White-collar organized crime

One, two, three strikes you’re out. The chairman, CEO and COO of Barclay’s all resigned in the wake of the bank’s manipulation of the London inter bank offered rate, or Libor. The bank agreed to pay a penalty of about $450 million.

The Libor rate is essentially how much interest banks pay to borrow money on a short-term basis from other financial firms, a process overseen by the British Bankers’ Association, an industry trade group.

Libor, a global benchmark based on a gentlemen’s agreement among major financial institutions, is a reference point for a whole range of securities, loans, mortgages and derivatives sold around the world. According to The Wall Street Journal, the total value of these financial products is as much as $800 trillion, which dwarfs the global gross domestic product of nearly $70 trillion. Libor’ s corruption means consumers, corporations and governments have been paying the wrong interest rate.

Government officials on both sides of the Atlantic are now investigating how many other big banks joined in attempts to manipulate this important interest rate for their own gain. The alleged behavior is similar to falsifying your net worth and salary on a loan application to secure a lower interest rate.

The number of banks participating in rigging the Libor ranges from 16 to 20. Their alleged behavior is reminiscent of the organized crime cartel put in place during the 1930s by managerial genius Charles “Lucky” Luciano (no one called him “Lucky” to his face) and his partners.

This cartel was based on ideas originally developed by advanced management thinkers like New York gambling impresario Arnold Rothstein and Chicago gang leader Johnny Terrio.

They believed the market for traditional criminal gang activities was so large and profitable that there was “room for everybody.” Wasteful competition between rival gangs was unnecessary, foolish and got in the way of maximizing profits.

The cartel was popularly known as the Mafia (which incorrectly implies that it was exclusively Italian). Its activities were based on the “Lansky Principle.”

Meyer Lansky grew up with Luciano on Manhattan’s Lower East Side and helped create the organized crime syndicate. His simple principle, which came from observing gambling rackets as a kid, was that the best way to make money gambling is to run the game yourself.

Isn’t that what the big banks allegedly did in conspiring to fix the Libor rate? We have a large number of firms (families) that roughly coexist within an environment of”mutual cooperation” and share broad common goals. Just like members of an organized crime cartel, these financial institutions understood how to manage a portfolio of various businesses to maximize their overall value.

Regulators are now dealing with the fallout from the alleged conspiracy. It turns out that the Federal Reserve Bank of New York learned about the rate rigging in the summer of 2007. The regulatory pursuit of this conspiracy was, to say the least, not put on the fast track.

This rate manipulation follows multibillion-dollar trading losses at JP Morgan Chase, the Facebook initial public offering debacle and the collapse of the Peregrine Financial Group just months after the failure of MF Global.

Now politicians and the Justice Department are tripping over themselves in hot pursuit of criminal wrongdoing in manipulating Libor. When it comes to pursuing the financial mafia, let’s hope they have more success this time.

Anyone with a library card knows that there have been very few recent prosecutions oflarge U.S. financial institutions and their senior executives. These days, this crowd is the untouchables.

Assuming they are successful, we should forget the tobacco settlement-sized fines, the handcuffs and multimillion-dollar settlements that represent a minuscule percentage of firm profits. The worst punishment you can inflict on these white-collar criminals is not a long prison term.

No, force them instead to spend the rest of their lives living on not more than say $75,000 a year. Too bad we don’t punish school teachers that way. But to crooked CEOs, that’s poverty. And with the multimillion-dollar lifestyles they’ve become accustomed to, it would be the worst punishment of all.

originally published: July 28, 2012

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