The Libor scandal is about to get a whole lot worse.
And that's the good news…
Not only are at least 20 more big banks under investigation as part of a massive fraud to manipulate interbank lending rates that affect some $800 trillion in loans and derivatives, but the Bank of England is about to take center stage in the scandal.
And that's bad news for central banks around the world.
Well, actually, it could be good news, as in really good news, if it's the beginning of the end of what central banks do to manipulate free markets to the benefit of their only real constituents, the world's big banks.
First the good news.
It's already come out that traders at Barclays with huge derivatives positions leaned on co-workers who sit on "panels" that submit internal bank borrowing cost data to Thompson Reuters. And Reuters averages the middle lot of submissions to determine Libor (London Interbank Offered Rate) "fixings" (not my word, but actually the established nomenclature for what it apparently is that they do… as in "fix" rates). And it's all under the auspices of the British Banking Association.
What's good is that we now know for a fact that the traders (crooks?) were aided and abetted by their co-workers, the submitters (crooks?), who were overseen by managers and top executives who design most of these schemes (crooks?), and were all blessed by the British Banking Association, an illustrious association of 200 some-odd banks, whose many members (crooks?) are panel members submitting crooked (no question mark necessary) data.
Still don't get why that's good news?
Because it's proof there are crooks out there.And this time it's easy to see where the "fix" actually occurs.
It's also good news because, according to one multinational banking executive, just quoted in The Economist, it's "the banking industry's tobacco moment."
He was referring to the potential mountain(s) of litigation being drawn up already to claim that gross manipulation of interest rates caused billions, maybe trillions, of dollars of harm to borrowers and financial players of all stripes.
Remember, back in 1998, Big Tobacco had to settle class-action suits related to death and injury from cigarettes and other tobacco use. (These plaintiffs argued that tobacco companies knew of the health risk of smoking and failed to warn consumers.) These lawsuits cost them over $200 billion.
The bad news is the Bank of England, one of the world's stalwart and oldest central banks, is about to face its own potential Lehman moment (at least we can hope). That's on account of the fact that Paul Tucker, deputy governor of the Bank of England (and its supposed next top dog), is going to have to come clean in front of Parliament very shortly.
Mr. Tucker is apparently on record (according to Bob Diamond's phone call notes) suggesting that the Bank of England wanted Barclay's to manipulate it's Libor submissions downward so as to not panic counterparties and the country who might view tight interbank lending conditions as a sign of stress across the entire banking system.
So, here's why the bad news for the central bank (encouraging, no, make that, demanding fraud) is really good news for free markets.
Central banks have done nothing to countermand the trend (nothing but encourage) leading to big banks getting bigger; so big, in fact, that now all of the big banks around the world are all too big to fail.
The bigger the world's banks are (bankers want size, because more size equals more power to price, to manipulate markets, and to pay bigger bonuses), the more important central banks become, both to the big banks, nations, and the global economy.
Central banks are the saviors of big banks that get in trouble, especially when systems and economies are leveraged for profits that backfire, and they all have to be bailed out.
Central banks are supposed to be above what's going on below their ivory towers, but, in fact, they are the puppets being manipulated by the big banks. It's a case of the tail wagging the dog.
Why are central banks pouring money into banks, really? Why aren't governments printing money to pour into ailing economies but instead aiding and abetting central banks?
It's because central banks are independent supra-national bodies who have been ceded monetary power by governments almost everywhere to benefit banks and bankers the world over, who are their only constituents, and for all intents and purposes, effectively "own" legislators and governments.
They're pouring money into banks to keep them solvent. That's what central banks are there for. The banks aren't lending the money (massive reserves are sitting on balance sheets to shore up appearances) because they need it to meet reserve requirements and offset the illiquidity evident in the interbank lending market… the same interbank (Libor) market that the Bank of England wanted to make look more liquid than it was viscous back in 2008.
But it gets worse.
What will happen when the "multiplier effect" takes effect? I'm talking about the potential for massive inflation when all those huge quantities of reserves (stimulus) get lent out instead of shelved on balance sheets.
How about massive inflation?
Heaven help us if all these macro crises are fixed quickly. The flood of idle cash and credits globally will make past inflationary bursts look like a 40-yard dash, compared to miles and miles of potential problems ahead of us.
We need free markets, not manipulated markets. We need to break up all the world's big banks so they can fail when they overleverage themselves and entire systems, nations, economies, and the global economy aren't all brought to their knees.
If we break up all the too-big-to-fail banks, we won't need central banks. We can go back to what are supposed to be free markets dictating interest rates and creating honest, open economies and opportunities everywhere.
Who's with me?
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.