The deputy governor of the Bank of England Paul Tucker goes before the British Parliament today as part of a widening probe into bank manipulation of a key interest rate. He will be quizzed about whether banks were encouraged to lie about the LIBOR during the 2008 financial crisis. LIBOR is the acronym for London interbank overnight rate, used to set interest rates for trillions of dollars of contracts worldwide. The scandal has already cost Barclays Bank its top three officials. As part of a $450 million dollar settlement with U.S. and U.K. regulators, the British banking giant admitted to rigging the LIBOR as early as 2005. The probe has widened to most global banks. Joining Diane to discuss the fallout are University of Maryland School of Law professor Michael Greenberger, chairman of the Commodity Futures Trading Commission Gary Gensler, Francesco Guerrera of The Wall Street Journal and Andrew Palmer of The Economist.


  • Michael Greenberger Professor, University of Maryland School of Law, and former Director of Trading and Markets at the Commodity Futures Trading Commission
  • Gary Gensler Chairman, Commodity Futures Trading Commission
  • Francesco Guerrera Editor, Money & Investing, The Wall Street Journal
  • Andrew Palmer Finance editor, The Economist


  • 10:06:56

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Investigators around the world are digging into a developing scandal over the London Interbank Offered Rate, the LIBOR. Britain's second largest bank, Barclays, agreed to pay more than $450 million in fines to U.S. and U.K. regulators. Ousted CEO Robert Diamond says other banks participated and senior government officials were complicit.

  • 10:07:30

    MS. DIANE REHMHere in the studio to talk about the fallout, University of Maryland School of Law Prof. Michael Greenberger. The Wall Street Journal's Francesco Guerrera joins us from the NPR bureau in New York, and Andrew Palmer of The Economist joins us by phone from London. I do invite you to be with us. You are always an important part of the program. Call us on 800-433-8850. Send us your email to Join us on Facebook or Twitter, and good morning to all of you.

  • 10:08:16


  • 10:08:17

    MR. ANDREW PALMERGood morning.

  • 10:08:17


  • 10:08:20

    REHMAndrew Palmer, are you there?

  • 10:08:23

    PALMERYes, I'm here, Diane.

  • 10:08:24

    REHMGood. Good to have you with us. Andrew, give us some of the background history of the LIBOR and how it seemed to work up to now.

  • 10:08:38

    PALMERSure. So as you say, LIBOR is a rate that's used to set as a benchmark that's used to price trillions of dollars worth of derivatives and loans around the world. It had its roots decades ago in an agreement by a trade body called the British Bankers' Association to come together and allow member banks to submit their estimates of how much it would cost them to borrow if they were borrowing from each other, from other banks.

  • 10:09:09

    PALMERAnd over time, this has developed into a system to set this LIBOR rate for a number of currencies and for a number of durations of borrowing terms. So every day, you have panels of banks that submit their estimates of how much it would cost to borrow. All of that -- all of those estimates are given to the BBA, the British Bankers' Association. They perform some statistical wizardry on it. They basically strip out the outlier estimates, the top and the bottom.

  • 10:09:41

    PALMERAnd then they average what remains, and that number is LIBOR. And then that gets flashed around the world this 11 a.m. U.K. time every day and is used to price all of these instruments.

  • 10:09:54

    REHMAnd you got a number of banks participating not only Barclays, the Royal Bank of Scotland, but you've got JPMorgan Chase, Citibank here on the United States. Andrew, talk about why this story is hitting such a deep nerve in the U.K.

  • 10:10:19

    PALMERWell, the obvious reason is that a British bank is the first one to have been hit by the storm. So as you say, Barclays is a very big, high street bank, mainstream bank here. It decided -- it seems erroneously that it would be in its own best interest to come out first, to settle with the regulators and to offer full cooperation. And the result of that is that they are the first bank in the lime light.

  • 10:10:47

    PALMERAdditionally to that, it was led by Robert Bob Diamond who had become something of a toxic figure in British political life. Bankers are not very popular over here anyway. Mr. Diamond is a brash, very well-paid American banker whose stock was very low. So there's virtually no goodwill towards him in the system when this story broke. And then, thirdly, what -- we have a political environment in which both parties jump on to this as a way to cause discomfort for their opponents.

  • 10:11:24

    PALMERThe ruling Tory, conservative liberal Democrat coalition, see this as a way of saying that things were not working as they should before the crisis when labor were involved and were running the country. And labor, by contrast, see this is a way of discomforting the conservatives by calling for stronger regulation, and the conservatives naturally won. So all of those things together mean that Barclays in Britain is where the story rages now, but my strong sense is that it will affect other banks and other jurisdictions.

