That is the title of a Rolling Stone piece and couple of follow up blog posts by Matt Taibbi. They serve as a good illustration of the principle that no one likes a fair fight if they can avoid it, that if someone can rig the game to get an advantage they will at least try. The series is an eye opening list of the various markets/indexes that have been rigged or suspected of being rigged and a rogues gallery of banks who’ve paid millions in fines for doing the rigging and/or are suspected of doing the rigging. A quick summary:
LIBOR – The London Inerbank Offered Rate, it is an interest rate used in trillions of dollars of all kind of derivatives. Here is a bit of a primer.
ISDAfix – Weird name, an interest rate used for interest rate swaps.
Gold and Silver
FX – Foreign Exchange markets
There has already been hundreds of millions of dollars paid out in fines by banks for the LIBOR stuff, investigations for the rest seem to be in progress. At the end of the main Taibbi piece he quotes from a report by the European Federation of Financial Services Users:
In general those markets which are based on non-attested, voluntary submission of data from agents whose benefits depend on such benchmarks are especially vulnerable of market abuse and distortion.
Well you don’t say. You’d think their love of the free market, of its stern yet fair hand, of the purity of competition, would prevent them from seizing the opportunity to game the system and rake in some filthy, ill gotten lucre. Most of these schemes require at least some cooperation between the participants. Michael Hausfeld, one of the lead attorneys for a plaintiff in one of the LIBOR lawsuits, is quoted in the same piece:
It’s now evident that there is a ubiquitous culture among the banks to collude and cheat their customers as many times as they can in as many forms as they can conceive. And that’s not just surmising. This is just based upon what they’ve been caught at.
So these large banks, the paragons of the creative destruction of the dog eat dog world of cut throat competition, do understand the utility of cooperation. It’s just with themselves against pretty much everyone else. So what have we learned?
- Yes, market participants will collude and cheat if it can give them an advantage and increase their profits
- No, there is nothing magical about markets that will prevent this by itself, no invisible hand will come down and dispense market justice
That leaves regulations, paired with a robust regulatory apparatus for enforcement to police the markets. But given that TBTF means too big to jail ( as Attorney General noted in a memo in 1999, you have to be careful of “collateral consequences” when prosecuting corporate crimes ), there seems that little can be done, except hand out fines that in the end amount to a fraction of the gains that the criminal behavior netted. There is also a cultural problem, put succinctly buy commenter tongorad at Naked Capitalism:
The problem is that the market is posited so firmly in the public mind as a state of nature, rather than a political arrangement.
So a common conception is that at best, regulations do little to impact the tectonic forces of nature as they march inexorably on, and at worst they are a perversion of nature’s work, leading to bad, horribly mutated outcomes and widespread misery. It’s a conception of markets that is tightly woven into the national mythos, and it would probably be best for most of us if it gets torn out and set aside. Preferably before the next financial crisis.