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Sunday, July 15, 2012

LIBOR manipulation -- inevitable?

Let's say you have the opportunity to gain a million dollars by doing something that you know isn't right, but which isn't really all that wrong, and won't really hurt anybody that will notice.  E.g. say a briefcase with a million dollars in it falls off a truck and you can pick it up without anyone knowing.  And you know that it's insured.  You might not break into a car to get the briefcase, but maybe you'd pick it up and not tell anyone.  Or maybe you wouldn't.  But a lot of people would.

Most Wall Street (or other market) traders are -- and have been since early in their lives -- richer, smarter, more ambitious, harder working, and better educated than other people.  You can't get a job like that without having those attributes, often in spades.  They are also likely people who started off more moral than most -- they wouldn't dream of shoplifting, cheating on taxes, or stealing a car.  Rich people are less likely than others to do that stuff.

But here's the problem.  They are put in a position where the tiniest little manipulation -- sometimes what might seem like a tiny fib -- can result in millions of dollars flowing their way.  Why do we expect them to resist?  I'm actually getting a little bit tired of everyone complaining about the "moral breakdown" in the banking community.  They are no less moral than the rest of us.  The problem is that their temptations are much much greater than anything the rest of us have to try to resist.  Few of the rest of us can resist even the simplest temptations -- like chocolate, fatty food, and adultery. 

What's the cure?   I don't know, but identifying the problem -- a system that puts people in a position to skim even a tiny percentage off of a huge torrent of cash -- is the necessary first step toward a cure.  Until we come up with a system that works without creating these opportunities for skimming, we will continue to have dangerous and manipulative behavior up and down the financial markets.

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