Regulators in at least seven countries are looking into the Libor interest rate scandal. New testimony and what it may mean on both sides of the Atlantic.


  • Simon Johnson Professor of entrepreneurship at MIT's Sloan School of Management, senior fellow of the Peterson Institute for International Economics, former chief economist of the International Monetary Fund, and author of "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You."
  • Joshua Gallu Reporter, Bloomberg News.
  • David Enrich Reporter, The Wall Street Journal.


  • 10:06:56

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Members of Congress and Britain's parliament are asking questions about bankers accused of manipulating a key interest rate before, during, and after the 2008 financial crisis. More than 10 U.S. and European banks are alleged to have been involved. Joining me to talk about how this scandal continues to unfold: Simon Johnson, professor at MIT's Sloan School, Joshua Gallu -- he is reporter at Bloomberg News -- joining us from a Dow Jones studio in London, David Enrich.

  • 10:07:41

    MS. DIANE REHMHe's a reporter for The Wall Street Journal. I look forward to hearing your questions and comments this morning. Join us on 800-433-8850. Send us your email to Join us on Facebook or Twitter. Good morning to all of you.

  • 10:08:06

    PROF. SIMON JOHNSONGood morning.

  • 10:08:06

    MR. JOSHUA GALLUGood morning.

  • 10:08:07

    MR. DAVID ENRICHGood morning.

  • 10:08:08

    REHMGood to have you all with us. Josh, let me start with you. What kinds of questions is Ben Bernanke likely to be asked about LIBOR today as he testifies?

  • 10:08:25

    GALLULawmakers are going to primarily want to know what the Fed knew and when it knew it about what was happening with the rate during the crisis time. There are basically two prongs to the investigation. One is whether traders were manipulating the rate based on profits they wanted to take on derivatives positions, and then there's another side which involves whether banks were lowballing the rates during the financial crisis in order to appear stronger than they actually were.

  • 10:08:56

    GALLUThat's the side that Bernanke is going to get questions on, and it'll basically be, what did they know about bank submissions at the time, whether they were improper, what did they do about it at the time, and also, what were their communications with the banks during that time? There's already been an allegation in the Barclays case that the Bank of England was actively engaged in speaking with them about submitting lower rates to appear stronger than they actually were.

  • 10:09:25

    REHMDavid Enrich, talk about the questions that Barclays' CEO Diamond got before parliament.

  • 10:09:36

    ENRICHWell, everyone's trying to figure out the degree to which this was just simply banks behaving badly or if this was also -- if there is an element of either regulatory pressure for them to do what they did or at least regulators being complicit in what they did.

  • 10:09:52

    ENRICHAnd Bob Diamond, who until recently was the CEO of Barclays which is so far the only bank to settle these allegations, was -- had a phone conversation with a very senior official of the Bank of England back more than -- or almost four years ago now in which that Bank of England official appeared to encourage him or at least open the door for him to understate their -- the borrowing costs, which are a key component of this index known as LIBOR. The...

  • 10:10:19

    REHMSimon Johnson, I get the feeling -- and I'm sure most of our listeners do -- it's a big scandal, but you argue that Barclays is just the low-hanging fruit. How big a scandal are we talking about?

  • 10:10:37

    JOHNSONI think it's very big, Diane. There are six banks that are almost all these LIBOR panels. This is the groups of banks that report interest rates from which they construct these key reference rates. And there are 18 banks in total that are in some way or shape involved three big U.S. banks: JPMorgan Chase, Citigroup and Bank of America.

  • 10:10:56

    JOHNSONWe know they're all under investigation. Barclays cannot have rigged these rates by itself. It's a collusive activity. That's what they're accused of, and that's what they admitted to in the agreement with the Commodity Futures Trading Commission.

  • 10:11:10

    REHMAnd what you're saying is that they would have rigged it not only with the other banks involved but, as David Enrich just said, talking with officials of the Bank of England itself?

  • 10:11:26

    JOHNSONWell, to go back to the way Josh broke it down at the beginning, there are two quite separate allegations. One is manipulation to benefit trading positions, presumably mostly in derivatives, done by individual traders and representing a total breakdown of control within Barclays and perhaps other big banks. Nobody thinks that the Bank of England or the New York Fed or anyone else was complicit or agreeing to that, although they may have known about it, which is an important point.

  • 10:11:51

    JOHNSONThe second issue is what happened during the crisis. Was there a nudge and a wink from the Bank of England to Barclays saying, yes, you can report a lower rate? I'm actually skeptical, and there's a split within Barclays management. Mr. Diamond is saying one thing, his former chief operating officer, Mr. del Missier, is saying something different. So we'll see that comes out of that.

  • 10:12:11

    JOHNSONBut there are certainly big issues about what the regulators knew when they knew it, and why they didn't act. Why didn't they take any action to either protect consumers and investors or to protect the safety and soundness of the system?

