Juggling Dynamite

“The economy is the main event but the LIBOR scandal will be on the under-card when Fed Chairman Ben Bernanke testifies before Congress today and tomorrow.

At issue is what the Fed, and other bank regulators, knew about manipulation of the key lending rate and whether they condoned banks giving low-ball estimates of LIBOR in order to make themselves look healthier during the crisis of 2008.

Bernanke is likely to face some inquires about this issue, but the U.S. regulator most questions are being asked about is Treasury Secretary Tim Geithner, who is set to testify about the matter before the House Financial Services committee next week.

In 2008, while President of the NY Fed, Geithner sent a memo to British regulators to raise concerns about potential manipulation of LIBOR, as has been widely reported and confirmed Friday by the NY Fed.

The question now is why Geithner didn’t do more to follow up on that memo, considering the central role LIBOR plays in the financial markets. Literally hundreds of trillions of dollars of financial instruments — including complex derivatives but also basic consumer loans are tied to LIBOR, technically the London Interbank Offered Rate.” 

Here is a direct link.

Support for HR Bill 1489, the Return to Prudent Banking Act of 2011 is slowly (painfully slowly) growing. The Act was tabled in April 2011:

“To repeal certain provisions of the Gramm-Leach-Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called `Glass-Steagall Act’, and for other purposes.”

Since then Bill 1489 has attracted 70 House sponsors. Here is the list of members who have endorsed this essential bill. If your representative has not yet pledged their support, CALL THEM AND URGE THEM TO DO THE RIGHT THING on this.

Reinstatement of the division between tax-payer backed banking and investment/speculation activities is a crucial step to restoring fiscal responsibility and health to the banking system in support of the real economy.

Financial conglomerates must choose to be a bank, or they can choose to be an investment dealer. But they can no longer be allowed to be all of these things wrapped up together and backed by the public purse. Their unfettered cross-selling and conflicts must end. We truly cannot afford it. Let’s get the leverage monster back in the bottle and get on with rebuilding the real economy.  It is long past time.

Mohamed El-Erian, PIMCO CEO & co-CIO, provides his perspective on stabilizing the euro zone; confronting the “fiscal cliff”; and whether the Fed should issue another round of easing. Here is a direct link.