  • 10:12:00

    REHMAnd do you think that the United States has just been slow to pick up on the importance of this?

  • 10:12:10

    PALMERYes. I think that's right for a number of reasons. The panels of banks that submit their estimates are global in nature. So as you mentioned, very, very big American names, Swiss names, German names are involved in this process. There is evidence from the probe into Barclays that other unnamed banks were cooperating with their traders. We know from other probes that are going on around the world, in Canada for example, Switzerland, Japan and other places, that this involved collusion across banks.

  • 10:12:44

    PALMERSo other big names will be involved. And perhaps, more importantly, because LIBOR is a benchmark global rate, that means that investors and borrowers are exposed to this rate around the world -- not at least in America. And if it was being manipulated or if it was inaccurate, then it affects the returns to those people or the cost of their paying for their borrowing. So this has implications for people with financial exposures around the world.

  • 10:13:12

    REHMAnd, of course, you mentioned the British Bankers' Association. It had been asked by its members to assist in setting the rate. We invited a representative of the BBA to be on. They gave us this statement when we asked them to comment about the LIBOR scandal. They said, "We are legally constrained and had been instructed by our lawyers not to give interviews." It would seem that you've got Barclays admitting to manipulating the rate. How did they do that, Andrew?

  • 10:13:59

    PALMERSo there are two phases to this scandal. The first pre-crisis phase, which in the probe into Barclays started in 2005, involved traders within the bank telling the people who submitted the estimate of their borrowing rates to the BBA to basically move that rate in a way -- it could be up, it could be down. But the objective was to help their bottom line. So they would have positions -- these are the traders. They would have positions which would benefit from a different LIBOR submission.

  • 10:14:33

    PALMERSo that was the first way that the rate was moved, and that was an attempt to manipulate the outcome. The final rate was being rigged. The second phase of the crisis -- of the LIBOR scandal came during the crisis, and that was 2007 on. When LIBOR was started to be looked at by the media, by regulators, by politicians, as a barometer of bank's health, if you had a high LIBOR estimate, that was signaling to many people that it was costing you more to borrow from other banks and therefore your credit worthiness and your stability was in doubt.

  • 10:15:11

    PALMERSo what happened then was that banks -- and we don't think that Barclays was the only one -- banks started to lowball their LIBOR submissions. They put in inaccurate and deliberately low estimates in order to signal that their credit worthiness was not as bad as people might think.

  • 10:15:29

    REHMAndrew Palmer, he's finance editor for The Economist. He joins us from London. Turning to you now, Francesco Guerrera. What can we conclude about the culture at the bank from the emails and memos during this whole period?

  • 10:15:52

    GUERRERAThe emails really make a very, very interesting reading. They present, unfortunately, very unflattering picture of the culture on Wall Street and in the city of London. And from what we know, we think that they're not, by no means, an isolated case. The Barclays was just one of the banks that was doing this. The emails really paint the picture of conflicts of interest between the trading operations of this banks, and the people were charged with setting the rate to at least submitting this -- the rate to the panel that set LIBOR.

  • 10:16:24

    GUERRERAAnd that's something, really, that shouldn't have happened because of the obvious conflicts. The other thing that we can see is that there was no compunction about boasting about this. It was very -- it was all very well-recorded. The regulators have shown us that the bankers and the traders were actually very open about what they were doing and influencing the rate setters, the people who shouldn't be influenced was pretty much common practice.

  • 10:16:49

    GUERRERAIt happened according the Financial Services Authority 173 times in a period of about three, four years. That's just Barclays. And as we have seen from the emails, we've also seen a number of effective collusion between different banks who were operating in this panel. So overall, I think it's a picture of a Wall Street that really didn't want to see that we thought had gone away after the crisis of the past few years, and that seems to be stubbornly there.

  • 10:17:18

    REHMBut you also got the Bank of England and Paul Tucker involved senior government officials, and Tucker is scheduled to testify before parliament today, Francesco.

  • 10:17:34

    GUERRERAYes. This is one the -- perhaps most bizarre twist in the whole saga. Just as Bob Diamond resigned from Barclays last week, he released an email that he had written after a conversation with Paul Tucker, with the deputy governor of the Bank of England, so a senior figure there, and he recalls a conversation that they had in 2008, in October of 2008, in which Mr. Tucker questioned the rates that Barclays was giving to the LIBOR panel and said the senior Whitehall officials, so these are the west wing of Britain if you like, were questioning and saying that Barclays was being too high.

  • 10:18:11

    GUERRERAIn other words, was being out of the pack. And then -- and that's a matter for contention that Mr. Tucker will no doubt tackle today when he talks to parliamentarians. Then it looks like Mr. Tucker said to Mr. Diamond to try and lower those rates. It was a direct instruction, but that's something that appeared to have happened.

