Romney may be delighted with the LIBOR scandal. It may just be the weapon he needs to finally destroy the seemingly impenetrable, but clearly worn-thin, shield of trust that protects Obama. Even the true believers may have their Obama dogma shattered by the unfolding of LIBOR, Geithner and the Banks. Let me explain it this way.
LIBOR is the interest rate that banks charge each other for lending to each other. It is set daily by a panel of 18 banks. It is supposed to represent each of the 18 banks cost of borrowing. But it is based on "estimates" not "actual" borrowing costs. Banks want to keep it low. Why?
Because LIBOR is also related to the interest rate that banks pay to bondholders and to investors in savings accounts. A low LIBOR rate means that a bank pays less to savers and to bond holders. In other words, a low LIBOR rate benefits banks. It makes sense therefore that banks, being frail and human, would want to set low LIBOR rates. The evil snake, in the tree, is that the banks set the LIBOR rates based on what they "say" they are charging each other for loans, not what they are "actually" charging. For example; if Barclays bank was actually paying 8% to borrow money, it would not want other banks to know about it so they might report a borrowing cost of only 2%, which makes them look financially healthier than they actually are. However, when the LIBOR rates are set deliberately low, big investors and big bond holders receive less interest. Ergo, they complain in the courts and the LIBOR scandal unfolds.
But wait. Are there not some benefits to low LIBOR rates? Yes, some mortgage holders with adjustable rate loans pay less interest to the banks because the lower the LIBOR rate the lower the interest payment they pay. Correct, but the Shakespearean rub rears its intransigent head and rubs the banks the wrong way again. Why? Because the people who lost money on the low LIBOR rates can sue the banks, and other "proximity entities," for fraud and likely recover some of their losses. However, the banks can not recover any funds from anyone that gained. As a result, the practice of reporting low LIBOR rates for their own benefit is a Pyrrhic victory for the banks.
Romney wins on this scandal because it appears that both Bernanke and Obama's Treasury Secretary Geithner may have been proximity entities. Most of us do not know what LIBOR even means, but the TV commentators. and PACs will explain this definition until we all know it by heart.
Remember, before you apply the lash, follow the cash.
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