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Saturday, July 28, 2012 - Page updated at 04:00 p.m.
Financial scandals mount with more revelations of regulatory failures
U.S. investors are skittering for hiding places as the economic uncertainty in Europe gets murkier and all the more unsettling.
Spain is talking out loud about a bailout for its economy by other euro-bound and international governments. After all, they came through for Greece. The gloomy news hit stock markets in the U.S., Europe and Asia.
The common link between what got the global economy into this mess and the perilous road ahead is a complete failure of transparency.
Investors are hit two ways. They do not have access to information about the true health and nature of markets, and they have no clue that so-called regulators are not doing their jobs. It is only revealed by disaster, and the expense of bailouts.
Revelation of the JP Morgan Chase $2 billion trading loss involving a London-based fund manager was followed by discovery of an even more insidious and complex scam.
The Libor scandal flared in London with the British bank Barclays, but is expected to have tendrils that reach across the Atlantic. Libor, the London interbank offered rate, is an average interest rate at which banks around the world pay to borrow trillions of dollars from one another.
In a word, the rate was rigged for the benefit of insiders. Traders could get the rate set to make their deals work. Everyone else picked up the tab, as Libor was used and reflected in financial swaps and contracts, and in consumer borrowing for student loans and mortgages.
Barclays was fined $435 million for manipulating the rate between 2005 and 2009. U.S. regulators are investigating, with the U.S. Community Futures Trading Committee part of the posse.
This scandal comes as the U.S. inches along toward protecting consumers from the abuses unleashed by the 1999 repeal of the Glass-Steagall Act, which protected Main Street for nearly seven decades.
The remedial Dodd-Frank Act is law, but its implementation has been fought every inch of the way by Congress. The head of the Consumer Financial Protection Bureau had to be installed with a recess appointment by President Obama.
Last Saturday a "good faith" version of a rule prohibiting proprietary trading by commercial banks was accepted by the industry, but the change has not been formally approved by lawmakers.
Belatedly, but significantly, voices inside banking are calling for renewed regulation. One of the most influential is Sandy Weill, former CEO of giant Citibank. Weill was a key advocate for repeal of Glass-Steagall. He has changed his tune.
Failure to regulate banking at home and abroad has consequences that are still revealing themselves. Investor flight from global stock markets is a leading indicator of the impact.
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