  • 10:18:32

    REHMFrancesco Guerrera, he is editor for Money & Investing at The Wall Street Journal. When we come back, we'll talk further and take your calls.

  • 10:20:04

    REHMWelcome back. We're talking about the LIBOR scandal certainly spreading in Great Britain but also here to the United States. Joining us now by phone is the chairman of the Commodities Futures Trading Commission, Gary Gensler. Good morning to you, sir. Thanks for joining us.

  • 10:20:28

    MR. GARY GENSLERGood to be with you, Diane.

  • 10:20:30

    REHMWhy did it take a U.S. regulator to leave the charge against a problem that was going on in the U.K.?

  • 10:20:40

    GENSLERWell, you're kind to say that. The Commodities Futures Trading Commission oversees very large markets that rely on this benchmark. We oversee derivative markets, which are called the futures and now, most recently, swaps. But this rate, the London Interbank Offered Rate, is used by so many people in America for their mortgages and credit card lounge, but also it's used by these contracts -- these futures contracts. And at the core, they have to honest.

  • 10:21:14

    REHMSo the suspicions, though, were first raised by The Wall Street Journal. Is that correct?

  • 10:21:22

    GENSLERWell, there were articles in the spring of 2008 by The Wall Street Journal and I think Bloomberg and possibly others. And a very talented career staff and our division of enforcement started to take a look more broadly and tried to learn so that these be honest rates.

  • 10:21:41

    REHMBut, you know, Chairman Gensler, it would seem that the settlement that Barclays has agreed to pay -- what does that say about the entire culture of global banking?

  • 10:21:58

    GENSLERWell, we thought this was a very significant problem. It was pervasive at Barclays. It involved four years. It involved motivations for profit to their trading desk as well as to manage the reputation, and this should not be allowed. So there was the most significant penalty, this 200 million that we've ever settled. But also we arranged with them certain undertakings that they would be more fact based to their submissions in the future. This rate just cannot be overstated how important it is to the public and should not be attempted to be manipulated.

  • 10:22:38

    REHMOf course, regulation has been one of the issues at the heart of the presidential campaign, and you said that the public should not be left at risk of unregulated bodies. Why is adequate regulation important for the public to feel, to know and to understand?

  • 10:23:04

    GENSLERWell, Diane, I have three daughters, and when I hand one of them the keys to the car, I sleep better at night knowing that there are traffic lights and stop signs and even cops on the road to help us protect against drunk driving. I mean, similarly, markets need some common sense rules, and I think as a nation, we've benefited since the 1930s for common sense rules in our securities and the futures market.

  • 10:23:31

    GENSLERAnd here is a case where with common sense rules, basically, you have to be honest when you pull together a rate that's supposed to be used by so many people in America. And we brought, I think, a strong action against Barclays, and we'll be vigorous moving forward.

  • 10:23:51

    REHMBut in the current political climate, realistically, what is going to be done to restore public faith in these institutions considering you've now got this practically, you know, it's not just here in the Unites States, it's broad in England, the Bank of England itself, the government of England may be involved? You know, people here have lost faith.

  • 10:24:26

    GENSLERWell, I think our small agency, the Commodities Futures Trading Commission, we're going to continue the reform effort that Congress laid out in Dodd-Frank. We're well over half way to the financial reforms we need in Dodd-Frank. We're going to vigorously enforce the laws. This LIBOR case is one example of that. And we're going to work with Congress to be well-funded 'cause right now we're underfunded.

  • 10:24:52

    REHMDo you think you're going to get the funding you need?

  • 10:24:56

    GENSLERWell, that's an excellent question. All we can do here is advocate for that funding, and the president's been fabulous in pushing for the funding as well. We're taking on markets that are vast. There's $20 of these complex contract swaps and futures for every dollar in our economy, and we didn't have oversight of these markets just two years ago and four years ago, and we saw what the crisis meant.

  • 10:25:23

    REHMMichael Greenberger, you and I have talked about these problems a number of times. How do you think that this whole LIBOR issue is going to affect people here in this country as they go to their own banks to borrow? What about interest rates there?

  • 10:25:47

    GREENBERGERI think it's going to have a very big impact. The point you and the -- Andrew Palmer from The Economist made earlier was this seems to have resonated more in the United Kingdom than it has in the United States. But I think we've only seen the tip of the iceberg here. The CFTC's settlement order indicates that the Barclays traders were coordinating with other banks, and certainly Bob Diamond, the CEO -- former CEO of Barclays, in his testimony was pretty adamant that this was par for the course and not an exceptional activity.