  • 10:12:24

    REHMBut you argue that it was actually the public outcry and not the officials of these banks themselves that brought this to light.

  • 10:12:36

    JOHNSONWell, the officials brought it to light. The CFTC pursued this and should get credit, I think, relative to the British authorities who dragged their feet. Until recently, those British authorities, the financial supervisors in the U.K., were willing to wave Barclays through with a very mild slap on the wrist. It was the political backlash to that which created this era -- this aura of scandal. And then Barclays started to push back, and Barclay started to accuse the Bank of England of being responsible for the whole mess. And then they told Bob Diamond and his colleagues to take a hike.

  • 10:13:08

    REHMSimon Johnson, he is professor at MIT's Sloan School of Management. Joshua Gallu, he's a reporter for Bloomberg News. On the line with us from London is David Enrich, a reporter for The Wall Street Journal. I do look forward to hearing your questions, comments. Join us on 800-433-8850. Joshua, how does all this affect you and me and everybody listening?

  • 10:13:46

    GALLUWell, that's a very difficult thing to quantify. Hundreds of trillions of dollars of securities and financial instruments are linked to LIBOR rates, which, again, these are the lending rates that banks use to finance their own operations. Whether those rates go up or down has an impact on what we pay for anything, from credit cards to car loans to mortgages, so there is a -- just a great swath of retail products that are tied to this.

  • 10:14:20

    GALLUAnd beyond that, these are the rates that are used in interest rate swaps, for instance, which are instruments that are used on Wall Street but also that get in big institutional investors, such as pension funds. Any movement in the rate has an impact on ultimately the price and the profit on any one of these instruments. So it's a really difficult thing to quantify. And what's important to remember is that on each side of these transactions -- well, each of these transactions has two sides. There's going to -- there's going to be a winner, there's going to be a loser, depending on which way it goes.

  • 10:14:58

    REHMSimon, how do you see it of the impact on those of us who are just learning, just beginning to learn about the LIBOR rates, and how they have or have not been manipulated and what it means for not only this financial disaster that we had been experiencing for the last few years but how it affects individuals?

  • 10:15:30

    JOHNSONWell, the core of world financial market stand has been demonstrated to be rigged. There has been widespread systematic cheating. The chancellor of exchequer in the U.K. referred to this as fraud. Certainly to any layperson, it looks very much like fraud. Presumably, there are both criminal prosecutions and civil damages arising from this. I would presume this will be on a scale that we haven't seen recently around the financial sector, given the patent of behavior that is now emerging.

  • 10:16:03

    JOHNSONWhat benefit will it do us? What good will any of this do us even if we have a full sorting out of who was responsible in the damage it did and so on and so forth? I don't know. I think it's another case of the financial sector and very powerful people at the core of the largest banks in the world having managed their way and our way towards another disaster.

  • 10:16:22


  • 10:16:24

    GALLUIt's an -- that's a very good point, and it's important to remember that one of the major tolls that this whole case is going to have has to do with confidence and people's confidence in financial markets. A benchmark rate like this that the integrity of it has been undercut, it's hard to quantify, again, the damage it does to confidence.

  • 10:16:46

    GALLUThe other thing to keep in mind is the context in which this all happened. So back in mid-August of 2007 -- this is when the U.K. bank Northern Rock, there was a run on that bank because this bank financed itself largely in money markets, a very expensive way to finance itself. There was a run in that bank. This really triggered the focus on LIBOR rates and what banks were saying they had to pay in order to borrow money and stay afloat.

  • 10:17:14

    GALLUSo from 2007 throughout late 2008 when Lehman collapsed and until early 2009 when markets were in such turmoil, it's also important to remember the counterfactual, what would've happened had banks reported their real rates? If I'm -- if I'm a bank and unable to borrow -- if banks aren't lending to each other, what's the real rate to report?

  • 10:17:38

    REHMAnd that's the question, Simon.

  • 10:17:42

    JOHNSONThe biggest question, Diane, to pick on one of Joshua's points, is that the confidence in markets, integrity of the markets according to question. Now, the Federal Reserve general counsel, Scott Alvarez, reportedly told Congress last week that the Fed "lacked jurisdiction" because this didn't pertain to the safety and soundness of the financial system.

  • 10:18:00

    REHMSafety and soundness.

  • 10:18:02

    JOHNSONI cannot imagine anything more important for the safety and soundness of U.S. banks and our financial markets than the integrity and the confidence in markets that's been completely undermined by the scandal.

  • 10:18:14

    REHMSimon Johnson, professor at MIT's Sloan School of Management, he's a senior fellow at the Peterson Institute for International Economics. We'll take a short break here. When we come back, your calls, your comments. Stay with us.

