The Libor Scandal, or: It Is Never as Bad as One Imagines It. It Is Always Worse

In an article I posted on August 27, written in Italian, I offered some thoughts on the ‘Libor scandal’ as an example of the way ‘free markets’ work. I was trying to steer clear of any moral judgment on the banks’ behavior, or on any of their employee’s or managers’.

Now, our students at Mip Politecnico di Milano, being interested in issues relating to ‘business and ethics’ asked me whether I could expand on that article to see whether the matter treated therein could form a basis for a fruitful discussion about those issues. Not being an expert on ‘business ethics’ I simply oblige here to our students’ requests, hoping to be of service. And I do it in English, as a sign of respect to the multi-nation background of our international MBA class, the one the request originated from. Of course, I shall not even summarize my previous article, it being within the linguistic grasp of every member of the class.

Rather, I shall start out with a question that I imagine the general reader might have: so, your students’ request aside, are there any reasons why we should go back to the Libor-fixing issue? What has been happening over the last four months that warrants a re-examination?

A lot has been happening, but the most important ‘new’ thing is this: “The conspiracy to fix Libor appears more extensive than that had previously been thought. This was not just a question of massaging submissions to make UBS’s financial position look stronger than it was after the crisis. The settlement also point to a co-ordinated effort across banks to manipulate market rates for profit.” (The Financial Times, December 19 2012), [emphasys added.]

Thus, originally we were talking about banks submitting untrue data in such a way to affect the average Libor in a way that they could profit from; then, as from the first part of the quote, we discover that banks, or at least UBS, ‘massaged’ data to look “stronger than it was”: which, for what one could understand, amounts to falsifying data to prevent the true situation from becoming public and one’s reputation be tarnished; finally, from the second part of the quote we now hear of a “co-ordinated effort across bank….” .

Now, though neither the first nor the second of the three possibilities above can be obviously archived as business as usual, the third one is something to take very seriously indeed, for what we are being informed that an organized, structured, ‘co-ordinated’ plan has been in the working for nobody knows for how long to generate profits for the banking system at the detriment of other industries and households. Why is this so bad?

To answer this question one has to go back to the previous article on Libor, posted on August 27, where a clear, though crude, description was offered of the moral basis of the neoclassical economist’s belief. There I pointed out that trade unions look particularly dangerous to self-proclaiming ‘liberal economists’ because they are the means through which workers are able to raise their wages above the ‘equilibrium market value’, that is, by forcing firms to have to pay wages higher than those they could pay if no union existed and workers were to bargain for their working conditions individually.

Now, it would seem that one has the right to ask: have we read any article by neoclassical economists – that is, the ones either IN the government or advising governments throughout Europe –  charging the banks with illiberal, anti-market, equilibrium-distorting, welfare-reducing behavior? As far as I can tell, the answer is: nowhere.

But enough taking the side of the working man by asking that banks be treated like everybody else. Let me conclude with a few questions that may help the discussion among my students:

Is it ‘more unethical’:

  1. to supply false data to manipulate an average without any other player knowing about it for the purpose of profiting from it, or
  2. to supply false data to manipulate the perception the public has of your reputation for the purpose of profiting from it, or
  3. to supply false data in a co-operative fashion with other willing players for the purpose of profiting from it?

[To guide you, here is what the UBS chief executive, Sergio Ermotti, is reported as stating:

“We deeply regret this inappropriate and unethical behavior. No amount of profit is more important that the reputation of this firm, and we are committed to doing business with integrity.” ]

Of course, we have no reason to doubt Mr. Ermotti’s word to any extent. But, to continue in the spirit of the August 27 article, we have one additional question to ask: a question about regulation. Of course, we do not want our self-appointed ‘liberals’ to get scared, but it is impossible not to remember that in democratic societies tightness of regulation increases with the gravity of the crime, and that both ex ante and ex post. The recent findings about the Libor scandal would seem to require an adequate tightening of supervision over banks’ behavior, and especially the strengthening of global regulations and controls. Indeed, while it is a good sign that both Barclays and UBS were made accountable to both British and US authorities, one may suspect that a wider array of banks and countries were involved in the scheme – just as one cannot rule out that the scheme we are talking about here is the only one in existence.

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