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Michael Greenberger is a professor at theUniversity of Maryland School of Law, where he teaches a course entitled "Futures, Options and Derivatives."Professor Greenberger serves as the Technical Advisor to the United Nations Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System.
He has recently been named to the International Energy Forum’s Independent Expert Group that provided recommendations for reducing energy price volatility to the IEF’s 12th Ministerial Meeting in March 2010. Professor Greenberger was a partner for more than 20 years in the Washington, D.C. law firm of Shea & Gardner, where he served as lead
litigation counsel before courts of law nationwide, including the United States Supreme Court.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.LIBOR, the London interbank offering, as people might know by now, is at the center of a scandal. That's the place every morning where the biggest banks in the U.K. and U.S., and I guess some others, get together and set the rate that they will loan to each other. And they are now accused of having manipulated that rate. And in England, Barclays has more or less admitted to it and paid hundreds of millions of dollars in penalty, although they still say they did nothing wrong, and American banks were up to their eyeballs in it and are now being sued by, amongst others, the City of Baltimore and other American cities, who claim they have lost millions of dollars as a result of this manipulation.Now joining us to talk about all of this is Michael Greenberger. He's currently a professor at the University of Maryland School of Law, where he teaches financial law, and he's a former division director at the U.S. Commodity Futures Trading Commission. Thanks very much for joining us again, Michael.MICHAEL GREENBERGER, UNIVERSITY OF MARYLAND SCHOOL OF LAW: Nice to be here.JAY: So some people are suggesting what's gone on here is tantamount to a criminal conspiracy. Do you think that's true? And maybe in answering that, you can explain again what was going on here.GREENBERGER: Well, maybe I can give the latter first. Practically every interest rate benchmark on loans that are made to the tune of about $10Â trillion worldwide were for derivative financial instruments called interest rate swaps, which [incompr.] $350Â trillion notional worldwide. The measurement of the interest rate to be paid is established by something called LIBOR, or a sister benchmark, which could be EURIBOR, TIBOR for the Japanese.LIBOR is the benchmark at issue here. As you said, going back many years, every morning at 11Â a.m. a panel of banks, sometimes 16, sometimes 18, submit the amount they estimateâand I underline the word estimateâthat they will be charged by their fellow banks to borrow money from them. That benchmark is submitted to the organizer of LIBOR, which is the British Banking Association. And the BBA, in conjunction with Thomson Reuters, eliminates the top 25Â percent interest rate settings and the lowest 25, then averages out the middleâsay, if there's 16, you eliminate four at the top, eliminate four at the bottom, get eight in the middle, and that is the LIBOR rate for the day.Now, that LIBOR rate could be settling trillions of dollars of transactions for that day until the next LIBOR rate is set.The problem here is there are two sets of problems in terms of manipulating that rate. One set of problemsâand this emanates from the Barclays disclosureâis that from 2005 to 2009, traders that had an interest in setting the rate at a level which would benefit their trades, bring them more money, were telling the members of the panel in their bank what to, quote, "estimate," for that day so that the bank [unintel.] fashion would come out ahead.A second problem is, during the 2007-2008 period, the rate that banks were saying they were being charged by each other was an indicator of the financial health of the bank. If the bank was saying it was costing them a higher interest rate to survive from day to day, they were (especially in United Kingdom) candidates for possible nationalization by the U.K. government. Barclays was on the hook as a possible candidate for nationalization, so they entered into some form of discussions with the U.K. regulators and said, look, if we come in very high, we're worried you're going to want to nationalize us, and by the way, we know that other panel members are not giving the proper interest rate they expect to be charged for the lower rate.So as an end result of these two different kinds of manipulation, the benchmark for determining the settlement of trillions of dollars of transactions was essentially rigged.Now, you asked the question: is this a criminal conspiracy? Well, let's take the word criminal first. There's no dispute this is a criminal problem. How do we know that? Because the United States Department of Justice entered into an agreement with Barclays and agreed that Barclays would not be prosecuted for criminal conduct if Barclays would pay $160Â million to the United States and agree to a set of facts which clearly lays out criminal conduct. In other words, they are on the hook for criminal activity. But the United States has said because Barclays was cooperative and paid $150Â million, they