Adair Turner, Equity, Growth, LIBOR, and British Bank Regulation

Adair Turner

New Orleans     In one of those serendipitous moments a friend in San Francisco had passed on a book for my reaction and the daily papers have been full of pictures and quotes of the author, so the first part of my flight home was easily occupied reading Adair Tuner’s Economics After the Crisis:  Objectives and Means an MIT Press publication of a series of lectures Turner did before he emerged front and center of the huge Barclays and LIBOR rate fixing scandals.  Turner of course is the chairman of the Financial Services Authority in Britain which investigated and imposed the nearly $500 Million fine on Barclays which brought the quickly spreading scandal to everyone’s attention.  Turner and his own agency are now in the crosshairs based on what they and other bank regulators knew, when they knew it, and why they didn’t do enough to stop it both in the UK and elsewhere around the world.

Reading Turner’s book, one finds him almost a welcome middle-of-the-road voice about financial markets and some of the major issues of our day, especially from the US perspective where the voices have become so shrill that there seems no compromise in sight.  Turner is for growth, but doesn’t pretend that growth is the be all and end all for our public economies.  He is dismissive of arguments that there are “free markets” or that they are capable of self-regulation.  Interestingly as a financial regulator he is skeptical about whether the financial services industry itself produces real value or is simply “distributive” and therefore increasing inequity.  In fact I looked hard at his arguments about both relative happiness and the need for more equity because from his position they could have not simply appeal but power.  Unfortunately Turner’s very middle-of-the-road stance leaves him unable to come to conclusions about some of the questions he raises, other than to clearly state in the classic two hat position of being an economist and a regulator that these are “political” and “policy” questions that society has to resolve.  He just wants the fight to be conducted on solid ground, and that’s the main contribution of his book which is less advocacy of any position in particular, but a reasoned “corrective” pushing back at more outlandish claims.

He also has a tendency to buy some pigs in a poke when they are outside his area of expertise, which is a tad dangerous as well and courts bigger trouble.  In talking about the real estate crisis in the US, which is obviously far afield of his study and research, he approvingly agrees with Raghuram Rajan’s Fault Lines and argues that the concern about

…increasing inequality in the United States, which in the American political culture could not be offset by a distributional response, led instead to the deliberately encouraged palliative of risky credit extension to lower income groups.  This explosion of sub-prime lending was a substantial contributor to the financial crisis.  Increasing inequality at the lower end of the income distribution as severe as that experienced in the United States in the last 30 years must matter a lot.

Amazingly, Turner is simply echoing the worst of the discredited right wing canards which seeks to blame the real estate collapse on community reinvestment programs and weirdly dresses up what are well documented fraudulent, unsupervised brokers at sub-prime shops where the inmates were running the financial prisons, regulators were out to lunch, good and bad loans were mashed into even riskier defaults, and so forth, almost none of which had to do with loans to lower income families, since they were broadly based in specific markets (NV, FL, CA, AZ, etc), and absolutely none of it had to do with either financial markets, governments, or anyone else using the real estate market to address inequality.  I wish!

Nonetheless from Turner’s book it was easy to see how he could have found himself in the pickle where he now sits as he faces Parliamentary questioning this week.  His inability to see the course of action from his analysis and move firmly to convert his analysis or at least sentiment into decision as head of the Financial Services Authority has put him in the meat grinder, probably deservedly.  His Agency has had a reputation for going soft on the financial institutions and handing down wrist slaps more often than real punishments, particularly when others are now looking at real criminal charges for these rouge traders who made lies of LIBOR.  The British have moved to overhaul their regulatory system and part of their fix is in fact to eliminate Turner’s Financial Services Authority completely.  Other political voices like former Exchequer chancellor George Osborne quoted in today’s Times say the regulatory system “failed spectacularly in its mission to maintain stability.”

None of this is pretty and Turner certainly was not alone in fully recognizing that banking and finance have become virtually criminal enterprises without strong and effective regulation.  Unfortunately despite his critique and his interest in great equity and fair distributions, the real story and lessons of “economics after the crisis” is that the crisis is not over until it is fixed, and there the job has hardly started and financial institutions have learned so little that Turner and others who believe that they understand the situation still seem so trapped in the overall system that they have not broken loose enough to rebuild something that truly protects national economies and all citizens.

