Monday, July 16, 2012

Libor manipulation undermines the whole premise of Dodd-Frank that regulators will use their expanded powers to protect the system

The number one casualty from the Libor interest rate manipulation scandal is the whole premise underlying Dodd-Frank and the Vickers Recommendations that financial regulators will use their expanded powers to protect the financial system.

What we saw with the manipulation of the Libor interest rates are regulators who didn't use their current powers and sat by and watched the banks engage in conduct that was detrimental to the financial system.

Their excuse was they were willing to overlook criminal conduct out of concern that exposing this conduct would make the financial crisis worse.

Of course, this defense does not address the question of why the financial regulators did not bring up the manipulation of Libor interest rates prior to the debate over the Dodd-Frank Act or to the UK's Independent Commission on Banking.

It would appear that the financial regulators were covering up for the banks and by doing so dramatically effected how the Dodd-Frank legislation or the Independent Commission on Banking recommendations reshape the financial system.

After all, look what happened after Barclays confessed to manipulating Libor.

The Financial Times' Martin Wolf showed how the recommendations for reshaping the financial system would have been changed had the Libor interest rate manipulation been disclosed.  To the list of reforms championed by the Vickers Commission, he added transparency.

Transparency is needed not only to prevent bad behavior by bankers, but to ensure good behavior on the part of regulators too.

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