankers who play such a vital role in funding them — won't continue to suffer the consequences.

Neil Weinberg is the editor in chief of American Banker. The views expressed are his own.

QUESTION: Do you think aggressive criminal prosecutions of financial wrongdoing would help clean up the system or result in a witch hunt? Share your views in the Comments section below.


(10) Comments



Comments (10)
Excellent editorial and comments. We need more prosecutions to send the message that these types of frauds have consequences to individuals involved. However, as Ms. Kane suggests, companies too should pay a steep price. Only then will improvements be made to their corporate governance regimes that permit and even reward this type of activity.

One has to ask who was reviewing or auditing the departments involved? Why did they not bring the activities to the attention of the boards at these companies? Without strong, independent control functions within companies, the public and political outcry will be for ever more intrusive regulation and complaints of regulatory burden will fall on deaf ears.

Although criminal charges against individuals involved surely discourage some employees from acting unethically, most criminals calculate pretty carefully the odds of getting caught and knowingly take the risk. Have you ever noticed how dramatically speed cameras slow down traffic? However, large fines and damage awards against companies will surely create incentives for shareholders to insist that their banks impose the type of governance and compliance regimes that are necessary to clean up their own houses.
Posted by David_Felt | Thursday, July 05 2012 at 8:51AM ET
I'm all for a witch hunt, which is usually what "aggressive pursuit of wrongdoing" is called by wrongdoers. My only hope is that after the witches are found, they are burned... each last one of them. Only when financial crime is punished will it finally stop.
Posted by j.doe | Thursday, July 05 2012 at 8:35AM ET
Since Barclays has committed to assisting US and UK authorities in investigating LIBORgate, and it is impossible that one bank could have rigged the LIBOR and YenLIBOR single-handedly, here's a suggestion to our 'enforcement-challenged' federal regulators. Offer a blanket deal to US banks. Come forward now, admit guilt, fire the traders involved along with their management hierarchy, have your CEO step down, clawback all their salaries and bonuses, and you will be fined no more than Barclays $450 million. Wait to be prosecuted and all the same penalties will be mandated, the minimum monetary fine is tripled and any lawsuits from parties affected by the LIBOR manipulation automatically receive class-action status.
Posted by jim_wells | Wednesday, July 04 2012 at 11:41AM ET
Congratulations Neil for printing the inconvenient truth about a once-respected financial industry that continues its decline into the worst degrees of dishonesty and predation -- unchecked by federal financial regulatory agencies. Would that federal financial regulators and the Justice Department had your testicular fortitude to pursue aggressive criminal prosecutions of financial wrongdoing at the banks that now appear to be running the system.

It should be obvious to all but the most ardent banking industry sycophants that even massive fines have little or no effect on reducing the nefarious activities of the world's largest financial institutions. I subscribe to the theory that the nefarious activities of government-insured banks would come to a screeching halt once a courageous prosecution results in TV coverage of a mega-bank CEO being led from a courtroom in handcuffs, on his way to prison. It worked wonders on the S&L industry.

So long as CEOs like Jon Corzine and Jamie Dimon can invoke the Sgt. Schultz' and Ooops defenses and be absolved from any responsibility for questionable activities of their firms, there is no compelling reason for them to discontinue questionable activities in their quests for profits. No matter who is harmed in the process.
Posted by jim_wells | Wednesday, July 04 2012 at 10:53AM ET
Good start....and where are all the other well run good banks who are continually taking public wrath for the actions of Barclays, ING's and Morgans as well as so many others. Why are any of the other banks willing to do business with people companies and management that decide not to play by the same rules. Forget mercy or forgiveness...just put them in the penalty box for a few years. Would you buy a car from a dealer who just cheated your neighbor. Let's all stand up for good honest banking, get this stuff off our backs and rebuild our credibilitywith the public as well as the regulators. We can start by putting them all on a short list of those banks and dealers we won't do business with....that will send a message.
Posted by Rhsmith999 | Tuesday, July 03 2012 at 5:17PM ET
As to: Do you think aggressive criminal prosecutions of financial wrongdoing would help clean up the system or result in a witch hunt?

First, one can identify the "witches" and their senior associates. Call that a "hunt" if you will.
Second, aggressive criminal prosecution and punishment of those in number one is the first step in sending a message to those who follow and are in "the system."
Third: we need to try number two for a change to see if any "clean up" occurs.
Failure to act can only be based upon cynicism as to the result and a clear symptom of geriatricism.
Posted by Geriatricism | Tuesday, July 03 2012 at 4:15PM ET
Good straight talk, Neil. Bet you take a lot of heat for speaking truth to power.
@EFB I would not go that far, but I worry that you might be right.
@Katherine Kane. Shareholders lamely accept the farce of corporate governance based on duty to shareholders and "shareholder value" without demanding reform. We can't have it both ways. In fairness, however, a substantial number of shareholders did try to push back against management at Barclays. Perhaps the number will grow now.
Posted by Lawrence Baxter | Tuesday, July 03 2012 at 3:53PM ET
Bravo for a great editorial. Now if only those weak-kneed prosecutors would listen.
Posted by Marlys Harris | Tuesday, July 03 2012 at 3:29PM ET
Should shareholders should take the hit for corporate conspirators? That's an interesting question. I'd toss out there: maybe shareholders could do more to push for good behavior from financial institutions.
-Katherine Kane, Editor, Dodd-Frank Reform Watch
Posted by kkane | Tuesday, July 03 2012 at 3:09PM ET
I won't happen, unfortunately these folks own the regulatory branch of government.
Posted by EFB | Tuesday, July 03 2012 at 2:52PM ET
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