Diamond of Barclays.

From outside the elite preserves of the financial industry, Britain’s LIBOR scandal follows a wearily familiar narrative arc: Yes, a leading investment bank has confessed to gaming a central borrowing index—the so-called London Interbank Offered Rate, which establishes how much banks charge each other to borrow money. And yes, that bank—Barclays of London—has coughed up 290 million pounds in fines to stave off the prospect of a criminal prosecution. But jaded consumers of financial news can be forgiven for thinking that this all amounts to the perennial status quo for the investment class, in the city and on Wall Street alike. Haven’t these characters always sought to live by their own self-seeking code—and haven’t fund managers long been little more than glorified corruptionists? If we systemically prosecute this sort of behavior, are we just futilely attempting to issue a restraining order against human nature?

In reality, the LIBOR dustup is a very big deal—and largely because of its very routine profile. Barclays has confessed to artificially deflating its LIBOR rate going back to 2005, in an effort to stave off jitters among investors in the bank’s sprawling derivatives portfolio. But the costs of marginal vanity upgrades to an institution’s profitability run very quickly into the billions in a market that covers hundreds of trillions in investments. LIBOR numbers govern just about every sort of borrowing done on a major scale, from bad mortgage bets to the credit default swaps used (delusionally, it turns out) to hedge against them. What’s more, the evidence suggests that conduct of Barclays—one of 16 banks now under investigation, on both sides of the Atlantic, for manipulating its LIBOR numbers—prolonged, in sweeping fashion, the ghastly derivatives bubble that collapsed in 2008. With much of world economy transacting its credit business on artificially swollen bottom lines during those wheezing boom years, the fallout from LIBOR fixing could run easily into the trillions.

The unprecedented scale of the LIBOR scam helps explain the alacrity that British lawmakers and regulators have so far shown in at least creating the appearance of a crackdown. The present drive across the pond to punish the lords of capital comes, we all know, athwart a long-standing culture of impunity in financial matters; the real outrage of jury-rigging the LIBOR is that it exposes the whole global credit system as an exercise in cronyist bad faith. And even symbolic shows of civil authority in the dealings of the city trigger large-scale cognitive dissonance at this point. Robert Diamond, the American head of Barclays, seemed a bit flummoxed to be so suddenly prevailed upon to resign; if Jamie Dimon and Lloyd Blankfein continue to reign securely atop their scandal-rocked investment fiefdoms, why should he be made an example of—especially with some 15 other banking chieftains potentially on the LIBOR make as well? And why should Paul Tucker—the presumptive incoming head of the Bank of England, who has sedulously groomed himself for the top slot since his arrival at the British equivalent of the Fed more than two decades ago—suddenly be dragged before Parliament to find his nomination in jeopardy for little reason beyond a vague impression that he should have done more to hunt down evidence of LIBOR-rigging back in 2007?

In truth, if British authorities were themselves more vigilant, the LIBOR mess wouldn’t have festered on for so long in the first place; a little-noted institutional side benefit of these nine-figure immunity deals that regulators so routinely cut with prosecution targets is that they insulate both the banks and their lax regulatory stewards from unwelcome public scrutiny. But even so, the public outrage stoking the British inquiries makes for an instructive contrast with America’s largely fatalist outlook on financial malfeasance. As Chancellor of the Exchequer George Osbourne announced in a recent speech on the LIBOR scandal before Parliament, “Fraud is a crime in ordinary business—why shouldn’t it be so in banking?”

Why, indeed? In the United States, the long-hapless Commodities Futures Trading Commission has been conducting its own years-long inquiry into LIBOR-fixing and has a grand jury reviewing potential criminal charges. But as Mr. Diamond well knows, these official investigations have a distinctly Potemkin feel in the States: At most, a fine is assessed, and a plea deal entered. Nothing as gauche  as an actual criminal prosecution ever dogs our scandal-plagued investment class, even though maximum-minimum sentences are standard fare in most jurisdictions when nonaffluent citizens commit their own repeat offenses, or run afoul of our draconian drug wars.

