Seven major US banks are being fined collectively by the US government for rigging bids to purchase financial derivatives called Libor – a scam that defrauded investors, $20 billion in fines and $40 billion in lost interest profit. This multi-billion dollar racket was first exposed in 2012, but to date more than a half-dozen banks, including JP Morgan Chase, have still not been prosecuted for racketeering and manipulation, while just last week we learned that the DOJ is attempting to put a gigantic cryptocurrency fraud scheme on the same list of racketeering and manipulation schemes.
Breaking up would hurt US government budgets too
This whole mess goes way back to 2003, but the five-year Libor scandal erupted in 2008. Five central banks and the UK’s Bank of England agreed to set Libor to help the UK economy navigate the economic crisis. It is meant to be a risk free interest rate. Instead, the banks rigged to their own advantage by looking up the risk of putting in a bid to buy a $1 billion bond (or certain derivatives) or by simply entering incorrect data. All in all, the five-year Libor scandal cost the banks an estimated $80 billion in interest and collateral losses over those five years. Additionally, Bank of America estimated that the scandal caused $2.1 billion in losses on losses in client accounts for BofA and its retail brokerage division.
One of the reasons the scam is still widespread is that the banks have not been prosecuted for racketeering and manipulation even though the indictment comes in as another scam. The same is true with the latest cryptocurrency fraud case. Yes, the government continues to look at this dubious asset class with a skeptical eye, even though for now its reputation has seemingly stabilized itself enough that the leading cryptocurrency exchange has earned a small number of formal accusations. But this regulatory debacle will eventually allow hackers and criminals a peek at cryptocurrencies – the more they do, the more chance there is that they will eventually figure out how to unlock them.
Just imagine how much money a computer could make or how many criminals could escape jail. Maybe if the banks could have at least been forced to pay up for their crimes, there would be some kind of opportunity cost somewhere.
How bad would Libor rigging look today? The courts would probably have accepted that explanation 100 years ago, because back then the companies involved were giant financial institutions. Today, banks are not really large entities, but rather merely large groups of people who need to be understood in context with their peers. It’s a different kind of scandal if there were big names in cryptocurrency charged with securities fraud or energy fraud or securities fraud or manipulation of LIBOR. It would be a completely different scandal with a much more nefarious impact.