  • 10:26:26

    GREENBERGEROne thing that I would disagree with Andrew Palmer about, he's -- Barclays has been very candid here. They did their own study. They provided a lot of the evidence that led not only the CFTC, which did a fabulous job, but the Department of Justice also got $160 million settlement out of this to avoid prosecution. I think, when all is said and done here, Barclays will be seeing to have got out of this at a very good price, getting the first to the door.

  • 10:26:58

    GREENBERGERAnd I think when all is said and done, not only will the American public know what LIBOR is and not only will they begin to understand the importance of the Commodity Futures Trading Commission, which now has $300 trillion jurisdiction of the most critical financial instruments that need to be regulated, but there will be other banks that will be much more prominent, much more tied to the United States that I believe will come to the fore.

  • 10:27:24

    GREENBERGERAnd, by the way, it's not just this LIBOR thing. JPMorgan Chase has obviously been on the front pages because of the so-called London Whale trade, and you and I, Diane, talked about that back in May. And at the time, Jamie Dimon was saying this $2 billion, maybe $3 billion, we're expected to hear this week that it may be as high as $9 billion.

  • 10:27:46

    GREENBERGERBut not as high on the radar screen, but I think very significant is the Federal Energy Regulatory Commission, a companion agency to the CFTC, has embarked an investigation where JPMorgan Chase is alleged to have manipulate the natural gas market and, therefore, electricity prices that American consumers pay. And if that sounds familiar, it is because that's exactly what Enron was charged with in the 1999, 2000 blackout.

  • 10:28:15

    GREENBERGERSo we're starting a conversation today that may seem strange to the American public, but I think the term LIBOR and the importance of the Commodity Futures Trading Commission and the need for bank oversight will become very, very clear to the American public.

  • 10:28:31

    REHMMichael Greenberger, he is professor at the University of Maryland School of Law. Chairman Gensler, Michael mentioned Jamie Dimon and JPMorgan Chase. We've heard that the chair of Barclays has now stepped down. Yet Jamie Dimon, speaking to the Congress, was given really quite polite and gentle treatment. Do you expect him to say more about what Jamie -- JPMorgan Chase has been up to and the fact that, as Michael said, the amount of losses could go as high as $9 billion?

  • 10:29:23

    GENSLERDiane, we've actually publicly announced some time ago that we, along with other federal regulators, have an investigation about the matters related to JPMorgan Chase, this chief investment office and that trading of credit derivative products. So I'm not really able to say more on that because it's an open investigation. But I do believe that every quarter, a bank does lay out their profits and losses and that JPMorgan has even publicly said that they would say more as they -- this develops.

  • 10:29:59

    REHMDo you think that that's going to mean more specific and perhaps slightly tougher questions for the chair of JPMorgan Chase, chairman?

  • 10:30:13

    GENSLERI think certainly the public will learn more as time moves on. I look at the matter as a reminder about how interconnected our global financial system is and that U.S. banks and U.S. financial institutions, even when operating out of London or offshore, that the risk can come crashing back here at home. And we have to make sure that our American taxpayers don't stand behind entities ever, but also make sure that if there's risk offshore, that they are under the common-sense rules that were laid out for financial reform.

  • 10:30:52

    REHMAndrew Palmer, let me turn back to you. What would it mean for British taxpayers if the Royal Bank of Scotland is involved?

  • 10:31:06

    PALMERWell, British taxpayers already pretty much own the Royal Bank of Scotland. It's 80-plus percent. So, you know, we've already taken on that burden. I suppose that the answer to that question -- and indeed the nature of the burden for other banks -- depends on the amount of litigation that comes. You know, Chairman Gensler and other regulators have imposed very large fines, but they're not large enough to upset the stability of the banks and to eat into capital.

  • 10:31:37

    PALMERIt is possible that we're going to see a wave of litigation, and we know that lawyers are very, very busy right now in London, in other jurisdictions, putting together client lists of people who might have suffered from this. So it's possible that we will see a lot of cases which lead to a very, very large bill for the banks that starts to bring into question capital adequacy and therefore requires more capital to come in, which might have to come from taxpayers.

  • 10:32:06

    PALMERI think we're a long way off knowing that yet, but that's where the threat to taxpayers comes at the moment. It's that litigation threat and how that affects the banks.

  • 10:32:15

    REHMI see. And, Francesco Guerrera, if, in fact, interest rates were being kept down, why should U.S. consumers, unless they end up footing the bill for this, why should they be concerned?