Even though England is a far more class-bound social order than ours is reputed to be, it’s clear at moments like this that the American polity has no real stomach for holding our financial overclass accountable to anyone. Indeed, our leaders have precious little real incentive to put the brakes on the stateside regime of banking impunity when financial titans can pull up stakes from their jurisdictions, taking both payrolls and donor rolls with them—even though the anemic condition of our credit and employment economies is largely the handiwork of that selfsame banking sector Better to shunt the whole business over to the largely captive regulatory system, which at least brokers its appointed fines and honors its appointed silence in somewhat decorous fashion. To really get to the bottom of something like the LIBOR cartel, you have to subject a whole culture of corruption to sustained scrutiny—and worse, to work out actual, enforceable measures to prevent it all from happening again. We have, it seems, gone in stunningly short time from a financial order deemed too big to fail to one that is simply too big to care about.

For collateral evidence of this trend, one need look no further than the wheezing machinery of the presidential race. Presumptive GOP nominee Mitt Romney clearly had banked (as it were) on widespread public indifference to financial niceties when he misleadingly claimed that his tenure as CEO at Bain Capital ended in 1999. So what if, as Mother Jones’ David Corn noted, SEC documents clearly listed him as CEO and 100 percent owner of the equity fund as late as 2002—well past the job-hemorrhaging Bain takeover of the GST steel mill in 2001, recently featured in a series of Obama attacks? Who reads SEC filings, let alone their supporting documentation? And until The Boston Globe sleuthed out the damning documentary record last week, Mr. Romney’s bet was bearing fruit; indeed, the same day The Globe story broke, Mr. Romney’s campaign released its own counterattack ad, seeking to refute the GST saga largely on the grounds that the entire deal went down at a time when Mr. Romney was no longer affiliated with Bain.

One little-noted casualty of the LIBOR scandal is Mr. Diamond’s public role as a Romney booster. Diamond had been a major overseas bundler of expat donations to the Romney campaign and was scheduled to host a July 27 fundraiser for Romney during the candidate’s trip to London for the 2012 Olympics. For obvious reasons, Diamond has had to relinquish that high-prestige gig as well. It’s a pity—the two men doubtless would have had a lot to talk about.

editorial@observer.com

• More graduates of MBA programs are finding jobs this year, but fat paychecks and practical-joke-sized signing bonuses have yet to return to vogue. [BBW]
• The Commodities Futures Trading Commission is not the wastrel federal institutio0n it once was, but it may still lack the resources to oversee the derivatives markets it is now charged with regulating. [NYT]
• Unlike the Federal Reserve, the European Central Bank is not exceptionally enthusiastic about pouring unprecedented amounts of money into the financial system. [WSJ]
• Ex-Federal Reserve chair Paul Volcker isn't convinced that the Fed's $600 billion quantitative easing plan will light a fire under the proverbial backside of our stagnant economy. [AP]
• The Federal Reserve may soon chill out a little bit about big banks paying dividends to their investors. [Reuters]

mtaylor [at] observer.com | @mbrookstaylor

The official report asserts that the crash wasn't the result of market manipulation -- a view the lead SEC investigator had previously expressed. According to regulators, falling liquidity levels in two broadly traded instruments and high volatility preceded the crash.

Furthermore, buy-side liquidity in the E-Mini S&P 500 futures contracts (the "E-Mini"), as well as the S&P 500 SPDR exchange traded fund ("SPY"), the two most active stock index instruments traded in electronic futures and equity markets, had fallen from the early-morning level of nearly $6 billion dollars to $2.65 billion (representing a 55% decline) for the E-Mini and from the early-morning level of about $275 million to $220 million (a 20% decline) for SPY. Some individual stocks also suffered from a decline their liquidity.

Then, a big investor (the agencies won't say who it was, but we have a pretty good idea that it was Kansas-Based Waddell & Reed) sold $4.1 billion worth of e-mini futures. It was an unusually large and sudden sell order -- at that point, the biggest seen in 2010. The sell order took the form of a computer algorithm that took trading volume, but not price or time, into account. The result was an extremely rapid sale of the futures contracts. At first, high-frequency traders, investors and others absorbed the sell orders. But soon, the high-frequency traders began selling off the contracts, and the big investor's trading algorithm responded to the higher volume by accelerating its own selling.

Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other - generating a "hot-potato" volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.

And as for the lessons learned:

One key lesson is that under stressed market conditions, the automated execution of a large sell order can trigger extreme price movements, especially if the automated execution algorithm does not take prices into account. Moreover, the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets. As the events of May 6 demonstrate, especially in times of significant volatility, high trading volume is not necessarily a reliable indicator of market liquidity.

mtaylor@observer.com

Twitter: @mbrookstaylor