Matt Taibbi and other Libor-Scandal exploiters, distracts us from correcting a much worse interest rate manipulation.

The regulators, for absolutely no reason at all, allowed banks to hold immensely less capital when lending to the “infallible”, among these some sovereigns and the AAA rated, than when lending to the “risky”, among these the small and medium businesses and entrepreneurs. 

That completely distorted the access of the real economy to bank credit, as well as the most important reference rate, the borrowing rates of the most solid sovereigns, usually the proxy for the risk-free rates. 

And that has signified an enormous tax, paid directly by all those bank borrowers perceived as “risky”, and indirectly by the society, by means of the many lost economic growth and job creation opportunities. 

For me the real cost of the society of that regulatory manipulation of bank capital, could be about a million times higher than all the costs for the society produced by the Libor rate manipulation 

I explain: one day the quoted Libor could be somewhat higher than its true rate, and on that day, Libor based borrowers would pay somewhat more, and investors earn somewhat more; other days the quoted Libor could be somewhat lower than its true value and the opposite would hold. But, in the long run, not much distortion was created and very few were really harmed. 

I certainly do not condone any Libor rate manipulation and those guilty of it should be punished with prison sentences which requires them having to pay for their own prison costs, but I do object to Matt Taibbi and other’s so scandalous agenda driven attacks on "Gangster Bankers", because that only distracts us from correcting a much worse interest rate manipulation.

PS. Matt Taibbi quotes MIT professor Andrew Lo saying that the Libor Scandal “dwarfs by orders of magnitude any financial scam in the history of markets.” If it is true he said that, then this professor has no idea of what he is talking about. If Professor Andrew Lo were to accept to debate the issue, he might do himself a favor by looking at the following material for a small quiz.

PS. Below two comments on Matt Taibbi’s article which I posted on the RollingStone web. 

1. Anyone capable of explaining the payoff in “The Biggest Price-Fixing Scandal Ever” being some “sushi rolls from yesterday”? 

2. The Libor Manipulation Scandal started because of the reporting of Libor rates which were lower than what they should have been... not higher... and so all borrowers who were on a Libor plus spread basis had to pay banks less interests. Can someone explain the irony of that?

Dear finance professors of the world, can you please help me?

Before the Basel Committee regulations’ era, banks cleared for (ex-ante) perceived risk, that information which for instance is to be found in credit ratings, by means of interest rate (risk-premiums), the size of the exposure, and other contractual terms; let us call that “in the numerator”. 

But Basel II, and now Basel III, instruct the banks to also clear, I would call it re-clear, for exactly the same (ex-ante risk) perceived risk, credit ratings, “in the denominator”, by means of different capital requirements, more risk more capital, less risk less capital. 

That is just plain crazy. Allowing banks to leverage many times more when lending to what is perceived as “safe” than when lending to what is perceived as “risky”, allows the banks a much higher expected risk-adjusted return on equity when lending to “The Infallible” than when lending to “The Risky”. That distorts and makes it impossible for banks to allocate resources efficiently.

Recently Anat Admati and Martin Hellwig published an excellent “The Bankers’ New Clothes” 2013, though I think “The Regulators’ New Clothes” would have been a better title. But, in one passage they write “Whatever merits of stating equity requirements relative to risk-weighted assets may be in theory, in practice…” 

And, dear finance professors, my problem is that I have not been able to find anything yet that I would include within the “Whatever merits”. 

Besides the so fuzzy “more risk more capital, less risk less capital, it sounds logical”, do you have any idea why the regulators did that? If not, can you help me asking around? 

I mean, it is no minor thing that our whole banking system seems to be driven by a loony double consideration of perceived risks.

I mean it is no minor thing that our bank regulators have decided to favor “The Infallible” those already favored by the market and bankers and thereby discriminate against “The Risky”, like all our small businesses and entrepreneurs.