  • 10:32:35

    GUERRERAI think they should be concerned about the whole system that they live in and the ability of banks to frankly rig the most important interest rate in the world, whether up or down, in a way, it's irrelevant. Also, 'cause the movements are so small that consumers are unlikely to have suffered or benefited that much from the rigging. The key issue here is the principle, and the principle being that these banks were operating as a cartel, a recognized cartel, but also use the cartel structure to rig the interest rate in their favor.

  • 10:33:06

    GUERRERAAnd that's something that consumers, investor and everybody else should be really worried about. I would take issue -- one thing that Professor Greenberger said about Barclays having come out with -- from this with a good price. The price of Barclays is pretty steep, and I don't mean just the $450 million that they paid. They also lost the entire management team and frankly a big chunk of their reputation.

  • 10:33:28

    GUERRERAAnd so it'd be interesting to see if other banks settle, what will happen to their management team? So will the CEOs choose to follow Bob Diamond down the path of the unemployment if they are found to be settled?

  • 10:33:41

    REHMAnd you're listening to "The Diane Rehm Show." Chairman Gensler, does the CFTC's role in the LIBOR scandal re-enforce the case against congressional Republicans for a strong enforcement budget?

  • 10:34:02

    GENSLERWell, I think it is absolutely necessary to fund the CFTC at higher levels. We're terribly underfunded. We just have about 10 percent more people today than we did 20 years ago. And the markets we oversee have grown so significantly. I liken it to if the National Football League were to grow eightfold and you had eight more games every -- eight times the number of games on the weekend and you had no more referees, you'd have mayhem on the field, and fans would lose confidence.

  • 10:34:38

    GENSLERWe now oversee markets that we need to have investors have confidence in, and it's a good investment for the American public. I hope that just when people watch what we do, they realize that it's good reform.

  • 10:34:54

    REHMAndrew Palmer, do you believe that this scandal could lead to criminal probes and even jail time?

  • 10:35:05

    PALMERI believe so, yes. I'm less well placed to talk about the American system. But we know that the Serious Fraud Office here in the U.K. is now looking at the traders involved at Barclays, with a view to potentially pursuing criminal prosecutions, and jail would be the end result of successful prosecutions. That's my understanding. So, yeah, so I think imprisonment may well be the course we're on.

  • 10:35:30

    REHMAnd, Michael Greenberger, to what extent do you believe this EU banking crisis may have had an impact on the euro crisis and even on the U.S. recovery?

  • 10:35:46

    GREENBERGERWell, that's an interesting question. Derivatives have had a cause for our financial crisis in 2008. For the euro crisis, interestingly enough, many of the countries got admitted into the EU by investing in the so-called interest rate swaps, which made it seem that their liabilities were substantially less than they were because they swapped profits for liabilities over time. And therefore, for example, Greece in 2007 said, hey, our debt is twice what we thought it was once you peel apart all the swaps that we've entered into from these banks that are setting LIBOR.

  • 10:36:32

    GREENBERGERBut I do think this is -- and by the way, the European Union is up in arms. They're meeting today about this. There's something called Euribor, which they established with banks along the same system. Again, a banking association is in charge of it, and there's a lot of dysfunction in that market. So the EU, Germany, Japan, Canada, everybody is looking at this. I think this is a separate problem, but a serious problem, and there's no doubt we're talking about litigation.

  • 10:37:05

    GREENBERGERAlready, before this thing has really hit the radar screen, there are a series of lawsuits that have been coordinated in the New York federal district court. And everybody from Charles Schwab to the city of Baltimore is suing for hundreds of millions of dollars, and they are eligible for triple damages in some case. So this is going to be a very, very big issue going forward.

  • 10:37:29

    REHMMichael Greenberger of the University of Maryland. Gary Gensler, he's chair of the Commodities Futures Trading Commission. I wonder, Chairman Gensler, can you stay on with us for a few more moments?

  • 10:37:46

    GENSLERIf it's just a few moments.

  • 10:37:47

    REHMThat would be great. Thanks a lot.

  • 10:40:04

    REHMAs we talk about the growing scandal involving the LIBOR as well as British and U.S. banks, let's open the phones and go to Jodie in Margate, Fla. Good morning to you.

  • 10:40:23

    JODIEGood morning, Diane. Nice to have -- speaking to you.

  • 10:40:26

    REHMThank you.

  • 10:40:29

    JODIEI am so curious about -- I know that they are being criminally prosecuted and they are -- but all banks, including Japan -- also, why are they -- well, how does it affect the small banks?

  • 10:40:47

    REHMFrancesco Guerrera.

  • 10:40:50

    GUERRERASo we're still counting how many banks are being investigated, but we can say that it's between 16 and 43, I think, is fair. So you can imagine all the big banks in the world, in fact. The way it affects the small banks it's -- because the LIBOR rate is used by just about everybody to price their loans, their derivatives, their financial services, products so it was imagined like a huge benchmark that everybody price their securities off.

