July 1 - July 15
Hello, and welcome to the Dispatch for July 1 through 15!
I devoted this week to clearing a couple stories that have been simmering for a while - none of the topics this week are New, but they are ongoing and noteworthy.
Let’s get started!
On June 28th, the Financial Services Authority, the UK’s financial regulatory body, levied a $450M fine against Barclays Bank. The penalty is due to the findings of an investigation into attempts by the bank to manipulate the London Interbank Offered Rate, or LIBOR, one of the benchmark numbers used to set interest rates on a wide variety of financial instruments. In addition to Barclays, the Royal Bank of Scotland, HSBC, and Lloyds are also facing investigations, and a series of lawsuits filed in courts around the world suggest at least 12 other major banks were involved in the scandal.
The scale of this scandal is phenomenal. Three factors will be particularly significant:
First, while it appears UK regulators neither endorsed nor encouraged the rate fixing, they did completely fail to investigate the matter until now, and not for lack of evidence of wrongdoing. It’s hard to critique actions taken during the financial crisis, but in 2008 it seems the regulators turned a serious blind eye to bank behavior. At the same time, it’s unlikely only UK banks were involved with the crisis, so there’s a question of whether and to what degree regulators elsewhere were negligent as well.
Second, a vast, vast majority of credit instruments are indexed to LIBOR, including credit default swaps and other insurance schemes. Any companies which have been adversely affected by movements of LIBOR during the time the FSA says the rates were being manipulated may have legal claims against the banks involved. Charles Schwab has already filed suit against 16 banks, alleging the banks’ actions cost investors more than $45Bn, and it’s likely many, many more lawsuits will follow.
Finally, the scale of the scandal and the casual nature of the emails exchanged during the conspiracy period suggest, as many analysts have posited, a widespread cultural indifference to regulation in the financial services industry. In the (admittedly unlikely) event regulators decide to dig further into the banks, it’s almost certain the LIBOR scandal wasn’t the only breach of rules occurring.
In all likelihood, the result of this crisis will be a series of fines on the order of a few hundred million dollars against a few banks. Banking regulators, here and around the world, have, since the beginning of the crisis in 2008, been at great pains to describe the banks as robust, trustworthy institutions, and I’d be frankly shocked to see that change now. The fundamental problem with the financial services industry is cultural: it was cultural in 2006 and 2007 when the entire industry turned a blind eye to the house of cards that was the CDS trade; it was cultural in 2008 and 2009 when they took in billions of rescue funds, payed massive bonuses, laid huge bets with taxpayer money, and rigged LIBOR; it was cultural in 2010 and 2011 when they spent millions in profits generated from taxpayer- and federal reserve- supplied funds lobbying against regulations and oversight; and it’s cultural in 2012 when the head of Barclays testifies the Bank of England told him to rig interest rates. Regulators have been repeatedly shocked by the degree to which large, respected institutions have flouted the rules, and the reason the institutions have been willing to do so is because the regulators have been by-and-large toothless. A $450M fine is barely a slap on the wrist to a company that made $7Bn last year. Absent significant new oversight or regulation, expect more scandals of this sort.
After pushing the Malian military out of the northern half of the country, the Tuareg rebels and Ansar Dine, their Islamist allies, fell out over questions of how to govern the region. After a brief conflict, Ansar Dine and al-Qaeda affiliates claimed control of the entire northern region. The Islamists have since begun destroying historic Sufi shrines and temples across the region, decrying the centuries-old monuments as un- Islamic.
The world has been slow to respond to events in northern Mali so far. This is partially due to the coup which displaced the democratically-elected government in Mali and allowed the rebel groups the opening to consolidate their hold over the northern half of the country; the leaders of the coup have behaved extremely poorly since taking control and have earned little sympathy from the leaders in the rest of the region. The rapid displacement of the (relatively moderate) Tuareg rebels by the Islamists should help spark more aggressive action, though: the groups occupying the north now are avowed al Qaeda affiliates, and the Malian army is clearly incapable of removing them on its own. The region’s proximity to Europe should help motivate the West into supporting action to bring the area back under control. Unfortunately, the damage to Timbuktu’s heritage has already been done.
US DEA agents shot and killed a suspected drug smuggler on July 3, the second incident in a month in which US agents have shot suspected traffickers in Honduras. The incidents are part of a pattern of increased DEA presence in Honduras; in May, DEA agents were involved in a botched raid that reportedly ended with four civilians dead and sparked riots in the country. Honduras has increasingly become a focal point in the War on Drugs; unlike many in the region, the country’s government is friendly to the US, and has allowed three new military bases to combat the drug trade.
In the wake of the original incident in May, the DEA stated its agents operated solely as support for Honduran troops, and would not engage in firefights unless their lives were threatened. Apparently that’s no longer the case, and given the spate of incidents DEA agents have been involved with over the last two months, it’s questionable whether that restriction ever was in place. The US’s close relationship with Honduras is particularly troubling given the current Honduran government: having won power in the wake of a 2009 coup after other opposition parties withdrew in protest, the administration of President Lobo has been accused of a series of politically motivated killings and other human rights abuses. The US’s increased presence comes as always with heavily increased military aid, which will help shore up the repressive government.
Honduras’s problems with smuggling and drug gangs are the same faced across the region: Heavy demand from the US combines with corrupt law enforcement officials to enable narco-cartels to operate with impunity in the region. The US’s response so far has been to flood countries along the smuggling routes with money and military equipment while pressing for wildly unpopular policies such as forced aerial eradication of suspected opium farms and aggressive military interdiction of suspected smugglers. The net result has been to increase the overall levels of violence, provide weapons and training to corrupt military officials (the Zetas, now one of the most violent and powerful cartels in the region, began as US-trained counter-narco troops), and to generally alienate the populace. The policy has not materially affected the availability of drugs in the US, and has cost us dearly overseas.
Everywhere they operate, the cartels are enabled by corrupt officials and complicit governments. US policy aims would be furthered far more by promoting solid, competent, transparent, accountable governance in the region than by paramilitary raids. In that light, that the US has doubled down on the Honduran project is rather disheartening.
All three of these stories exist because of the limitations of our current political climate: the LIBOR scandal is a product of years of economic zeitgeist that have severely constrained our ability to properly regulate financial institutions; our escalating affair with a corrupt Honduras reflects our inability to objectively evaluate the War on Drugs; and Mali’s crisis, and the potential danger it presents to the rest of the world, persist because the West has war fatigue after a decade bogged down in the Middle East. These are stories that shouldn’t have happened.
(Ok, that was a bit of a down note to end on. Here’s a video of fainting goats to wash it down with.)
Thanks for joining me, and my best for the week ahead! Eric