[Congressional Record Volume 158, Number 117 (Thursday, August 2, 2012)]
[Senate]
[Pages S5959-S5960]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
LIBOR
Mr. DURBIN. Mr. President, It was recently revealed that at least one
bank--Barclays Bank of Great Britain--attempted to manipulate LIBOR
over a 4-year period beginning in 2005.
LIBOR stands for the London Inter-Bank Offered Rate. This rate is a
benchmark used by industries all over the world to set interest rates
for nearly $800 trillion worth of financial instruments.
LIBOR determines how much people across the world pay for student
loans, mortgages, and credit card fees. The higher LIBOR is, the more
it costs a college student to borrow money for school or a business to
obtain a line of credit.
This means that people across the world with student loans, mortgages
and credit cards, and municipalities selling bonds may have paid more
to borrow money because of Barclays' actions.
Barclays settled with U.S. and British authorities and paid over $450
million in penalties to the Commodity Futures Trading Commission, the
U.S. Department of Justice, and British regulators.
Now, as many as 20 megabanks, including several U.S. banks, are under
investigation or named in lawsuits alleging they also rigged LIBOR.
Over the next several weeks and months we will learn more details
about exactly what happened.
But it seems clear we are facing a scenario that is all too familiar:
the largest banks have once again put greed and profit above the best
interests of their customers and the economies of at least six nations,
including the United States.
At the same time--nearly 4 years after the worst financial crisis in
our lifetime and 2 years since the Democratic-majority Congress passed
Wall Street reform--my Republican colleagues continue to undermine the
financial regulators by cutting their funding and spending countless
hours in the House of Representatives debating and passing bills to
roll back the Dodd-Frank Wall Street Reform Act.
This is not good for our financial system and it certainly isn't good
for the American people.
But let me back up. What is LIBOR? It is a benchmark used by
industries all over the world to set interest rates
LIBOR impacts--directly or indirectly--nearly every person in the
world.
[[Page S5960]]
Here is how it works.
LIBOR is calculated for 10 currencies and 15 maturities. For example,
one of the most important LIBOR rates is the 3-month dollar LIBOR.
A select panel of 18 major banks report how much they believe it
would cost to borrow money in dollars for 3 months at 11 a.m. on a
particular day.
The top four estimates and bottom four estimates are discarded, and
the remaining rates are averaged to calculate LIBOR. LIBOR is published
every day at 11 a.m., and companies across the world use this rate to
set interest rates for consumers.
So why would the major banks want to manipulate LIBOR?
The simple answer is profit. And greed.
Many of the major banks that help set LIBOR stand to lose or gain
millions of dollars each day based on the smallest change in LIBOR.
As the leading trader of derivatives in 2007, it has been estimated
that Barclays stood to lose or gain $40 million per day.
The settlement between regulators and Barclays lays bare a scenario
where traders not only regularly attempted to manipulate LIBOR, but
they didn't even try to hide it.
Once the financial crisis hit in 2008, manipulating LIBOR was also
about survival.
Banks were under intense scrutiny. If it cost a bank more to borrow
money, it could be an indicator that other banks thought lending to the
bank was risky.
In Barclays' settlement with regulators the bank admitted that it
underreported the cost of borrowing during the financial crisis to
mislead regulators and the public about the true financial health of
the firm.
Unfortunately, it seems as if the Barclays settlement is just the tip
of the iceberg.
Lawsuits worth billions of dollars have been filed against banks
alleging wrongdoing. Regulators in the U.S., Canada, Japan, EU,
Switzerland, and Britain are reportedly investigating.
U.S. regulators should be fully engaged in investigating the LIBOR
process and any wrongdoing by U.S. banks.
However, U.S. financial regulators can't conduct the necessary
investigations into claims of wrongdoing or enforce new laws meant to
rein in Wall Street if they don't have the people, software, and
resources necessary to do the work.
Congress passed Wall Street reform because the largest financial
institutions in this country took advantage of loopholes and the
unregulated swap markets.
They drove our country into the worst economic recession in our
lifetime.
In the aftermath, we said we are not going down that road again. No
more too big to fail, no more bailouts. We are going to have
transparency and accountability when it comes to swaps.
We gave the job to the Commodity Futures Trading Commission and the
Securities and Exchange Commission.
With the recent approval of final rules defining swaps, the CFTC and
the SEC have now triggered the implementation of an array of other
rules to finally bring the swaps market out of the shadows and into the
light.
This is a huge step forward.
But now, just when the financial regulators have the rules in place
to oversee the $300 trillion market that nearly destroyed our economy,
the Republicans are trying to cut the agencies off at the knees.
Their philosophy is if you can't repeal reforms by passing
legislation, you can undermine the agency's ability to enforce the law.
Let me put this in perspective. The $37 trillion futures market has
historically been policed by the CFTC. That is an enormous market to
oversee, by anyone's calculation.
But it pales in comparison to the complex and previously unregulated
$300 trillion swaps market now under CFTC's purview because of Dodd-
Frank. That is eight times the size of the futures markets.
Common sense tells you that it is impossible for an agency to
increase its responsibility eight-fold while its resources are cut by
41 percent.
Yet, that hasn't stopped the Republicans in the House. They recently
reported out of Committee a bill that cuts funding requested in the
President's fiscal 2013 budget by $195 million for the SEC and $128
million for the CFTC.
That's a 41 percent cut for the CFTC and a 12 percent cut for the
SEC--from the President's request.
Keep in mind that while Congress sets the level of funding for the
SEC, it is largely funded through fees on trading volumes. So the cuts
to the SEC aren't about concern for saving taxpayer dollars--it is
simply a way to remove the regulators' ability to properly function.
When financial tragedies befall people--think of missing customer
funds at MF Global or Peregrine--we want investigators to find out what
happened and seek recovery of money to the families and farmers who
trusted those companies. Those are the jobs the Republicans want to
cut.
This tells firms such as Peregrine that while we have laws on the
books they must follow, we aren't going to give the regulators the
resources to enforce them.
The funding levels for the CFTC and SEC reported out of the House
promises we will face another situation like MF Global or Peregrine in
the future because we won't have enough cops on the beat.
A mere 4 years after the worst financial crisis in our lifetime and
just several weeks after the latest scandal where farmers lost their
hard earned money, this is simply irresponsible.
We are still struggling to dig our way out of a recession that
resulted in millions of jobs lost and $17 trillion of lost retirement,
personal and household wealth.
Yet, instead of working together to ensure that never happens again,
Republicans are doing everything they can to stop the regulators from
implementing laws that would have prevented that crisis and could
prevent the next crisis.
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