would beâprosecutorial discretion would be exercised and Barclays would not be prosecuted.So we have a criminal problem here. By the way, Barclays is probably the first in a row of settlements for prosecutions to be made. They've essentially agreed to [unintel.] to talk about what the other panel members were doing in terms of participating in this manipulative activity. And that's where you may begin to see a criminal conspiracy.JAY: Just let me jump in for a sec. We hear a siren in the background, and I should just alert viewers to the fact that these sirens are not police cars on the way to arrest bankers. I don't even have to investigate to know that's true. Go ahead, Michael.GREENBERGER: So you have, by virtue of this settlement by Barclays with the United States Justice Department, which has responsibility for prosecuting criminal manipulation, admissions here of wrongdoing which the Justice Department believes is criminal in nature. Barclays has, throughout, indicated that they are not alone in this venture, that other panel members, many of them U.S. bank holding companies, are guilty of similar conduct. So, yes, this is a criminal problem. No, it does not stop with Barclays. Yes, there will be further activity. On the civil side, we can expect the United States Commodity Futures Trading Commission, who settled with Barclays on the civil penalties side for $200Â million, to be looking into other wrongdoing by other banks in conjunction with Barclays, and we can expect the Justice Department to be following suit on the criminal side. In the United Kingdom, the United Kingdom regulators, including the U.K. government, have said they are going to beef up their Serious Fraud Office and there will be criminal investigations in the United Kingdom. The Japanese are looking into this. The European Union is looking into this. The German government is looking into this. This is a very big deal. It affects the transactions of almost everyone in the world who borrow money from banks.JAY: Michael, there is some sense that the British authorities knew about this fairly early. And we interviewed Bill Black. He was saying there's some reporting that British authorities may have to some extent even connived in this for the sake of not allowing the British banking system to look too much in distress. We also know now that (and The New York Times reports this on Friday) there's been some earlier reports about this that Barclaysâactually, an employee of Barclays informed the New York Fed while it was headed by Tim Geithner in 2007, and again Barclays told the New York Fed in 2008 that this was going on. The Times reports that the Barclays employees told the Fed, you can only guess or you would know why they want to lower these rates. So is the Fed to some extent implicated here? And what does it mean for Tim Geithner?GREENBERGER: I think that story has not fully been told yet. It's clear that Geithner wrote a letter to the sponsor of LIBOR, the British Banking Association, to the chief British regulator and financial services [unintel.] and the Bank of England and said all is not well here and recommended fixing it. Now, that fix was never made. But what we don't know is also theâas far as I'm concerned, and as history has now demonstrated this last week, the two enforcement agencies, at least in the United States, who had to do something about this were the Commodity Futures Trading Commission and the Department of Justice. What we do not know is whetherâI do know, and it's being reported, that the CFTC opened its investigation in 2008, and because it was a complicated investigation, it took this time, from 2008 to last week, before they and the Department of Justice were able to settle. What I would hope has happened, at least within the United States, is that Geithner, in his capacity as president of the New York Fed, was either alerting the CFTC and the Justice Department or knew that the CFTC and the Justice Department were looking into this. That would have been an appropriate way to act and, as far as I'm concerned, wouldâhe would have turned this over to the regulators, who we know from last week are responsible for cleaning this mess up. We don't know what Geithner saidâat least, as I sit here, I don't know what he knew or what he said.JAY: And if he didn't do what you saidâor even based on what we already know, some people are calling for Geithner's resignation. What do you think?GREENBERGER: Well, again, I wantâbefore I start calling for resignations, I want to have the evidence in front of me. There is a nuanced problem here, which, frankly, I think needs to be aired, but I find not to be acceptable, is that the Bank of England, the Financial Services Authority in the United Kingdom, and the New York Fed in United States, they have been saying themselves the world is coming to an end, we have problem restoring confidence to the markets, now is not the time to reveal the fact that a worldwide benchmark for hundreds of trillions of dollars of transactions is being tinkered with, and by the way, this is actually helpful if we have reports that may not be truthful but restore confidence and avoid a worldwide depression.JAY: So a bit of convergence of interests between the banks who made money, whether they've made it go up or