  • 10:41:17

    GUERRERAAnd so if that was wrong or indeed rigged, everybody had priced securities for four, five years wrongly, and that affects loans by the small banks as well as, you know, the big, complex derivatives that the big banks sell.

  • 10:41:30

    REHMAnd here's a question for you, Chairman Gensler, from Jan here in D.C., who wants to know, "Will anything change for those of us with LIBOR-pegged adjustable rate mortgages? The recent low LIBOR rates were part of what reassured me that norm was appropriate for my finances. Now I'm worried these bankers' lies will wind up hurting me. Am I stuck with the LIBOR peg?"

  • 10:42:08

    GENSLERWell, I think that Jan and millions of another Americans will benefit that whatever the bankers are putting in will be honest and there's integrity to those rates. Of course, this is just one action, one bank, but we will be vigorous in enforcing the laws to ensure that that peg, the LIBOR peg in our mortgage accurately reflects what it's supposed to be, the borrowing rate between these banks in London.

  • 10:42:37

    REHMAll right. To Cleveland, Ohio. Good morning, James.

  • 10:42:42

    JAMESHello. I was just curious -- and, by the way, thank you for having me on the show.

  • 10:42:48


  • 10:42:48

    JAMESI was just curious who exactly, besides the bankers, would stand to profit from the manipulation of the LIBOR rate.

  • 10:42:58


  • 10:43:00

    GUERRERAThe way it was worked is the bankers -- or the traders, in fact, told the bankers who are putting in the LIBOR submission to put out very high or very low submission depending on what positions they have, depending on what suited them for their particular trade. And we have seen both the CFTC and the FSA studies suggest that they benefited from it when the bankers were successful in influencing that rate.

  • 10:43:29

    GUERRERAIn addition to that, the traders' compensation was also linked to their positions and their profits. So if they made a profit, their compensation went up. So it was a chain that went from the LIBOR rate to the trader's paycheck.

  • 10:43:42

    REHMGary Gensler, I know you have to leave us. I have one last question for you. This about the city of Oakland, which has voted to abrogate contracts written with Goldman Sachs based on possible fraudulent rate setting related to the LIBOR scandal. How will this resonate and move through the world of municipal lending?

  • 10:44:13

    GENSLERWell, I think it is correct, Diane. Even municipal governments sometimes base their borrowings on LIBOR. LIBOR is the mother of all benchmarks, if I can say that, and so it's so critical that it be honest and have integrity and that an agency like the CFTC be well-funded and be able to be an effective cop on the beat. I don't know the specific case that you raised about the city of Oakland, but what we're looking out for is all the American public, small banks, mortgage holders, credit card holders and municipalities that need to rely on this rate.

  • 10:44:54

    REHMGary Gensler, chairman of the Commodity Futures Trading Commission, thank you so much for joining us this morning.

  • 10:45:04

    GENSLERThank you, Diane, for having me. It's a true honor.

  • 10:45:06

    REHMAll right. Thank you. And now let's go to Boston, Mass. Good morning to you, Howard.

  • 10:45:14

    HOWARDGood morning, Diane. How are you?

  • 10:45:15

    REHMFine. Thanks.

  • 10:45:16

    HOWARDAnd hello to your guests. I'd like just to reflect back that I think -- well, first of all, I believe most of the bankers (unintelligible) are living in their own bubbles. I happen to believe the only solution to our problems worldwide is if we retreat back to the Glass-Steagall Act, which was done away with in the Clinton administration. I think we have so little trust in banks. And I have no trust in the LIBOR. I have no trust in any of the exchanges in Washington, the CFT, the SEC, what have you.

  • 10:45:51

    HOWARDI think the American public -- most of the American public share my views. We were let down (unintelligible) and I don't think it's we're going to see a regaining of trust until we see prosecutions. But, unfortunately, I don't think that prosecution is going to happen.

  • 10:46:06


  • 10:46:07

    GREENBERGERWell, I think the prosecutions here are a big surprise. Again, the reason I think Barclays was smart to be first is they bought of the Justice Department prosecutions for $160 million, and we're talking about trillions of dollars of transactions. I am -- as you know, Diane, I have been very critical of the Department of Justice for not bringing more prosecutions for financial crimes.

  • 10:46:32

    GREENBERGERThey did get a statement of facts out of Barclays in this that is really quite serious and I think will -- even though they've let Barclay's go for 160 million, will be the basis not only of further criminal prosecution in the United States by both the federal government and states, but will be the basis of many, many private law suits. But there is no doubt about it, whether it's the serious fraud office in the United Kingdom, whether it's the German regulators, whether it's our Justice Department, the way to get this stopped is for people to end up in jail.

