EthicsBite™

Libor is the London Interbank Offering Rate. It is an interest rate that is used between banks as they lend each other funds. It is a “free market” rate that has been used as a starting point for variable rate mortgages (based on Libor plus some number), rates for borrowings by municipalities and over $360 TRILLION-with-a-T in financial and derivative contracts. (Hmmm, isn’t that more than the combined GDP of all the world’s countries? Would that bring us down?)

Libor is calculated using estimates from the banks and it is those estimates that were, how shall we say this, allegedly fudged.

Last week a growing global gasp could be heard as we have learned that London’s Barclays has settled an accusation of having manipulated that rate, paying a fine of $450 Million. We then learned that potentially a dozen other large banks in North America and Europe may be under investigation. Banks may include Citigroup, Inc., Royal Bank of Scotland and Deutsche Bank. The manipulation of this rate apparently was going on before and just prior to the near global financial melt-down of 2008.

The story continued with word that Secretary of the Treasury Tim Geitner, who was head of the NY Fed during that timeframe, was potentially aware of issues with the setting of Libor and advised the British on what to do to get the situation under control. In the UK, the scandal has included allegations that the Bank of England’s deputy governor may have known but not taken action.

Ethical Analysis

The Law was broken. That’s not my personal opinion, it’s obviously the conclusion of more three-letter government enforcement agencies in the US, UK and elsewhere than can be listed here. They undoubtedly set Barclays up with a plea deal so that they can go on from there to the other banks that may have been involved. Congressional representatives are already calling for anyone involved to be prosecuted. Over the weekend the New York Times reported that the US is considering criminal charges against some banks and their employees.

Contracts and agreements were not honored. That IS my opinion and the supporting evidence is only just starting to come forth. Several municipalities are considering suing because the interest payments on their loans may have been higher than justified. They argue that they have been forced to cut their budgets to support those rates.

The community expectation of fair play was violated. When the investing public, would be mortgage holders, municipalities in need of lines of credit and other financing all have an expectation that the Libor rate is a free market rate, then manipulation of that rate by the investment banking industry which is often on the other side of the loans is clearly a violation of the standard of fair play.

Professional standards were ignored. We had expected that everyone in the investment banking industry upheld a minimum of professional ethical conduct standards. Financial advisors should be giving their clients objective analytical based recommendations. Institutions whom we entrust with our money should safeguard it from recklessness and be prudent in its management. Investment banks we might invest in as shareholders should be transparent about their business and its risks. The Libor scandal is just one of a series of continued ethical breaches by this entire industry. It is long past time to call them out.

Moral and spiritual values have been disregarded.

The true ethical issue is this: the banks believe the money is theirs, the traders think the money is theirs, and the individuals making trades think that the level of risk they successfully take with the money that is not theirs to begin with is a game to play that enables them to personally be rewarded, satisfy their ego and prove they are the biggest Whale in the sea.

The money is NOT theirs. It belongs to shareholders, depositors, pension funds and retirees. As the source of accumulated capital that drives the world economy it is a tool that can be used to the benefit of all and a hammer that can be used to dash the lives of many.

The banking industry still does not get this, as I pointed out when I tweeted this quote from one Lloyd Blankfein of Goldman Sachs: “If you put too much penalty on risk judgment, what kind of world are you going to have?”  We already know the kind of world we do have – one in which too much risk judgment takes place without, up till now, much in penalties. Perhaps we need to take fewer risks while in the process of “risk management.”

Yet to be determined is the potential impact this alleged rate fixing among the banks may have had on the overall global economy. If the rates were lower than market reality leading up to the crash, which is where the facts seem to be pointed, then a bank could lend more money than it otherwise would have been able, thereby contributing to the bubble.

Bottom Line:

The banking industry’s imprudence with the money entrusted to it, the resultant hardship and harm that has been inflicted on so many around the world and the inability of industry personnel to recognize the culpability of their firms and themselves in the global recession, coupled with their lack of regard for those who have been hurt is at odds with any true spiritual principle I am aware of.

Other Assessments: Two other interesting opinions on the ethics of the investment banking industry are

“Wall Street Ethics Codes Make Me Want to Inhale” by Susan Antilla of Bloomberg News

“The Market Has Spoken, and It Is Rigged” by Simon Johnson, Professor of Entrepreneurship, M.I.T. Sloan School