News comes that the DOJ and SEC are “examining whether some of the world’s biggest banks colluded to manipulate a key interest rate before and during the financial crisis, affecting trillions of dollars in loans and derivatives, say people familiar with the situation.” The Wall Street Journal Reports that:
The inquiry, led by the U.S. Justice Department and Securities and Exchange Commission, is analyzing whether banks were understating their borrowing costs. At the time, banks were struggling with souring assets on balance sheets and questions about liquidity. A bank that borrowed at higher rates than peers would likely have signaled that its troubles could be worse than it had publicly admitted.
Roughly $10 trillion in loans and $350 trillion in derivatives are tied to Libor, which affects costs for everything from corporate bonds to car loans. If the rate was kept artificially low, borrowers likely weren’t harmed, though lenders could complain that the rates they charged for loans were too low. Derivatives contracts could be mispriced because of any manipulation of Libor.
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices….”
Adam Smith, The Wealth Of Nations, Book IV, Chapter VIII, p. 145, para. c27.
But, of course, the question is whether there was a conversation! 🙂
And it is also probably worth quoting the next, and much less often referred to, lines from The Wealth of Nations:
“It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”
Or simply a reasonably competitive market converging on a fairly consistent price for the inter-bank lending rate? Oh, but that would not be sufficiently scandalous to give US regulators another juicy public relations gambit of going after the big, bad banks.
Certainly a strong possibility Mike. To be fair, the reports suggest the investigation is about the possibility of an actual agreement between banks, rather than inferring as much from pricing patterns. As the article suggests via quotes from a number of antitrust lawyers, successful enforcement in the absence of an actual agreement is pretty unlikely.