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LIBOR: Banking as a Criminal Conspiracy

Little Rock   Put London and banking in the same phrase, squeeze it into an acronym and snores start rising from nodding heads all around the world, and that’s too bad, because the LIBOR scandal that has erupted at Barclay’s and in Parliament will engulf the big US-based banks like Chase and Citicorp and might finally yield enough total revulsion and disgust at the greed and lack of good faith that has warped the culture of all banking institutions that reform might finally be possible, if not inevitable.

I used to hear the phrase LIBOR all of the time when we were in negotiations around banking agreements and home mortgages.  I can still remember having to ask one of my colleagues what the heck it was and then having to Google it later.  LIBOR is the London Interbank Offered Rate.   In plain English, that means that this is the rate used by banks when they loan money between each other.  An interesting article on its derivation ran this week and essentially it emerged over the last 20 or more years to replace the “prime” rate in prominence as a banking benchmark standing for the fairest lending rate fixed at a particular place in time.  The rate was arrived by consulting all of the major banks on what the rate they were using that day in lending money in major areas, throughout the high rate and the low rate, and then taking the average of the rest of the rates to equal the LIBOR for the day.

This was the gold standard of banking practice backed by the full confidence and good faith of the financial systems that this stood for something fair and certain about what constituted the real interest rates.  Results of the investigations revealed thus far have now proven that that was a total lie and what’s more, it is fairly clear that banking at the very top is certainly more of a criminal conspiracy than the MAFIA or the drug cartels might have ever imagined practicing.

Barclay’s will pay close to a half-billion in fines in Britain for their manipulation of the rates.  Unlike other criminal conspiracies, the $10 million dollar a year CEO of Barclay’s recognized no code of omerta and in trying to rationalize his own inept management (I’ll come back to this!), pointed his finger with clear evidence that the regulators turned a blind eye to the rate manipulations and other banks, like the big boys in the USA, were also involved in the interest rate fixing.   It is now clear that what was happening was the bankers and their traders were setting the average rates falsely during the financial crisis so that they seemed more financially solid than they were and with less interest rate cost and liabilities, and furthermore their own traders in some cases were gaming the rates both higher and lower, sometime against the interests of their employers in order to maximize their short term trades and therefore returns and therefore their personal rewards.

Whether subprime mortgage brokers, trading desk cowboys and cowgirls, or your regular banking shysters is it not finally abundantly clear that if you pay people based on their percentage of the kill, their systemic self-interest will bleed everything dry including their employers?  These CEOs are simply unable to surprise their employees on a banking model that is pay-as-you-go.  For all of their “not me’s” there are not enough mea culpas where they admit they simply are unable to curb the greed of their troops on a business model from the City of London financial district to Wall Street and beyond which incentivizes greed and therefore destroys institutions and makes the concepts of “trust” and “good faith” oxymoronic when it comes to banking.

Furthermore, who do you think was responsible for setting the LIBOR?   If you guessed the government or regulators, go to the back of the class.  The British Bankers’ Association was in charge and the very banks that were part of the criminal conspiracy were in fact heading up the committee that surprised the LIBOR rate setting for trillions of dollars worth of loans costing companies and governments billions and ordinary citizens thousands as well.  Unbeliveable!

Supposedly the UK Serious Fraud Office (SFO) is looking at criminal charges now, but the Wall Street Journal was pretty clear that their record to date is lame and, mostly noted by the Times, they have buckled in the face of business interests.  It is hard to believe that we will get much more from the USA side.

The least we should be able to expect is the end to the fiction that banks can self-regulate, that banks can supervise both trading and security of funds (how can we not bring back some form of Glass-Steagall?), and banking isn’t much more than criminal enterprise until government and citizens clean this mess up.  Given the low level of current interest rates and the practices of banks, it seems under the mattress may once again be a viable and secure option for handling your personal funds.

Traders crowd the sidewalks outside the New York Stock Exchange on the day of the 1929 market crash. The Glass-Steagall act followed. Photograph: Bettmann/CORBIS
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