Game Over?

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And the hits just keep coming…

With the recent Libor scandal, I thought it wise to talk a little more about the impact that such a widespread scandal could have and should have on our global banking system.  The Libor interest rate fixing not only went on for years, but also did so with the knowledge and approval of our very own Treasury Secretary Tim Geithner.  Not only that, but the amount of money affected, via derivatives, was some $500 trillion dollars!

Will Geithner be charged with, as James Rickards pointed out today, for “aiding and abetting a crime?”

Don’t hold your breath…but do hold onto your wallet.  If the impact is as bad as it looks, there will be some banks going under; others will be in need of “rescue."  And we all know what that means...

The next big scandal is here

But even before we’ve had time to digest the Libor scandal, we now have to chew on perhaps what will be the next great scandal.  And unlike most things we consume, this one was made right here in America.  I’m talking about the Municipal Bond Rate scandal, or “Son of Libor” as some have called it.

This involves interest rate fixing on the part of municipal bond issuers and banks, and hits very close to home.  In fact, it is home.  Americans buy municipal bonds with great confidence and maybe just a little pride because they not only give a tax-free yield, but also they help build our cities, schools, and infrastructure.

And just who do you suppose would be responsible for the possible fraud of rate fixing?  Ah yes, that would be…the banks.  Again.

Is there really a municipal bond scandal before us? Not yet; but there is an investigation into the banks’ behavior in that area.  Apparently, like the Libor, the interest rates on municipal bond debt are set by a daily survey of banks.

What?  Banks quoting their rates with no oversight?  Shocking.

Not a big confidence builder, that bit of news, is it?

If there has indeed been manipulation of the municipal bond market by the banks, that may well bring Meredith Whitney’s dire predictions of 2010 into play: the widespread bankruptcy for cities, and massive defaults in the municipal bond market.  She was roundly criticized for her assessment, but don’t be so sure that it can’t happen.

A little personal experience from my days as a broker might be of help.  I always put clients’ money into positions that, to the very best of my knowledge, were safe and suitable investments.  Many of those positions were in municipal bonds. Imagine if that market is found to be built upon bank fraud and manipulation in an age of global financial meltdowns, bank closures, and housing market collapse and city bankruptcies. Investors’ reaction would be swift and predictable; investors by the tens of millions would liquidate their municipal bond positions overnight.

The municipal bond market would then go into a free fall. Cities and municipalities across the nation would be caught short—shorter than many of them are already.  Borrowing costs would rise dramatically, if they could attract investor money at all.  Rather quickly, cities across the country would become insolvent and even states like California would most likely be forced to declare bankruptcy.

Of course, things would deteriorate from there.  That’s how big of a deal this pre-scandal might just be.

In yesterday’s Gorrie Details, I talked about how studies by economic historian Niall Ferguson showed that graft and corruption—which is what lawlessness really is—actually undercuts the economy. More to the point, the widespread culture of graft that now seems to be the standard operating procedure in American finance, politics, and business has a real and depressing effect on the trust in our financial system specifically, and our economy as a whole.

Put simply, corruption kills the economy.  A dead economy means a crippled America.

Make graft a national offense

We cannot afford to have our economy continually attacked and abused by those in high positions.  It is, or ought to be, a national offense and dealt with swiftly.  Without an economy recovery soon, we will become a nation in rapid decline, made of up a corrupt elite and groveling masses with no means of upward mobility.

From a national interest standpoint, this culture of corruption must be shown for what it is and wiped out.  Those involved—including Timothy Geithner—must be brought before the courts and publicly prosecuted and punished.  Bank presidents, CEOs, politicians, and whoever else is involved, must be rooted out and treated severely.  That list should also include the private bankers that are running our currency into oblivion. Yep, I mean Ben Bernanke and the entire Federal Reserve.

Think that’s over the top?  I don't.  Remember, our banking system, our capital markets, stock markets and all the rest really only function if there is confidence in the system.  The abuses and never ending scandals that emerge on a daily basis not only show the rot in the system, but also erode investor confidence.

When and if we reach a saturation point in all of that, when we are all convinced that the system is just a game for the very top and that we’re the ones being played, then it will stop being a viable system and will all come tumbling down.  But then, that’s what always happens with confidence games, isn’t it?

And those are…The Gorrie Details.

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