  • 10:20:04

    REHMAnd welcome back. We're talking about the unfolding LIBOR scandal. We seemed to have some indication that Barclays, for example, is going to pay a certain sum of money. But, Simon Johnson, you just said that Barclays is the low-hanging fruit. Here's an email from Matt, who says, "When will enough be enough? The big banks have caused havoc with our economy with every day shining light on new dishonest business practices. When will these corrupt thieves be held criminally accountable?" What do you think about that, David Enrich?

  • 10:20:55

    ENRICHWell, I think that's very emblematic of -- that's what happens when you have just instance after instance of banks not obeying the rules and think that they're above the law. And just in the past couple of weeks, we've seen just a parade of examples of this, whether it's HSBC this week getting in trouble for facilitating money laundering in Central America. We've got this Barclays thing. We've got the collapse of Peregrine. We've got -- and it just seems like there's an endless series of these episodes.

  • 10:21:27

    ENRICHAnd I think it's completely natural that people are very frustrated. To me, the bigger question that still needs to be answered, and we've kind of addressed this to an extent, but it's -- the regulators, whether they were complicit in this or not, were well aware of the widespread suspicions about what was happening with LIBOR and other similar rates as LIBOR way back in more than four years ago.

  • 10:21:49

    ENRICHAnd, you know, there's a question now, people are really dwelling on the question of whether specific individuals were -- have tacitly given instructions for banks to break the rule. But it kind of misses the point. The bottom line is that regulators have known for a very long time that there was widespread misbehavior going on. And as Simon said, there really wasn't an impetus to deal with this until the political wind started to shift.

  • 10:22:13

    ENRICHAnd I think that that to me is more damaging, or should be more damaging for confidence to the financial system because we don't have watch dogs who are being particularly proactive here.

  • 10:22:24

    REHMHere's an email from Bill, who says, "I've been wondering why the U.S. has moved so fast to try to bring charges against people responsible for manipulating the LIBOR rate in England but still has not brought any charges against anyone in the U.S. for the 2008 home loan meltdown." Simon.

  • 10:22:52

    JOHNSONWell, that's a good question also. There have been legal settlements around, for example, Angelo Mozilo, who's the head of Countrywide, but the prosecutors decided, I think at the very highest level, not to be aggressive with regard to what happened.

  • 10:23:07


  • 10:23:08

    JOHNSONHonestly, Diane, I think it was a political decision coming from the White House, coming from Treasury and inclined to basically not make too much trouble for the financial sector. But today, on Capitol Hill, there are hearings about HSBC for the money laundering scandal. There are hearings about Peregrine in a different committee about the collapse there. I believe that's before the Agricultural Committee.

  • 10:23:29

    JOHNSONAnd, of course, there's the Ben Bernanke hearing. All of these problems continue to be with us. The forbearance shown to the financial sector in 2007, since 2008, has not done us any good at all. The pattern of behavior remains the same.

  • 10:23:42

    REHMWhy is this pattern of behavior going on and on and on, and yet there are still people out there arguing regulation is the wrong way to go, Josh?

  • 10:23:58

    GALLUThat's a very important question, and I think it gets to the heart of addressing how and whether anyone was prosecuted for wrongdoing during the financial crisis. Many regulators -- for instance, the Securities and Exchange Commission, which has jurisdiction over many of the financial products that were -- that exploded, they will say, we are confined to the limits of securities laws, and those are rather narrowly defined.

  • 10:24:27

    GALLUAnd sometimes, some of the behavior that you found to be really problematic wasn't necessarily a violation of law. And everyone can have their own judgment on that, but it begs the question of exactly what you said. What is the appropriate regulatory framework? How can these things be reigned in? And it gets back to the comments from Jerry del Missier from Barclays, who said, I took this as an instruction from Bob Diamond to say set the LIBOR rate lower. I understood that to be coming from the Bank of England. They were our regulators. They -- so I assumed that is was OK.

  • 10:25:08


  • 10:25:09

    JOHNSONIf a regulator tells you to commit fraud...

  • 10:25:12


  • 10:25:13

    JOHNSON...that is not allowed. That's a criminal -- a potential criminal liability incurred by the regulator because he or she is stepping outside the purview and the constraints and the limitations of that (word?).

  • 10:25:23

    REHMBut I'd sure like to hear some of the tapes of conversations that perhaps went on in this country. Here's an email from Bill in Lansing, Mich., who says, "I'm a homeowner with an adjustable rate mortgage pegged to the LIBOR. What, if anything, are the implications of the rate fixing scandal on people like me? It's not clear if the scandal is supposed to have resulted in artificially high or artificially low rates." Simon.

  • 10:26:00

    JOHNSONWell, what we know so far, specifically from the CFTC agreement with Barclays is what Barclays said -- conceded that they did is that there were two phases of manipulation, one in which that Barclays would sometimes help push the rate up and sometimes push it down. So if it goes up, obviously that hurts the homeowner.

