Is anybody surprised? No. We know they behave badly. In the past week, though, we have learned of some previously unrevealed varieties of misbehavior.
In my day to day life, any time I've mentioned the London Interbank Offered Rate (Libor), I've watched the eyes of my friends and acquaintances glaze over. In brief, though, it is the average interest rate at which major banks borrow from each other. Other rates for consumer and business borrowing are derived from Libor.
To compute Libor, banks report their own borrowing rates. Barclays' Bank, we now know, was reporting lower rates than it actually paid back in 2008, because being forced to pay higher rates would have been seen as a sign of financial weakness. As a result, Barclays' has paid a $450 million fine for fibbing (amounting to little more than a rounding error for a major international bank) and its CEO, COO, and board chairman have resigned.
Barclays' excuse? "All the other kids were doing it!"
Indeed, that seems to be the case. British and US regulators are investigating ten other large banks, including (needless to say) Citigroup and JPM. A bit more distressing, though, is Barclays' claim that its regulators knew what was happening, and gave tacit consent. Among those regulators was the New York Fed, at that time under the leadership of Tim Geithner.
"Well," I can hear the regulators saying should they ever be called upon to explain themselves, "we thought it would be better for market confidence if people didn't know just how fucked we really were back then."
Krugman's confidence fairy strikes again.