Liborgate : N’essayez pas de ressusciter un mort !

LIBOR and the Pathology of a Dead System : Do Not Attempt to Revive the Cadaver !

Authors :

• Bertrand Buisson, Paris, Website Editor
• Roger Moore, Wiesbaden, Financial Crimes Analyst

A Tale of Two Irreconciliable Systems : Any efforts to "reform" and "regulate" LIBOR, but actually the Interbank Market are doomed to failure. The supremacy of the London Interbank Market (formerly, the London Eurodollar market), which emerged over more than four decades, met it’s deserved end in the course of 2007 and 2008. The continuing use of LIBOR in hundreds of trillions of derivatives contracts is a monetarist benchmarking absurdity, with criminal implications.

1) The 1933 "New Deal" and then World War II economy of the United States under President Franklin Delano Roosevelt, and the post-WWII reconstruction economies of Europe, did not enslave their policies, of directed credits for mid and longterm expansion of the real economy, on any considerations of the interest rates at which private banks might make short term loans among each other with unused deposits. The actual credit market was either government created or backed, credit generation, oriented to the promise of future increases in real productivity, and thus, the interest rates unfolding from the government and into the commerical banking system, were tuned to facilitate and reflect those productivity increases. It was that government originated credit generation, financing real economic activity, which determined the rate of expansion of the volume of liquidity, deposits (monetary base) captured in the commercial and savings bank system and, emphatically not, the other way around. A nation planning its future economic goals and needs, would never base itself on the available deposit base of banks, and certainly not on rates they charge each other to leverage up their lending capabilities through mutual short term borrowing, as in the London Interbank Market. The supremacy for governments and banks on both sides of the Atlantic, of a London "Interbank Market LIBOR Benchmark" would have been seen in those seemingly distant past decades as an absurdity.

2) The evolution of the deregulated Eurodollar market under the direction of the City in London since 1956 (see Nicholas Shaxson’s excellent book Treasure Island), it’s expansion with the flood of dollars during the deficits associated with the post-Kennedy assassination Viet Nam War, permitted the final attack on FDR’s fixed exchange rate Bretton Woods System on August 16, 1971 under President Nixon. The large scale move of Wall Street and continental European banks to the City during the 1970’s reflected their own complicity in expanding the pool of deregulated dollars outside of U.S. regulatory oversight, such as Glass Steagall. Every U.S. dollar in the unregulated London Eurodollar market had a much bigger leveraged speculation "bang for the buck" than such a dollar on deposit within the U.S. The City brought in its big but younger sisters on Wall Street, and continental banks, as with the Inter-Alpha Group of Banks. That legacy can be seen in every bank scandal of the last years, AIG Finance—the City ; UBS—the City ; JP Morgan Chase CIO derivatives debacle—the City ; HSBC money laundering—the City ; Standard Chartered—the City ; LIBOR rate rigging, again, the City.

3) Over the subsequent decades waves of deregulation, which either removed, defanged, or captured national regulatory laws and agencies, permitted the introduction of "financial innovations", which would have once been considered criminal. The Weapons of Mass Destruction, like derivatives, were the evil twin of LIBOR, a product of the same mother, the City’s Interbank Market. The leveraging made possible by the London-centered Interbank Market (with its LIBOR), and with its growing Shadow Banking Sector, made possible the decoupling of the financial world from the realeconomy, and the inevitable systemic bubble of largely fictituous financial titles. That System went irrevocably bankrupt in 2007 and 2008, and has since only been kept alive by artificial life support bailout measures.

PUBLIC CONSULTATION on Post LIBOR-EURIBOR ?

TOPIC 1 : Tackling the Culture of Manipulation

Q1 : The stem cell of the cancer was the London Interbank Market itself, a geo-economic attack on the FDR Glass Steagall and Bretton Woods regulated financial/credit system, as well as the related methods of financing the post-WWII reconstruction economies of Europe. A separation of the megabanks according to the original Glass Steagall Standard would end the bailout regimes in all facets, including the hyperinflationary money pumping of central banks, the taxpayer backed bailout funds, the criminal neglect seen with toleration of narcotics and organized crime money flooding the system (Wachovia, HSBC), and, the criminal neglect shown in not stopping LIBOR rigging even though it was known (Geithner FRBNY-Bank of England email correspondence).