  • 10:26:16


  • 10:26:16

    JOHNSONIn the second phase, in 2008, the accusation is that Barclays was trying to manage that rate down. And that's what Jerry del Missier, the former chief operating officer, has conceded. In that case, the homeowner would presumably have benefited, although there may other -- may have been other things going, and anything that disrupts and undermines confidence in financial markets is not good for any investor or borrower using those markets.

  • 10:26:41

    REHMSo -- go ahead, David.

  • 10:26:44

    ENRICHThere's also another important tangible way where this may well have hurt everyone, which is that a lot of states and municipalities have tried to protect themselves from swings in interest rates by buying these sophisticated derivatives that are pegged to LIBOR. A lot of states now, or at least a number of states, are starting to look into the possibility that as a result of this downward pressure on LIBOR by these banks.

  • 10:27:09

    GALLUSo banks doing exactly what they said they were doing, which was understating LIBOR, that that actually might have caused these -- essentially these insurance contracts that the states and local governments took out to not pay off the way they were supposed to. So there's a real possibility that states and localities that are now suffering through massive budget crisis of their own that those situations could've been exacerbated by the actions of these banks.

  • 10:27:33

    REHMSimon, we haven't talked about Timothy Geithner. To what extent do you believe he should've or could've done more?

  • 10:27:44

    JOHNSONWell, it's a fascinating question, Diane, because the New York Fed issued a paper, private circulation among regulators, in the spring of 2008 which very nicely summed up what was wrong with LIBOR and what should be done to run that system better. But, of course, the paper raises two questions. First of all, how do they know that LIBOR was so badly broken? Really, it's a very, very good paper, very smart, clearly, very well-informed about all these things what we, the broader public, are now learning about. This is 2008.

  • 10:28:12

    JOHNSONAnd, secondly, what did they do about it? What did they -- who did they tell at the Bank of England? Mervyn King, the governor of the Bank of England, is now saying he didn't know about this, the dimensions of this problem, until two weeks ago. How is that possible? And in addition, the Fed, not just the New York Fed but the Federal Reserve System, in particular the board of governors absolutely has responsibility for the safety and soundness of the American financial system.

  • 10:28:35

    JOHNSONAnd they can issue any kind of preemptive injunction or other informal, behind closed doors, words to the right people, to change how certain kinds of behavior happen, including around LIBOR, if they think it jeopardizes the system. Well, this is -- the system is jeopardized in part by this incredible illegal pattern of behavior.

  • 10:28:58


  • 10:28:59

    GALLUOne of the things that was most interesting to come out of some of the reporting on this is to see how shabby the internal controls that banks has been with regard to LIBOR. And you have to ask the question how regulators allowed a situation to crystallize in which hundreds of trillions of dollars of contracts are linked to a rate that is set by a person sitting in the Treasury function of bank, who is not at all walled off from traders with derivatives positions that are keyed to that rate.

  • 10:29:35

    GALLUIt's -- in some of the reporting, what's evident is it became so institutionalized that the traders and the rates submitters were very cavalier about their communications about this. They said, could you -- in emails, in instant messages, they are not making much of an attempt to cover their tracks.

  • 10:29:55

    REHMWhat kinds of examples can you give us of those emails or messages?

  • 10:30:02

    GALLUIn the Barclays settlement, several were laid out in which traders would say -- to the rate submitter in the treasury function, they would say, I really need LIBOR to be down, the three-month rate to be down, preferably at X percent, usually to two decimal points because it really doesn't take much to be able to profit on a very large position. And you would have an answer from the rate submitter, saying, I'll see what I can do, or there you go. And they would make the submission in line with what that trader requested.

  • 10:30:35

    REHMMy mouth is hanging open. David Enrich, can you comment?

  • 10:30:40

    ENRICHYeah. Well, I think an important component of this whole scandal is that LIBOR isn't set by a government body or a regulator. It's set in London by the British Bankers' Association, which is -- it's a trade group. It's compromised of some of the biggest banks in the world, and their interests are not always aligned with those of the broader public or even necessarily of the entire banking industry.

  • 10:31:03

    ENRICHAnd so one of the elements of this that we've seen recently is that the regulators -- especially in the U.K., but also in the U.S. to a certain extent -- are basically trying to deflect blame for this, saying, yeah, maybe we knew about these problems, but it wasn't our responsibility to act. This is something that's privately managed by the British Bankers' Association. We simply have no jurisdiction to do anything about it.

  • 10:31:25

    ENRICHAnd in the Bank of England's case, they received warnings about this from Tim Geithner when he was at the New York Fed. And they simply hit the forward button on their email, passed it on to the British Bankers' Association and essentially washed their hands of it. And to me, the -- there is -- based on a very technical, narrow interpretation of what a regulator's power is, I think they're probably right that they didn't have legal authority to do a whole lot about this.

