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Geithner on Financial Crimes: The Dog Ate My Homework

posted by Adam Levitin

If I rob a federally insured bank and make off with $20,000, I'm facing years of federal prison time. If I defraud federal insurance programs, be they FHA or Medicaid, I'm also facing years of prison. If I engage in insider trading, I could also be looking at prison time (although that's pretty rare).

But if I rig the most widely used interest rate index in the world, a leading bank regulator doesn't think that the Department of Justice needs to be notified because they're not part of the regulatory working group focused on LIBOR. That was Timothy Geithner's explanation today as to why he didn't notify the DOJ when he learned of Barclay's LIBOR fraud. For real? What's next?  The dog ate my homework?

It all leaves me scratching my head. The harm from the LIBOR rigging is massively greater than any of the other financial crimes for which we send people to prison. Why wouldn't the then head of the NY Federal Reserve Bank think that this was potentially a criminal matter? The "not part of the working group" is just about the lamest excuse I can think of. I don't normally talk to the police, but I call them if I think there's a crime in progress.

So perhaps Geithner simply didn't think the wrongdoing was criminal or even potentially criminal. How is that possible?  My hypothesis is that it simply isn't comprehensible to Geithner that senior executives in financial institutions could be engaged in criminal behavior. Criminals don't wear suits.  They use six-guns, not fountain pens. Perhaps many bank regulators are simply too cozy with bankers to see them as even potentially criminal. They might have gone to college together. They interact regularly and their careers are intertwined.  They may be part of the same social milieu and may even socialize. Institutions might get fined (without admitting any wrongdoing), but criminal penalties?  Not for these kind of people.   

I'm not sure how one can possibly test this hypothesis, but I've started asking my students about it. Some of them, I figure will one day be prosecutors and regulators, and need to be prepared to deal with this situation. I ask them if they would have any reservations about sending the person sitting next to them to prison for 20 years or if they could lock up a college acquaintance. When I ask, I'm not really looking for a specific answer, although the conversation can be interestign. Instead, the questions are meant to drive home the point that it's a lot easier to prosecute someone with whom you have no connection than someone close to you. Regulatory capture seems to shape the way we regulate financial institutions in an endless number of subtle ways.

As an aside, I wish the NY Times coverage of the hearing were a little more probing. The fact that Dems rushed to Geithner's defense, while the GOP attacked him is sort of like reporting "dog bites man." It's election season already in DC, and that means it is not possible to have a real conversation about any policy issue until 2013. Every hearing now is political theater, more so than usual. Speaking of which, did anyone notice the incessant string of mid-summer Dodd-Frank hearings? It's amazing to see how regulations most of which are not yet in place are responsible for choking credit to the economy for years and for the travails of community banks which have been dropping like flies for decades. Logic disappears in bad cases of electoral fever.


Logic gate, one wrong in and one right in, right out, XOR-NAND.

Geithner allowed the misrepresentations to continue because he believed it was the greater good.

In 2008, the government wanted to bail out banks and homeowners. A misrepresented LIBOR lowered payments on adjustable rate mortgages and facilitated confidence in financial institutions. To be sure, there would be losers: mostly municipalities with interest rate swaps and long-term confidence in the financial system. But stimulus packages could be passed to send money to municipalities, and as for long-term confidence, we are all dead in the long run anyway, as Keynes pithily noted. Besides, utilitarianism always entails losers, as the classic runaway trolley problems show.

This is the problem with government subsidies of financial institutions. Once you are in for a penny, you are in for a pound.

This is the same guy who didn't pay his taxes in westchester county NY. And when got caught, played the same, stupid card, and became the Treasury Sec.

Its amazing how americans just sit idly by and watch these politicians just do whatever, whenever they want.

Geithner is a hack - his appointment was an indication of how corrupt Obama really is.

Why aren't ALL these guys sharing a small cell with a horny gal named Darnell?

Americans are yearning for justice - a hangin judge if necessary - and the GOP is DREAMING if they think we are in the mood for a Carl Icahn type raider for prez.

I hate Obama.... feel date raped after my YES WE CAN vote. but then, I'm not gay, illegal or looking for a job at the airport groping kids and grandmas.

Obama is a monster -- but Romney is a financial predator. If those are our choices, I vote Libertarian or Constitution.... even Green - and not ONE vote for Dems or Republicans.

I want jumpers on Wall St... and suits serving LONG sentences. THEN, and only then will I consider another vote for either party.

O, Bush and Robmey are part of a criminal class that needs to be purged.

Joe Paterno and Tim Geithner each saw evidence of a great crime. Paterno passed the information to his employers but did nothing else, and died in disgrace. Geithner sat on the evidence, did nothing at all, and stands proudly close in the line of succession to the presidency.

