The Largest Banking Scandal of the 21st Century

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Although the century is still young, this is shaping up to be the banking scandal of the century thus far.

On the heels of last week's announcement that British bank Barclays will fork over $450 million in penalties to U.S. and British authorities for manipulating the interest rates at which banks lend to each other (known as LIBOR for U.S. dollar lending, and EURIBOR for euro-denominated debt), the scope of the scandal continues to grow. Further news of a pending $233 million penalty against Royal Bank of Scotland -- which is 82% government-owned after that institution's quasi-nationalization -- comes as a particularly painful twist for British taxpayers.

But it would be a major mistake to view this emerging scandal as a British affair. Both Citigroup (NYSE: C  ) and Swiss bank UBS (NYSE: UBS  ) join London-based giant HSBC Holdings (NYSE: HBC  ) among those explicitly implicated by U.K. Chancellor of the Exchequer George Osborne. U.K. periodical Daily Mail reports the list may grow to more than 20 banks involved in these efforts to rig the LIBOR and EURIBOR rates, and it lists JPMorgan Chase (NYSE: JPM  ) , Germany's Deutsche Bank (NYSE: DB  ) , and Japan's Bank of Tokyo Mitsubishi among "others under scrutiny."

This is a global banking scandal, with potential victims equally widespread. Providing context for the $160 million penalty assessed to Barclays by the U.S. Department of Justice last week, Assistant Attorney General Lanny Breuer explained: "Because mortgages, student loans, financial derivatives, and other financial products rely on LIBOR and EURIBOR as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide." Rolling Stone reporter Matt Taibbi reminds us that "almost every city and town in America has investment holdings tied to Libor."

Taibbi has been hot on the trail of another, completely separate bank scandal involving bid-rigging in municipal bonds, in which several of the same banks have been implicated. By "secretly colluding to rig the public bids on municipal bonds," Taibbi explains, "the banks systematically stole from schools, hospitals, libraries, and nursing homes" all across the United States. Although the LIBOR and EURIBOR scandal is many orders of magnitude larger than the separate caper in the $3.7 trillion municipal-bond market here in the U.S., Taibbi is correct to point out that in the wake of both scandals, it's getting "harder and harder to make the case that the major banks do not routinely cooperate at the expense of the public when it serves their purposes to do so."

The next big banking scandal?
I wish to remind readers that yet another potential banking scandal continues to loom on the horizon. The U.S. Commodity Futures Trading Commission is in the fourth year of an ongoing investigation into manipulation of the price of silver, and Commissioner Bart Chilton already blew the whistle back in 2010 by declaring: "I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price." Both HSBC and JPMorgan Chase were named as initial co-defendants in a related civil lawsuit brought before the U.S. District Court in Manhattan.

Scores of currency-market observers have seen red flags of foul play in the gold market as well, and I believe both metals may be targeted for manipulation as part of a broader effort to cushion the impacts of structural impairments that have roiled key fiat currencies amid the ongoing global financial crisis. After all, the value of fiat currencies is expressed and commonly understood through relative measures against each other, and precious metals offer the primary barometer for weakness throughout the complex of paper currencies.

The proliferation of leveraged financial instruments representing a fractional-reserve approach to the world's supply of actual physical gold and silver paves the way for widespread manipulation with potentially dangerous consequences, and in my view, the sooner these issues are afforded the sort of transparency now befalling the LIBOR and EURIBOR rate-setters, the sooner folks will be empowered to ensure that banks are not colluding to pursue objectives that may ultimately run counter to the common public interest. At the very least, we now know for a fact that banks have indeed colluded to pursue their shared agenda, and I for one would now like to know whether any such collusion has occurred with respect to silver and gold.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns no shares in the companies mentioned. The Motley Fool owns shares of Citigroup and JPMorgan Chase. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 05, 2012, at 9:09 AM, XMFSinchiruna wrote:

    Here is Matt Taibbi's latest on the scandal:

    "The email from the CEO to the other two senior Barclays execs purports to detail the content of the conversation Diamond had with Bank of England deputy governor Paul Tucker that same day."

    "In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from "a number of senior figures within Whitehall" – that is, the British government – expressing concern about Barclays' high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were."

  • Report this Comment On July 05, 2012, at 9:54 AM, XMFSinchiruna wrote:

    Fellow Fool Dan Caplinger on why the LIBOR scandal is bigger than you think.

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