  • 10:31:48

    ENRICHBut that's a slightly more creative or liberal interpretation of a regulator's mandate would be, that if they start talking very loudly and publicly in complaining about the way something is being run, the industry is going to sit up and take notice and start to do something about it. Certainly politicians will, and that -- it was a real missed opportunity for a lot of regulators to actually make some noise about this at the time.

  • 10:32:10

    REHMSo the question becomes, is this scandal going to lead to any regulatory reform?

  • 10:32:18

    JOHNSONI think it's a tobacco moment, Diane, meaning that the industry is finally going to have to concede all of the problems that Joshua and David just laid out: the failures of internal control and the damage that they've done. And the fact that the states have lost so much -- both state and municipal borrowers, and also their pension funds -- means that state attorney generals are going to be in that mix, and they're going to be pressing the Department of Justice to take this very seriously.

  • 10:32:44

    JOHNSONAnd I think the industry will have to eventually come to a very large comprehensive settlement that will include changes across the board in many of these practices.

  • 10:32:53

    REHMBut this whole presidential campaign has been focused on regulation, in part. So in the midst of a presidential campaign, what do you see happening?

  • 10:33:08

    JOHNSONWell, I think the fight will become about financial markets. What does it mean to run Bain Capital? To what extent is President Obama responsible for what was not done to clean up the financial system after 2008? Was Dodd-Frank, the financial reform legislation, was that enough? Who should be held accountable for that? These are going to be big issues.

  • 10:33:28

    REHMAnd you're listening to "The Diane Rehm Show." We'll open the phones now, 800-433-8850, first to Cincinnati, Ohio. Good morning, Shawn.

  • 10:33:45

    SHAWNGood morning, Diane. How are you today?

  • 10:33:46

    REHMFine. Thanks.

  • 10:33:48

    SHAWNOK. I guess kind of a comment that I have is -- and it kind of got touched on -- is, you know, the Republican Party and the Tea Party seemed to push very hard that deregulation or that regulation is (unintelligible) and, you know, is killing our economy. But there seems to be a very clear-cut point of deregulation or subsequent deregulation hurting our economy and hurting, you know, hurting regular people in a way that, you know, is tangible.

  • 10:34:16


  • 10:34:19

    GALLUWell, I think that's a indisputable observation of the situation politically, and it's really hard to estimate how that's going to pan out. I think basically the same people are going to continue to make arguments for a stronger regulation, and the same people are going to continue to fight them. And I'm not sure where that's going to come out.

  • 10:34:42

    REHMAll right. To Bethesda, Md. Good morning, Andrew.

  • 10:34:46

    ANDREWGood morning, Diane. Love the show.

  • 10:34:49


  • 10:34:49

    ANDREWI was just wondering if your panelist -- do the fines or penalties that the institutions received ever approached the profits made on this sort of activity? It seems like, you know, you hear that it could just be attributed to fines -- that is, to the cost of doing business.

  • 10:35:10

    REHMDavid Enrich.

  • 10:35:12

    ENRICHYeah. Well, first of all, we don't really know the degree to which Barclays, at least, made a lot of money off of this trade, but the broader point is definitely a correct one. Barclays was -- ended up paying about $450 million to settle these allegations. That's a rough -- that's a low percentage of the annual profits -- probably even of the quarterly profits -- that the bank makes. So it's definitely -- and that was when they were settling.

  • 10:35:38

    ENRICHIt's one of the -- Barclays was more concerned with keeping its top executives' names out of the settlement and keeping them from being blamed individually than it was about being forced to pay a little bit more in the fines. So it's -- the fines that these institutions pay are not material to them. And they're -- I think that it's right to be described as just simply a cost of doing business.

  • 10:36:00


  • 10:36:00

    JOHNSONI would go further, Diane. Barclays Bank has a balance sheet of about $2.5 trillion. That's roughly the same size as the British economy. A bank of that kind is backed by the taxpayers, whether you like it or not. Therefore, when you fine them and you take away from their shareholders and you undermine the capital in the business, you're creating a larger liability for the taxpayer. We are paying the fines whether we like it or not, whether the regulators will level with you or not.

  • 10:36:27

    JOHNSONThere's only two things that make a difference in this kind of matter. Do you fire the executives responsible? Does anyone go to prison? That's all that matters.

  • 10:36:36

    REHMSo you think, you believe that if criminal prosecutions take place, it could put a stop to this kind of manipulation? Josh.

  • 10:36:51

    GALLUI think that would certainly be a deterrent. But, again, I think time and time again, in many of the financial crisis cases, we've seen very junior people being named in civil lawsuits...

  • 10:37:02


  • 10:37:02

    GALLU…from regulators. We haven't seen many cases that involve chief executives, chief financial officers. We've seen a couple, but not from the major Wall Street firms. You know, the -- as Simon said, many of these penalties are symbolic, and it's hard to understand what sort of real penalty it is for the company, but it's going to depend on who goes -- who is held accountable.

