Ignorance not bliss

By Bart Chilton

McClatchy-Tribune

Another megabank has reached a humongous settlement. It involves smoke, mirrors and sneaky backroom dealings with potentially dangerous world economic impacts. Barclays settled with the Commodity Futures Trading Commission and others for a cool $454 million for doing some things that, well, just weren’t cool.

The settlement indicates that Barclays sought to manipulate interest rates that affect consumers relating to mortgages, car loans, credit cards — even student loans. Sounding like gobbledygook, the London Interbank Offered Rate (Libor) is the average interest rate large banks charge when lending to other banks. Most financial institutions, mortgage lenders and credit card agencies rely upon it. Barclays sought to sway the rate to its advantage by falsely reporting numbers, thus attempting to skew the average.

What is big?

There are other reasons the settlement is important. We often hear about “big banks,” but what is big? In Barclays’ case, it’s about 50 million customers in 50 countries and assets of more than $2 trillion. That’s gigantic. And remember, there are even bigger banks. Despite those astonishing numbers, big isn’t the prevailing problem in this instance. The alarm is placing the banks’ interests ahead of their own customers.

‘Sure winners’

Barclays sought to gain an advantage for the bank. That’s not wrong unless it breaks the law or hurts customers. Other megabanks have been in trouble for this in a little different way. Goldman Sachs and Citibank each created innovative investments that some would have called “sure winners” and marketed them hard to their customers. The problem was: they were “fake-out” funds. These megabanks actually took the other side of the investment — which (surprise surprise) turned out to be the winning side.

The U.S. financial reform law passed two years ago sought to put the brakes on exactly this type of proprietary trading with something called the Volcker Rule. Under it, megabanks would have to be banks again—not hedge funds — and focus on their customers instead of gaming against them or gambling with their money. The problem now: the megabanks continue to aggressively oppose it, and regulators haven’t implemented it. Applying a strong version of Volcker could have stymied Barclays’ scheme, Goldman’s ruse and Citibank’s ploy.

The banks are making the case for Volcker’s immediate implementation.

Bart Chilton is a commissioner on the U.S. Commodity Futures Trading Commission and the author of Ponzimonium: How Scam Artists Are Ripping Off America. Distributed by MCT Information Services.