Resentment against fin institutions due to LIBOR scam: INET

Evaluating the impact of the LIBOR scandal, Robert Johnson, Executive Director, INET said that this episode is building resentment towards large complex financial institutions that were bailed out or turning countries in Europe inside out to avoid taking write downs on the loans they made.

"With the stresses in Europe, the stresses of deleveraging around the world, fears of another downturn, the idea that regulators and legislators have not cleaned up our capital markets with reform in response to the calamities of 2008, are regaining momentum. People are getting more and more demanding on governments to rein in finance in its axis," he tells CNBC-TV18. Below is the edited transcript of the interview. Q: What is your reaction to the LIBOR scandal? How will it impact banks and the fact that it is not just Barclays but half a dozen banks that are now under investigation?
A: The integrity of capital markets matters very much to the quality and vibrance of economic activity productivity growth and when trust is destroyed because people are manipulating markets. Essentially, they hold these interest rates too high it makes everyone suspect, less trust in financers and it damages the entire system. Q: But this isn't the first time that doubts have been raised. Over the last few days, we found out that the New York Fed raised an alarm all the way back in 2008. There have been debates on before that as well regarding the accuracy and the integrity of the data being reported as LIBOR. What do you in your assessment think of the systemic issues with LIBOR that now thanks to this scandal may have an opportunity to be redressed?
A: What is different about this scandal is that the abuses from the financial sector which became increasingly apparent in 2007-08 and 2009 are now mature. People are frustrated. There has not been more substantial reform.
With the stresses in Europe, the stresses of deleveraging around the world, fears of another downturn, the idea that regulators and legislators have not cleaned up our capital markets with reform in response to the calamities of 2008, are regaining momentum. People are getting more and more demanding on governments to rein in finance in its axis. Q: What do you think would make for a better process in order to prove LIBOR from this kind of data manipulation that we have seen in the last years especially in the Barclays case?
A: In a bank market, by its very nature, is over the counter market or some legislatures in America called a dark market meaning oligopolistic meaning highly concentrated firms are playing games and setting things to their own benefit.
I would prefer to see a transparent exchanged based system where the LIBOR is set in a way where people can see the previous bid, the previous spectrum of offers and bids around the clearing rate and see how that changes through time with very high frequently publicly posted pricing and take this out of this kind of dark corner where people set the rate rather than having market clearing determined the rate. Then I think future exchanges are much better than over-the-counter as a mechanism.
_PAGEBREAK_ Q: An exchange rate or the base rate is one way to do it, the New York Fed in its letter to the BOE suggested random selection from the courts provided by those 18 banks. Is this the full extent of reform that you think should take place to be able to fix the current crisis with LIBOR?
A: I think the LIBOR crisis affects the pricing of trillions of dollars of commerce. But setting that range should not be that difficult. If it is done transparently and fairly, we inhibit the ability of firms who key their loans to LIBOR to push the rate unofficially high at times when it works to their benefit profit wise and to the detriment of the larger capital market that you refer to. So by putting things on in exchange and making the bids and offers transparent, one can diminish that practice.
But you still have to be mindful of the capacity for collusion. Many of the people who I follow and admire in financial regulation, particularly Simon Johnson from MIT, talk about how these banks are just too big and part of what we need is a more competitive market place and one that is less populated by the large complex too big to fail what they call systemically important financial institutions. So breaking up the banks, as Simon says, will do a lot to reduce this problem. Q: Is that even a realistic possibility? Academically, Mr Simon is one of a growing chorus that has been calling for a breaking up of banks system that is not plagued by too big to fail but is that even realistically possible?
A: You can take the same argument, which is the reason you cannot break up the big banks is they are politically powerful and the reason you cannot reform LIBOR in any way or reform over the counter derivatives markets is because they are politically powerful.
If you want me to go into the realm of what is feasible, I shouldn't even be on the air because what is feasible given how politically powerful banks are, is to do nothing.
What has to take place is society has to reach a different sensibility about who is the servant and who is the master. It has to do some things that we are here to for not considered practical or politically feasible in order to make the reforms to make these now dysfunctional markets return to a place where they serve the process of capital allocation, it is not doing that right now. Q: What do you make of the impact this crisis will have on several other banks or the banking system largely speaking on both sides of the Atlantic because more than half a dozen banks are currently under investigation?
A: I think this episode is one in a chain of what is building resentment towards large complex financial institutions that were bailed out or turning countries in Europe inside out to avoid taking write downs on the loans they made. They always loved the free market beforehand but after the fact they want to turn the country like Spain or Italy inside out rather than write down their debts.
People around the world are more resentful of the political power of these financial institutions and as that resentment builds the detection of wrong doing, scandals, structural flaws will continue to rise just like Jamie Dimon in America went through this hearings and the embarrassment over his loss on credit derivatives after he abolished the Walker Rule.
Just like we are about to see in the United States a big rollout of scandals that relate to banks and their participation in municipalities, state local governments and how they have created all kinds of fees and coercive financing so that those regions are now having the lay off teachers, firemen, policemen and basic services as the financiers who are making more and more money. The resentment is building and it will not go away until the political process starts to take over and correct these problems.