  • 10:37:28

    REHMJoshua Gallu. He is a reporter for Bloomberg News. When we come back, more of your questions and comments. I look forward to hearing from you.

  • 10:40:04

    REHMAnd welcome back as we delve further into the LIBOR scandal. Here's an email from Morgan, who says, "Seven of 10 committee members, who Jamie Dimon testified before, received money from J.P. Morgan, thus soft questions. Same problem, money and politics." Would you agree with that, David?

  • 10:40:37

    ENRICHWell, I actually have an even more startling statistic that speaks of the same thing. In the U.K., in parliament, the committee members who have been quizzing Barclays' executives and regulators about their role in the LIBOR scandal, two of the 10 or so committee members actually used to work at Barclays. So how's that for an incentive to screw things up?

  • 10:40:59


  • 10:40:59

    ENRICHBut I think there's an -- there definitely is a concern, a widespread concern that lawmakers, like regulators, aren't doing enough to -- or haven't been doing enough to hold banks' feet to the fire. They certainly have -- there's been a very proactive effort in parts of Congress and around the world, really, to water down important elements of regulation.

  • 10:41:21

    ENRICHI don't know how much of that is directly attributable -- I don't know if there's a cause-and-effect relationship between people receiving campaign contributions and doing that. But, at the very least, there's a correlation, and I can definitely understand why that's damaging to confidence.

  • 10:41:36

    REHMWell, damaging to confidence, not only in the banks themselves but in the Congress, in the government as a whole. Here is an email from Tom, who says, "Our Congress may talk this to death, but they are way too dependent on bankers' money to do anything to correct or punish those institutions involved." But you, Simon, see this, as you referred to it, is a tobacco moment.

  • 10:42:12

    JOHNSONThat's right, Diane. I think that this is a more powerful industry than tobacco ever was. They give more money in terms of political contributions. And within the American system, they can play off different politicians, different regulators against each other. But when you have a groundswell of opinion and when you have the states involved and when you can pursue criminal charges, that changes the dynamic, and I think that changes the political logic.

  • 10:42:33

    JOHNSONAnd there are plenty of people on the right of the political spectrum, as well as on the left, who've had it with the megabanks, the too-big-to-fail banks. And remember, it's the few huge banks that are doing most of the damage here. There's lots of other people involved in financial markets who are hurt by this kind of scandal, whose business is undermined by what the very largest banks have got away with over the past four or five years. So I expect a broader backlash from this.

  • 10:42:56

    REHMAll right. So J.P. Morgan Chase with Jamie Dimon testifying kid gloves. What happens the next time he comes to Washington? Is anything different now in the manner in which he is treated because of LIBOR?

  • 10:43:19

    JOHNSONWell, we'll see what the CFTC establishes with regard to the behavior of J.P. Morgan Chase and LIBOR. J.P. Morgan Chase is one of the most prominent international banks. It's present on every LIBOR panel except one, so it's present on nine out of 10 of those panels, and it seems like a bit of a stretch to think that they will escape unscratched by this affair. But we don't know exactly what are the legal dimensions of the CFTC's findings here.

  • 10:43:45

    REHMAll right. To Greenville, N.C. Good morning, Charles.

  • 10:43:50

    CHARLESGood morning. Thank you for taking my call.

  • 10:43:53


  • 10:43:55

    CHARLESMuch of what I was going to ask about has already been discussed, but I'd like to go into it a little bit further. Corporations are not people. That is a corporation itself is not a person. The people running the corporation are the people who signed the request for this, that and the other thing, the people who decide what the interest rates are going to be. But we don't ever hear about these people, the top people, being held accountable for the decisions which are made. And I know that there's a limit to regulation.

  • 10:44:27

    CHARLESYou know, we can go ahead and say that people who commit murder shall be punished themselves by being killed. That doesn't stop people from killing each other. And I know that what I'm saying is very naive because nothing's happened before that has really punished these people and made them recognize that what they had done is wrong. Is it possible? And that's the question that I have. Is it possible for us to get to the politicians who make the regulations and who are the ones who really are responsible, in my opinion, for what has happened?

  • 10:45:08


  • 10:45:10

    GALLUWell, whether these things come back to politicians seems to me a matter of popular opinion and activism. But the larger -- the other point about who is held accountable, I think, is critical to this. You know, time and time again, we've seen junior executives being made to take the fall for acts that are systematically done not only in single firms but across the industry, and this goes all the way back to 2002 with Sarbanes-Oxley, which was meant to hold the chief financial officer and the chief executive officer more accountable for public statements that the firm makes.

  • 10:45:58

    GALLUSo, you know, when you get into things like deals that are not -- that don't go all the way up to the chief executive's level and maybe the setting of a daily interest rate, those things are hard to tie to the top, but it also doesn't seem that prosecutors have made much of an effort to do so.

  • 10:46:17

    REHMAll right. To Houston, Texas. Good morning, Edward.