  • 10:47:09

    GREENBERGERThat is the therapy. Codes of conduct don't do the trick. Civil penalties don't do the trick. And I expect that this will unwind in a way where there will be no other basis but to bring serious prosecution...

  • 10:47:23

    REHMFrancesco, would you agree?

  • 10:47:26

    GUERRERAIn principle. I think in practice, the difficulty here is that it's -- and this has been proven from the prosecutions since the financial crisis -- very, very difficult to prove these crimes. And there have been some major setbacks by the prosecutors in pursuing crimes related to the financial crisis of 2007 and 2009. I think in this case, the justice will be done through the private lawsuits, which we will see a lot of. And let's not underestimate the serious fraud office in the U.K.

  • 10:47:56

    GUERRERAThey gave themselves a very tight deadline, about a month, to come out with criminal prosecutions against individuals involved in this case. So it's possible that we will see something very quick on this front.

  • 10:48:07

    REHMBut, Francesco, who are the individuals who might bring these lawsuits?

  • 10:48:15

    GUERRERAThese are, virtually, every investor who ever used LIBOR, and because we just established that LIBOR is the mother of all interest rates will -- anybody who's ever priced their security off LIBOR, bought a security price off LIBOR can bring the cases. Some lawsuits are already outstanding, thanks to our reporting in 2008 onwards. People have already brought lawsuits. This materially strengthens their case because if you look at the facts established by the DOJ, the CFTC and the FSA in the U.K., they are pretty damning facts.

  • 10:48:46

    REHMAll right. To Middleburg, Va. Good morning, Tom.

  • 10:48:51

    TOMHi, Diane. Actually, my question was just answered. I just want to make one quick comment that it's -- I think it's appalling the inequity in our justice system that some poor kid in the ghetto goes to jail for years selling a few ounces of pot. These guys caused financial mayhem to retirement funds in individuals, and they're rarely prosecuted. And I guess it's because it's difficult to get them. But I really feel that they should be prosecuted, and that will cause a real deterrent to further fraud.

  • 10:49:20


  • 10:49:20

    GREENBERGERRight. Yeah. I -- boy -- men, I mean, it's sort of Victor Hugo all over again, stealing a loaf of bread, and you end up life in prison. I think that this -- if you look at the settlement papers here, the evidence is overwhelmingly and damning, and there were some unsuccessful prosecutions by the Department of the Justice in the early financial crisis. You are now going to have juries that are much more sensitized to the damages that is being done, and I believe there will be successful prosecutions brought forward.

  • 10:49:54

    REHMHere is a tweet. "Is this an example of self-regulation going wrong?"

  • 10:50:00

    GREENBERGERAbsolutely. We were entrusting the banks to have a self-interest in this to just report, and it wasn't even reporting on historical loans. They were estimating what they would have to pay. And in some of these currencies and maturities, they weren't even participating. So it's very easy for a trader to say, hey, I can make a couple of million dollars if you lower the LIBOR rate. Just put in a low thing if it wasn't based on history they were estimating. And that's where -- this was just self-regulation gone crazy.

  • 10:50:33

    REHMHere's an email from Brian in Dallas, Texas. "Why was the scandal made public? Are there potential or any legal grounds for a massive class-action lawsuit by investors and borrowers alike? If not, why not?" Francesco.

  • 10:50:58

    GUERRERAI think that people will definitely try for a class-action lawsuit. It's difficult to tell right now what we will have. What we'll see now is a series of lawsuits, private lawsuits, and some of them may try to be classified as class. What we'll also see in the next few months is other settlements by other banks, so more may come to the surface. We understand that Barclays wasn't the worst offender in this case.

  • 10:51:20

    GUERRERAIt was just the first and the one that cooperated the most, frankly, so the worst could still be to come on this. And so there'll be more grounds for people who want to bring lawsuits and in particular, class-action lawsuits.

  • 10:51:32

    REHMAll right. To West End, N.C. Good morning, Brenda.

  • 10:51:37

    BRENDAYes. Hello. How are you?

  • 10:51:39

    REHMFine. Thank you.

  • 10:51:40

    BRENDAGood. I was wondering, does this affect people who have checking accounts with Barclays U.K.?

  • 10:51:48


  • 10:51:49

    GREENBERGERThe short answer is I don't think it directly impacts your checking accounts. I mean, I think Barclays is still a stable bank, and your checking account is fine. It may be if you have an interest rate on your checking account that LIBOR is factored in there. Of course, thanks to Gary Gensler and the CFTC, Barclays now has to be much more honest in setting their LIBOR rates. So I wouldn't worry about that.

