The rules against insider trading are meant to ensure that ‘the market’ is democratic and that everyone has access to the same information on which to base investment decisions, and to prevent individuals from taking advantage of knowledge that might give them more accurate knowledge of the true value of something than the public at large. As a result, we are constantly reassured how ‘the market’ has a self-correcting mechanism that results in the publicly stated value of financial products reflecting their true value.
In reality, that is not true because there will always be some people who have more access to useful information than others. The system benefits insiders with access to the halls of power and those insiders like to keep it that way. For example, the STOCK Act was meant to prevent members of congress and their staff from benefitting from knowledge about pending legislation, but major portions of it were quietly repealed with little or none of the fanfare that accompanied its original passing. In these days of computerized trading, having access to useful information for even a short time before anyone else is enough to make huge amounts of money
One important piece of market information is the ‘benchmark’ price for certain rates and fees. But how are those benchmarks set? We tend to think that they are arrived at by some sort of impartial averaging of market-driven data. But that is not always true. There are some major areas where important input data is under the control of a tiny group of people who are in a position to benefit from that knowledge, since they can manipulate these figures in the short run to enrich themselves. The potential for corruption is obvious. The LIBOR price fixing scandal was one such example.
Of course, no one went to jail for that because the big bank friendly Obama administration continues to be reluctant to vigorously prosecute the top executives of these banks and threaten them with jail. Attorney General Eric Holder (who reluctantly admitted that he felt that the banks were too big to jail) and his assistant Lanny Breur (who never threatened any bank executive with prosecution while he was assistant Attorney General) both came to government from Covington and Burling, a high-powered law firm that has the big banks on its client roster. Breuer returned to that firm earlier this year after successfully not prosecuting the banks.
Michael Hausfeld of Hausfeld LLP, one of the lead lawyers for the plaintiffs in this Libor suit, declined to comment specifically on the dismissal. But he did talk about the significance of the Libor case and other manipulation cases now in the pipeline.
“It’s now evident that there is a ubiquitous culture among the banks to collude and cheat their customers as many times as they can in as many forms as they can conceive,” he said. “And that’s not just surmising. This is just based upon what they’ve been caught at.”
[Former director of the trading and markets division at the Commodity Futures Trading Commission Michael] Greenberger says the lack of serious consequences for the Libor scandal has only made other kinds of manipulation more inevitable. “There’s no therapy like sending those who are used to wearing Gucci shoes to jail,” he says. “But when the attorney general says, ‘I don’t want to indict people,’ it’s the Wild West. There’s no law.”
As sure enough, just as Greenberger predicted, we see yet another case of insider manipulation. Matt Taibbi writes about the latest scandal, in which the same big banks who were caught finagling the LIBOR rates are now revealed as also finagling the ISDAfix rates, which is the fee that banks charge when borrowers change their loans from variable rates to fixed ones.
In each case, about 18 or so individuals who are supposed to accurately use the rates used by their banks to fix the daily average, instead fudge the numbers in the short term in order to benefit themselves and their banks. It seems likely that these institutions felt that there was no danger of any repercussions if they got caught.