  • 10:46:22

    EDWARDGod morning, Diane, to you and your panel. Thank you for taking my call.

  • 10:46:24


  • 10:46:26

    EDWARDI have a real interest in this. I am the chief executive of a $2 billion regional bank in this area, and we have quite a few mortgages tied to LIBOR. What's interesting, though, is this is the index or the benchmark that's used for "the sophisticated" borrower and primarily for jumbo mortgages on the upper end. And so to the extent that these have been manipulated downwards, it was the upper-end wealthy that most benefit from it, but the real damage here, as one of your callers said to us, is we can't use this benchmark anymore.

  • 10:47:01

    EDWARDWe no longer trust it. And so we'll probably have to go back to Treasury for some other benchmark. But again, it's the loss of confidence in the system. And we're a small player even at $2 billion, but this has hurt us. And I'm anxious to see how this unfolds, but we will not use this as a benchmark anymore because we can't have faith in it.

  • 10:47:22

    REHMThat's very interesting. Simon.

  • 10:47:25

    JOHNSONWell, I think people like Edward have an important say in this matter because their business has been absolutely fundamentally damaged by this. And with regard to who exactly benefited, he's right about jumbo mortgages, but also a lot of subprime mortgages here -- some of the more toxic adjustable rate mortgages were linked to LIBOR, and pension funds have lost serious money.

  • 10:47:45

    JOHNSONThe scale and the scope, particularly with the manipulation when they were pushing the rates up and pushing them down by 2008, that has damaged many people, including people who borrowed directly into LIBOR.

  • 10:47:57

    REHMHere is an email from Orlando, who says, "Many of the plaintiffs in all of this LIBOR scandal are wealthy and powerful parties, such as the city of Baltimore. If the banks are found liable and cannot afford to pay, will the taxpayers once again be obliged to rescue the banks with their tax payments? Josh.

  • 10:48:30

    GALLUI don't know the answer to that question. I can imagine that it's very, very difficult to calculate the actual damage from these things, which I'm sure will become an issue in all of the civil litigation. And, in fact, I think that was an issue for regulators. If you look at the CFTC's order against Barclays, they claimed that Barclays has attempted to manipulate LIBOR. They didn't actually say that they succeeded.

  • 10:48:55

    GALLUAnd I think part of the issue there is that it's very difficult to calculate what impact it actually had. You have to understand that -- what impact does one bank have when there are 12 others also submitting rates? And I think Simon made the point earlier that that might be quite difficult for them to actually move the rate that would impact someone's mortgage or, you know, all the way down the line.

  • 10:49:20

    REHMDavid Enrich, do you see anyone from Barclays or anyone else, any other bank going to jail?

  • 10:49:31

    ENRICHI don't know about going to jail. I mean, it's important -- when we talk about the lack of accountability for senior executives, though it is important to note that three of the very top executives at Barclays all lost their jobs over this, which is a part...

  • 10:49:43

    REHMWell, losing one's job is one thing, but going to jail is quite another.

  • 10:49:48

    ENRICHYep. It's a completely different thing, especially when, despite losing your job, you're still leaving with millions of dollars from compensation. The bottom line is I don't know. The executives that allowed these banks, in one telling sign, has started retaining criminal defense lawyers, though, which is a sign that they're certainly worried about this. And I think what everyone's waiting for is -- you know, Barclays is just the first one to settle. There's -- it's not at all clear that they were even the worst offender out there.

  • 10:50:14

    ENRICHThere are at least a dozen other banks and financial institutions that are under investigation all over the world. I think it's very likely that over the next year or so, we're going to see a lot more of those banks settle. There's obviously intensifying political pressure in the U.S., also in England to -- for authorities to bring criminal cases against these people. The question, though, just, you know, it is -- it's not just as simple as people wanting to see someone go to jail and, therefore, sending someone to jail.

  • 10:50:40

    ENRICHYou need to build a criminal case. You need to be able to convict someone in a jury. And that's often very tricky to do, especially given, you know, how removed senior people are from the nitty gritty of running these institutions.

  • 10:50:52

    REHMDavid, what happens to the LIBOR rate itself?

  • 10:50:59

    ENRICHWell, that's another good question. There's certainly some talk about replacing that with any number of other alternatives. It's not -- and again, as I said earlier, one of the problems here is that LIBOR isn't -- it's not something that's like run by a government or a regulator. It's something that's compiled by a private banking association that's -- 'cause the members are all the world's biggest banks. And so there's some talk about having that run by or at least overseen by a more impartial institution, whether that's a government or a regulator or a central bank.

  • 10:51:30

    ENRICHBut there is -- it's also -- and some banks are growing understandably weary of being part of LIBOR because of the political and legal liability there. So it's -- that's very much up in the air. I think that's -- I think over the next year or two there -- it's very likely that there will be some drastic changes to LIBOR if it's not abandoned altogether.