  • 10:52:14

    REHMAnd do you agree with that, Francesco?

  • 10:52:17

    GUERRERAI think that's right. I think you can be safe if you have a Barclays checking account. The main thing now is to see whether the rate is set in a proper and clean manner.

  • 10:52:27

    REHMAnd who's going to take over doing that while all this is going on?

  • 10:52:33

    GUERRERAI think it's very important -- the answer is not being why reported. It's very important what the CFTC has forced Barclays to do, which is a very simple thing, is to say no longer base your submission on an estimate that you have. Just do it with what you see in the market. Just tell us the truth of how much it cost you to borrow in the market. Now, if everybody does that and everybody will have to do that, we'll have a market-based rate, and that is the rate that we want.

  • 10:52:57

    REHMI hope everybody does that. You're listening to "The Diane Rehm Show." Michael.

  • 10:53:04

    GREENBERGERYeah. I just want to say something that's been implicit but should be made explicit. The CFTC is one of the smallest financial regulators in the federal government. As Gary Gensler said, the chair, they have about 600, 700 employees, which is nothing. President Obama has sought an extra $100 million for them, raising their appropriation from $200 million to $300 million. A hundred million dollars, and look what they did on this Barclays thing. The Republicans are dead set against it.

  • 10:53:31

    GREENBERGERTheir view is the way we let these banks go free is to put handcuffs on the cops. The president has threatened to veto the farm bill unless he gets the money that is needed for the CFTC and I think...

  • 10:53:43

    REHMBecause that's within the farm bill.

  • 10:53:45

    GREENBERGERYes. Yes, that's -- that is within the farm bill.

  • 10:53:48

    REHMAnd why is it within the farm bill?

  • 10:53:50

    GREENBERGERWell, that's a historical anomaly because the commodities were one-time-only farm products. We have long since obviously passed that. So the agricultural interests are predominant here, but it is in the farm bill. The president has said, if you don't get $100 million in a multi-trillion dollar budget -- $100 million, they want to move -- the president wants to move them from 600 employees to 1,100 employees.

  • 10:54:19

    GREENBERGERAnd the Republicans want them down to 500 employees. What does 500 employees mean? It means we will see this kind of robbing and thieving going wild unless we put the cop back on the beat.

  • 10:54:32

    REHMFrancesco, how much do you think this LIBOR scandal is likely to influence members of Congress as the farm bill moves forward?

  • 10:54:45

    GUERRERAI think the timing couldn't be better for the Commodities Futures Trading Commission just as they're fighting this (word?) battle to get more money. I would point out just a couple of things. They did a great job, but the original tip came from reading the newspapers -- happens to be my newspaper -- and then, of course, they followed up. And as they did themselves admit, they had to count on extensive corporation for Barclays, like the emails that we talked about came from Barclays.

  • 10:55:12

    GUERRERABarclays gave them the hard drive, and then they did their job. So they're still facing a lot of difficulties improving these cases, and they have to cooperate with the banks, which inevitably leads to the settlements, right? So they don't find them guilty because they need them. So it's a very difficult enforcement process, and I'm not sure that having more people will really resolve that. They may be able to pursue more cases. But the way they pursue them, it will be very similar to what they do now, which is relying on the banks.

  • 10:55:40


  • 10:55:40

    GREENBERGERWell, this -- as a former Justice Department official, this is a classic. They've got a settlement and a cooperator, and you move on up the line. Barclays -- it's in Barclays' interest now to report further and what other banks did. As Mr. Diamond's testimony from the parliament, he's anxious to do that. And this is how you start the prosecution going forward.

  • 10:56:01

    REHMWhat do you think is going to happen with JPMorgan Chase and Jamie Dimon? Michael.

  • 10:56:09

    GREENBERGERI think they're going to come under much more pressure. I think the embarrassment of the way Congress treated Jamie Dimon, like a king, is going to end. The American public just isn't going to stand for that. It made parliament, which was criticized in the United Kingdom as to being too light on Bob Diamond, look like the Spanish Inquisition. And that's -- a lot of that is -- we're in election season. People are looking for campaign contributions, and only the American people can cause Congress to wake up and be serious about this.

  • 10:56:42

    REHMMichael Greenberger, he's professor at the University of Maryland School of Law. He's former director of trading and markets at the Commodity Futures Trading Commission. Francesco Guerrera of the Wall Street Journal, Andrew Palmer joined us from London. He is with The Economist. And, of course, you heard Gary Gensler, chairman of the Commodities Futures Trading Commission. Obviously, more to come on this story. I'm glad you heard it here today. Thanks for listening, all. I'm Diane Rehm.

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