As many financial crime experts have recently stated—including French Police Superintendent Jean-Francois Gayraud, former UNODC Director Antonio Maria Costa, and Russian Anti-drug Chief Viktor Ivanov—the global financial system is intrinsically criminogenic and heavily dependent on organized crime money thus, the first and unavoidable phase for dealing with this is the question of criminal prosecutions. A multitude of agencies on both side of the Atlantic have ongoing investigations into money laundering, LIBOR, and related matters. "Too Big Jail" should not be tolerated, Justice must be done.

The primary benchmark for credit generation will become that associated with government created or backed mid and longterm credits for needed reconstruction projects. Those interest rates, associated with real productivity increases in new wealth, will become the standard for a genuine "rate of profit", interest rate, in commerical lending activity. Anything is else is for gamblers, and they are on their own, and denied access to government insured and regulated bank deposits.

Q2 : a-d.— Monetarist, "supply and demand" conceptions of economic value, and thus of credit Benchmarks will not be applied. The Benchmark standard rate, will be the result of deliberative efforts between government credit generating and/or dispersing agencies consulting with commerical banking entities, assessing the real expected value gains of the projects to be financed.

These were standard activities as under FDR with the Reconstruction Finance Corporation, and the German government Kreditanstalt für Wiederaufbau (KfW) in its first decades after WWII. France also adopted this principle in 1945 with the Conseil national du crédit (CNC) setting a banking credit benchmark according to physical economic growth objectives, and the Fond de développement économique et social (FDES) receiving direct credit for the Banque de France for
infrastructure projects.

TOPIC 2 : Establishing Integrity and Trust Post LIBOR/EURIBOR

Q3 : The core element of a sane banking credit system in the transatlantic world will depend of government action, not "investors." Credit in circulation will depend on governments uttering loans for well-defined national, bilateral, regional reconstruction and infrastructure programs, as with the Eurasian Landbridge transport corridors to Asia, and similar plans reviving southern European countries devastated in the Euro crisis (Spain, Greece, etc.) as nodal points for transportation routes/tunnels to northern Africa. Only governments can inspire "confidence" for such investments.

Multilateral international conferences can work out such arrangements.As most LIBOR contracts are highly derivatives related, Glass Steagall standards of evaluating what is real and what is fictituous, i.e. speculative, in those contracts is required. Civil suits on both side of the Atlantic are tackling that problem, but, "global settlements" without criminal prosecution, as with LIBOR rate rigging, cannot be tolerated.

Q4 : Under a Glass Steagall banking system, financial operations will be fully framed by law ; any shadow system transactions with Dark Pools, offshore entities, and OTC derivatives will be forbidden. The Glass Steagall law will create a legal framework allowing the banking system to operate efficiently at the service of real economic development.

To achieve such a goal, regulators, on behalf of prosecutors and legislators, should be given subpoena power, under public temporary requisition order, to go investigate banks in order to clean up their books from purely financial fictitious assets.

As French 1945 banking law provided, legislators and regulators should be represented inside banks ; indeed, to secure the conformity of investment bank operations with the general welfare, de Gaulle’s provisional government instituted a public officer mandate at each private bank board with
investigative authority.

Q5 : To start with, criminal prosecutions should be fully followed for any observed, avowed or suspected financial crime, until the truth has been rendered for public scrutiny, and their perpetrators lawfully punished. Thus the regulators and public opinion will find out, as with the effects of the famous 1933 Pecora Commission, that the present financial system is led by crime and is, in and of itself, structurally, purely criminogenic.

The only way to restore ethics and morality into the financial services industry is to submit it, regardless of their claims, to the imperative of a serving growth of the real economy, from which people can live and their children can have a future.