"The harm from the LIBOR rigging is massively greater than any of the other financial crimes for which we send people to prison."

I invite you to prove that, which I think is unlikely, in part for the reasons D mentioned above. Driving interest rates down, to the extent the alleged rigging did that, is generally stimulative to an economy. Central banks engage in interest rate rigging all the time! Ron Pauls and Tea Partiers get outraged, are you now a Ron Paul / Tea Party devotee?

Also, when one actually looks at LIBOR prints on given days, even when someone was allegedly trying to rig it, you will have a hard time showing a successful rig, and I have not seen an example of more than a basis point of alleged movement.

Last, people who don't work in finance may not realize this, but interest rates like the prime rate, or base rate, and even the Fed's discount rate are quoted in 25 bp increments, and only occasionally adjusted, whereas LIBOR is quoted in 1 bp increments and sometimes in fractions of that. So if you feel there was some harm from LIBOR rigging, which still prints within the range of other interest rate methods, you must logically believe that all of those other rates, because they don't offer the precision of LIBOR, are causing harm too. Merely because someone is honest in saying "I will only quote rates in 25bp increments" does not mean that it isn't doing economic harm by over or understating what a market rate might be, and merely because LIBOR is allegedly rigged up or down a bp or two doesn't mean it isn't economically beneficial compared to the clunkier methods.

A normal case. A normal response. A normal loss of memory. A normal 'not me'. A normal "just who is responsible". Why isn't everyone use to this by now. Maybe Bud Abbott and Lou Costello (OK- now you know my age) were right on track when they tried to explain who is on first base and what is on second. Likely both would be much better at running Treasury and even the Country because what is happening today is a joke.Lets get out and vote.......ugh, ugh.

Unfortunately, it's always psychologically easier to prosecute and convict someone who's viewed as Other than someone who's One Of Us. And since the judges and other authority figures involved in the process generally come from the classes that produce white-collar criminals rather than the classes that produce street criminals, we get the situation where the rules become less binding the further one goes up the social food chain. Not to mention the continual hypocritical fretting of the elites about the supposed depravity of the lower classes when they are engaging in behavior that is just as bad or even worse.

mt-- You want me to prove the harm from LIBOR rigging? Let's do a rate swap in which I get LIBOR + 350 and you get fixed 500. If LIBOR is off one way or another, someone has been harmed. Yes, the harm has inured to the benefit of the swap counterparty, but that doesn't mean there's no harm. If I rob a bank, my balance sheet expands, while the bank's contracts. It nets out, but there's still harm. So let's apply that to the trillions of dollars in interest rate swaps and adjustable rate loans based on LIBOR. That's a massively greater financial harm than just about anything I can think of.

mt--Also on your other points.

(1) Yes there are proof issues. But that's not the question here.

(2) Yes there are clunkier ways we do index rates. Again, that doesn't excuse LIBOR rigging.

(3) Yes central banks set rates. But only sort-of. They set target rates that they achieve largely via open-market activities. Two key differences, then, with LIBOR. First, it is set based on honest behavior, and second, it is market-based. I've got issues with the Fed's faux-apoliticism, but not with its actual activities.

"So perhaps Geithner simply didn't think the wrongdoing was criminal or even potentially criminal. How is that possible?"

While I have much respect for you Adam (I drink at the trough of your writing often) I am compelled to point out that your hypothesis is incorrect.

The answer is quite simple. Geithner is also a criminal.


Even once you have shown harm from LIBOR rigging, in the form of detriment accruing to one party and benefit to another that would not have occurred but for the rigging, we still have not determined why this act of government forbearance is distinguishable from any action that reallocates benefits.

Changes in the money supply constantly reallocate benefits between debtors and creditors, yet the government will do it without a second thought. Thus, while your example indicates how a party is harmed by a misreported LIBOR, that alone cannot be determinative.

Is it just the fact that people thought the LIBOR was honest, but it turned out not to be? Do the parties that report their borrowing costs even owe any meaningful duty to third parties that lazily rely on this benchmark for their own contracts? And could one not still argue that violating the trust placed in the LIBOR was not still worthwhile from a utilitarian perspective?

Ah now I get it, "D", and "mt": a crime isn't a crime unless someone is noticeably harmed by the "criminal" act. So, for example, if Robin Hood steals from BofA and gives the money to the poor, BofA isn't noticeably harmed (he ONLY stole $100million), but the poor are aided immeasurably, so not only isn't it a crime, its a good deed! And if I were a humble weed dealer, selling a quality product for a fair price, a product that helps lots of people medically, as well as lots of others to simply unwind at the end of a long day, than I have not commit a crime either, because no one has been hurt. I'm starting to like this new criminal law you guys are suggesting! Some other changes I can envision...