down, and then the political authorities don't want to add to the panic.GREENBERGER: Yes. I'm hoping that is not what the answer is going to be, because, you know, as history has shown in so many scandals, trying to kick the can down the road only burns you more severely than you would have been burned if you'd dealt with it immediately. I think the markets, given the fact that they were already in a state of disarray, could have handled that right. It will be a big embarrassment to Geithner, and possibly the president in the middle of a reelection campaign, to find out that this wasn't dealt with either on the civil side or the criminal side as the law was being revealed as being broken.Now, again I just want to say that the CFTC did begin to look at this in 2008. The settlement they derivedâand they're bringing in the Justice Departmentâbegan with an investigation in 2008. My hope isâfor the rule of law, if for no other reasonâthat Geithner knew that that was happening.JAY: Now, is the underlying problem here bigger than a scandal or some of the names we're talking about? I mean, is what really going on here is the big banks and the whole finance sector of the economy, in particular what people call the parasitical sector, have just become so politically powerful that they really have nothing to fear, so even if they get caught, they get a slap on the wrist, it's the cost of doing business, they pay a fine here and there, and merrily carry on to the next adventure?GREENBERGER: Again, I think you certainly can look at the Barclays situation as an isolated matter. And sayingâfor example, buying off prosecution that would put people in jail, for Barclays, to the tune of $160Â million, is akin to you and I paying a traffic ticket to avoid going to jail. That was a very cheap price for them.Now, on the other hand, what this suggests to me is theâBarclays did do self-reporting here. They did come to the government and adduce this evidence. I think, and what I'm hoping is, as is true of all criminal investigations, you get one of the key actors to be on your side, given a grant of immunity, which effectively has been done here, and they then become your lead evidentiary source for going up the ladder and getting two others. And that's certainly what the Department of Justiceâ.JAY: So the theory is, Barclays turns on Goldman and JPMorgan and some of the others.GREENBERGER: Yeah. I think when you look at this and you understand the way complicated financial investigations are carried out, that makes sense. That's certainly what's being advertised here. Many people have said Barclays made a terrific mistake, they shouldn't have admitted anything, they shouldn't have settled. I think if, and what I expect is, at the end of the day, there will be a dozen banks implicated in this. Barclays, by getting in early and effectively turning state's evidence, will have handled this right.JAY: Now, given that both presidential candidates, President Obama and Mitt Romney, are kind of tripping over each other to try to get Wall Street moneyâand apparently Romney is now winningâbut how likely are we to see a real vigorous prosecution of this?GREENBERGER: Frankly, I think, you know, whatever motivations President Obama may have had or hoped that Wall Street would be neutral or equally supportive of him and presidential candidate Romney have gone by the board. I think any hope now that President Obama will get funding from Wall Street if he pulls punches in this LIBOR scheme will be a double loss. One, he'll get no funding from Wall Street. They're fully committed to Republican agenda of no prosecution, no regulation. And it will very badly disappoint not only his base, but the American public as they are becoming understanding of this.It's another shoe that has dropped among many different shoes (the JPMorgan "London Whale" case and others) that the banking system is not one that should be supported. Its social value to the economy is very limited, 'cause these big banks have no interest in making loans to small businesses or individuals who are entrepreneurs. They really in their best sense should be a utility: they take in money, they hold it safely, invest it wisely, and make loans to businesses. That's not a rocket science.The banks don't want to do that. They want to have very risky bets Ã la the London Whaleânow we know $4.4 billion lost to JPMorgan Chase. That's how they want to survive.DoddâFrank has drawn the wagons around that. I think the American public have had it up to here with that. And it is instructive that in the United Kingdom both parties are now saying, we not only have to regulate the banks, but they're saying, we've got to shrink these banks, we've got to introduce new banks into the system, banks that will be focused on helping everyday citizens getting the loans they need to start businesses, buy homes, and go to school. There's no percentage anymore, I think, for politicians to be catering to the banks.JAY: Yeah. Well, we'll see whether President Obama listens to any of this, 'cause so far he certainly has not adopted this argument. But maybe things are changing. We'll see. Thanks very much for joining us, Michael. And thank you for joining us on The Real News Network.
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