  • 10:51:51

    REHMSimon, would you agree?

  • 10:51:54

    JOHNSONYes. LIBOR has to change. Mervyn King, the governor of the Bank of England said recently, my word is my LIBOR is dead. In other words, you can't trust a banker just to say this is the rate which I could borrow a certain amount on a particular time on a particular day. You have to actually see the transaction. You don't run stock market indices on the basis of what somebody said.

  • 10:52:13

    JOHNSONThey could have bought or sold stock at -- you look at the actual transaction, and those transactions have to be reported in a system with a great deal of public disclosure. That's what you have to move to in terms of the interest rate reporting.

  • 10:52:24

    REHMYou know, considering all the scandals that we have heard about, one begins to wonder about the world economy itself and just how stable it is with all of this manipulation going on. How does anybody trust that what bankers are saying, what politicians are saying, what those at the very top are saying about the economy?

  • 10:52:56

    JOHNSONIt's a big problem, Diane. We built very, very large financial markets in which trust is an essential element...

  • 10:53:02

    REHMUsed to be.

  • 10:53:02

    JOHNSON...and we soar in 2008. That trust broke down dramatically in the fall and was put back together with a lot of government assistance. But now, the eurozone is in deep trouble. We see big financial disruptions of various forms coming our way and heading through these opaque derivative markets towards major U.S. financial institutions that have been allowed by the Federal Reserve to pay down their capital, to pay out the dividend, to have share buybacks, to reduce their equity, which is a buffer against losses.

  • 10:53:32

    JOHNSONAnd that's what protects the taxpayer against being on the hook again. So I'm afraid -- ultimately, I would ask Ben Bernanke about safety and soundness of the system and to what extent the policies pursued by the Federal Reserve over the past five years have helped or hindered that safety and soundness.

  • 10:53:51

    REHMAnd you're listening to "The Diane Rehm Show." Will he be asked that question directly? And what about putting more stimulus into our economy at this time?

  • 10:54:06

    JOHNSONWell, obviously, people will argue a lot about the stimulus today. But I think in the weeks ahead, there will be some very focused hearings for Mr. Bernanke and also for Mr. Geithner, drilling down specifically into LIBOR and to this issue about whether the Fed was doing its job or whether -- and that should be my argument that it really dropped the ball on this one. It had the jurisdiction, and it failed to act on LIBOR in 2007 and 2008.

  • 10:54:32

    REHMTo Grand Rapids, Mich. Good morning, Frank.

  • 10:54:36

    FRANKGood morning. Excellent program, Diane.

  • 10:54:38

    REHMThank you.

  • 10:54:38

    FRANKThank you for taking my call.

  • 10:54:40


  • 10:54:41

    FRANKI -- this brings to mind what Ron Paul has been pushing for with auditing the Federal Reserve. Can you imagine your checkbook not having close scrutiny by at least you and your spouse for 100 years? The Federal Reserve, I think, is in collusion with the LIBOR since the Federal Reserve is a private corporation, like the LIBOR, ran by private individuals. And I think it's time for the people worldwide to wise up with their elected officials and air all these red herrings that we keep smelling, coming through the airwaves and in our newspapers.

  • 10:55:27

    REHMAll right. Any indication of a connection between the Fed and the rates of the LIBOR, Simon, Josh, anybody?

  • 10:55:41

    GALLUI think that there is a connection in the sense that the Fed was made aware of this concern. Barclays' employee back in 2008 told a Fed official -- we've seen the transcripts of this phone call -- that we are lying about our LIBOR, we are being dishonest. And that was not brought up the chain of command at the Fed. The Fed complained about this to British officials, but did not do so in a particularly loud or assertive manner.

  • 10:56:07

    GALLUAnd I think the broader point is that the -- what the caller just said is emblematic of a broad loss of faith in financial systems and financial leadership in the world, which is an inevitable result of years of crisis when nothing really seems to change.

  • 10:56:25

    REHMLast word, Simon.

  • 10:56:26

    JOHNSONThe legitimacy of the Federal Reserve has taken another big hit, and that may turn out to be the biggest casualty. Mr. Ron Paul, of course, would like to end the Fed. That's his slogan. I'm not there with him, but I do agree completely that Federal Reserve has behaved badly and is not taking sufficient care of the safety and soundness of the American and international financial system.

  • 10:56:46

    REHMSimon Johnson of MIT's Sloan School of Management, Joshua Gallu, reporter for Bloomberg News, David Enrich, a reporter for The Wall Street Journal. Thank you. It was all bad news, but I thank you for being here. And thanks for listening, all. I'm Diane Rehm.

  • 10:57:10

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Susan Nabors, Megan Merritt, Lisa Dunn and Rebecca Kaufman. The engineer is Tobey Schreiner. Natalie Yuravlivker answers the phones. Visit for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information.

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