I never claimed that "a crime isn't a crime" unless someone is harmed. My point is that governments take action all of the time that helps some people while harming others.

The original post questioned how the government could choose forbearance in the face of acts that benefited some while harming others. I presume the answer is that practice makes perfect, and that I am still wondering how this is either distinguishable from other such acts or is not justified on a utilitarian basis.

The rest of the rubbish you say about stealing sums of money insignificant to the victim and selling drugs appears to be irrelevant, and somewhat grounded in an unfamiliarity in the distinction between conduct that is malum in se and malum prohibitum.

D, you are clearly positing that the government shouldn't necessarily impose any sanction on the libor manipulators merely because one party gained and another party lost. Then you go on with some rationalization about how anyone who trusted libor is lazy anyway, and should not rely on such numbers, calculated and published by the government based on numbers provided by the banks. So, in effect, it seems you think that violating the public trust, the maintenance of which is one of the responsibilities banks are vested with in exchange for the windfall arrangement they are given to print money, loan it at interest and generally take profitable part in the running of our financial system, is not really a big deal. Aside from the question of whether the manipulation of libor is a crime or not, it seems that lying to the government and society at large in order to squeeze some extra profit should be, at least, a civil violation if not a criminal one. You ask if it is really a bad thing to violate the public trust and lie to the government in order to make additional profits, especially if it has a utilitarian purpose (presumably other than the aforementioned profits). My response is that you seem to place little stock in the idea of the public trust and confidence in the financial system in general. Yes our financial system is riddled with corruption, as is our government. But the answer then, one would think, is not to retroactively declare such corruption and manipulation harmless, utilitarian or, better yet, a way to catch out the lazy and stupid and divest them of their money. But that is exactly what you do. The answer is to prosecute and sue, and fix the system that is broken. My point was that, if one is comfortable taking such a lazy and blase attitude towards libor corruption, one would be comfortable doing the same with more traditional forms of theft, or drug dealing, where the results of such acts could be easily seen to be utilitarian nay, even beneficial to society at large. If such acts as the banks commit are to be judged not by the law, but by smug armchair philosophers, then why should the deeds of other, non-bank, actors not be treated with the same philosophical perspective? The only problem I see with your approach is that what the banks do happens to erode the public trust and undermine our commonwealth. My friends, the pot dealers and bank robbers, do far less damage to the public trust than do your banksters. And yet it seems you would apply a much lighter stick to the bankster than to my black market friends. Your moral compass need realignment.


I think you do not understand what I am saying. I am not advocating exoneration of the banks. I am discussing Geithner's regulatory forbearance.

I am clearly *not* positing that the government should not sanction LIBOR manipulators. My point is that the when original post asked how Geithner could have foregone action when he learned of the manipulation, I asked how that forbearance is any different from the multitude of other times where the government creates winners and losers via other regulatory actions on a utilitarian trade-off. As I have said, it is not the fact that people were harmed that distinguishes this example, so what is it?

You then argue that I do not find the violation of the "public trust" that banks are entrusted with maintaining to be worthwhile. However, this merely goes into the above utilitarian trade-off. A lower LIBOR assisted struggling banks and homeowners in 2008-2009. There were undoubtedly costs. But once again, the fact that costs were being imposed is not what makes this act of government forbearance different from a multitude of other acts.

You then argue that I place insufficient stock in the public trust. It matters not one bit how much stock I place in it. It is apparently Geithner's opinion that matters. In any event, if your response is simply that after a utilitarian balancing, violation of the public trust is a harm greater than the benefits derived from a lower LIBOR, that is at least an answer to why this case is different, but a rather subjective one.

You then argue that if there is corruption, that it should be prosecuted. I never argued that it shouldn't be. All I am asking is why there is outrage at the idea that Geithner did not take action to immediately restore LIBOR to its true rate, even though this would inflict harm on desperate banks and homeowners. It may well still be the greatest good to now penalize banks that whose scam inadvertently provided benefits to third parties.

You then argue that I must then support decriminalizing theft and drug dealing. We need not get into it, but I do support decriminalizing drug dealing, but not theft. Malum in se v. malum prohibitum. Perhaps our first act should be to determine where the banks' acts fell.

In short, Geithner took the action he did because he felt it was in the best interest of society. Perhaps he miscalculated. Perhaps he should not be trusted with such authority. Perhaps there should be more oversight and disclosure. Perhaps the banks should be punished even though their actions were unofficially sanctioned by a government official. But to argue that we have absolutely no idea how Geithner could act as he did is to be almost willfully blind to the multitude of similar acts taken on a daily basis.

And by the way, come of your high horse about how my "moral compasses" is off and how I am a "smug armchair philosophers." I know this is the Internet, but I have been rather cordial to you, and you could at least at the same in response.

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