Five Reasons the Libor Scandal Won't Spur Reform

Despite the shockingly brazen nature of the scandal and its undeniable impact on global markets, allegations of interest rate rigging by big Wall Street banks haven’t captured the attention of most Americans.

Consequently, the Libor scandal isn’t likely to serve as a catalyst for the kind of focused outrage many commentators believe it warrants -- outrage that would ultimately lead to tangible reform.

Like it or not, the scandal will probably dissipate before any critical mass of popular anger coalesces around an effort to not only hold those responsible accountable but also to ensure that it can’t happen again.

Some of the reasons might be viewed as cynical. That doesn’t mean they aren’t solidly based in reality. (And I’m not even including the fact that it’s summer and a lot of people would rather go to the beach than think about how global interest rates are set.)  Others suggest a more nuanced approach to the allegations.

In any case, here are five reasons the scandal won’t be, as some had hoped or predicted, the straw that broke the camel’s back in terms of prompting widespread financial and regulatory reform:

1. No U.S. banks have been implicated so far. As it stands, no formal allegations have been made against the likes of J.P. Morgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), or Goldman Sachs (NYSE:GS). Conventional wisdom holds that all of the major global banks colluded during the financial crisis to manipulate the London Interbank Offer Rate, or Libor, apparently to maintain the appearance that they were all healthy and could still borrow at relatively low interest rates. But so far only Barclays (NYSE:BCS) has admitted to low balling its Libor estimates for its own profit. Most Americans have never heard of Barclays because it only gained a significant foothold on U.S. soil in 2008 after buying up the remnants of bankrupted Lehman Brothers.
2. No immediately identifiable villain has emerged. For most Americans all of the big Wall Street banks are villains. Throw in an arrogant, well-attired and extravagantly paid CEO, put him in front of a televised Congressional hearing and the public has a face to attach to all that villainy. Goldman Sachs CEO Lloyd Blankfein, J.P. Morgan CEO Jamie Dimon, Bank of America CEO Brian Moynihan, among others, have all participated in these bits of political theater. That’s not been the case here. Bob Diamond, the Barclays CEO who was forced to resign earlier this month as a result of the scandal, is unknown in the U.S.
3.  No immediately identifiable victims have emerged. The financial crisis of 2008 brought on by “too big to fail banks” taking on too much risk caused millions of Americans to lose their jobs and their homes. More than 20,000 Lehman Brothers employees lost their jobs when that venerable investment banks went under. Many of those stories, and those of countless others who have lost their jobs since 2008, have been told in the media. As well, thousands of Americans have lost their homes or entered into foreclosure since the housing bubble burst four years ago. Their stories are familiar to anyone who reads or watches the news. The Libor scandal is harder to quantify, despite ardent efforts by many to do so. Libor is used to set borrowing rates for myriad financial products such as mortgages, futures contracts, and many other derivatives used for hedging and protecting against investment losses. If the Libor rates were manipulated so presumably were the rates attached to those products. But while apparently huge in number, no specific face has yet been attached to the victims of the scandal.
4. Even by Wall Street standards, this is complicated. Most Americans have never heard of Libor and have no idea how the rates are set, let alone how or why they might be manipulated. As it stands, there is confusion and debate as to why the banks might have manipulated the rates. Did they do it for malevolent reasons – to boost their own profits, as Barclays has admitted to? Or did they do it to maintain an appearance of health, which was important in 2008 as the world teetered on the brink of financial collapse? The scandal that erupted following J.P. Morgan’s announcement in May that it lost billions on a hedging position was also complicated but it could be boiled down to a simple narrative – a "too big to fail bank" is once again losing huge sums of money by taking on too much risk. The Libor scandal affords no such simple narrative.
5. Timing is everything. The manipulation of Libor allegedly occurred between 2007 and 2010. In other words, the real scandal occurred several years ago and during the worst of the financial crisis brought on by the collapse of the hyper-inflated U.S. housing market. As information has emerged, it turns out regulators knew what was happening – in some instances at least – and may have tacitly approved of banks low balling their borrowing costs in order to maintain orderly financial markets. At the time, banks with high borrowing costs were viewed as weak and vulnerable to Bear Stearns-like runs on their deposits. So far Barclays is the only bank to admit to lying about their borrowing rates purely for the benefit of investment positions taken by the bank. Most importantly perhaps in terms of public perception, the Libor rate rigging scandal didn’t contribute to the financial crisis, it occurred as a result of that crisis.