Monday, July 16, 2012

LIBOR update (2)

The LIBOR scandal is important for two reasons: 1) It's size—this literally affects billions of people, and 2) It exposes the utter hypocrisy and deep meaningful bullshit that informs our fairy-tales about money.  Of course, LIBOR was being fixed!  I have been claiming that interest rates have been fixed ever since I discovered a tiny handful of people could run up the prime rate to 21% in 1981.

Of course this leads to the interesting question—whose ox is being gored.  When the freaking Economist starts calling the LIBOR scandal the worst of all time, you gotta know someone powerful lost a big pile.

JULY 10, 2012

LIBOR Manipulation is a Scandal, But Not the Right Scandal

System Failure

Bankers are losing their jobs and the financial press is up in arms over the manipulation of a key interest rate, LIBOR (London Inter Bank Offer Rate). The manipulation is a big deal because of how large of an effect LIBOR has– $750 trillion of Swaps (notional) is outstanding and most of it is priced to LIBOR. Additionally, another very large amount of loans have interest rates based on LIBOR. So manipulation of the interest rate shifts a very large amount of money from one group of people to another.

For a sense of the size of the problem, the goods and services the U.S. economy produces in a year are worth around $16 trillion. So the idea of $750 trillion in securities being manipulated is nearly beyond comprehension. But consider this: (1) most of the $750 trillion in Swaps (notional) outstanding were issued after the financial crisis in 2008 and (2) most financial markets are already being ‘managed’ meaning that manipulation of prices is the rule, not the exception.

Swaps are used to trade one financial return for another. Swaps notional is a scalar, a fictional value used to scale payment calculations, not a dollar amount at risk. The actual dollar amount at risk is the summed difference between these returns over some period of time. The manipulation of LIBOR produces gains for one group at the expense of another. Manipulating LIBOR is straightforwardly theft. And given the scale and that banks and bankers are the culprits, this interest rate manipulation is organized crime on a massive scale.

However, the existence of the Swaps market already was a scandal. The Swaps market is OTC (over-the-counter), meaning by design there already was little price transparency for Swaps. If a Swaps dealer can set the price that they pay (or receive) a bit lower (higher) without the purchaser knowing it, because there is no price transparency, the market has already been manipulated. Manipulating LIBOR in addition just adds insult to injury.

The Swaps market would be relatively easy to put onto a securities exchange. Doing so would provide price transparency and the potential for regulatory oversight. But Wall Street, with the help of current and former Obama administration officials, has lobbied furiously to keep Swaps off of exchanges because the banks don’t want price transparency. The banks profit from having information that their customers don’t have. This $750 trillion game was already rigged before the LIBOR scandal. more
Someone is no doubt upset in a City clubroom.  My heart bleeds.

The LIBOR Scandal Reveals The Rotten Heart Of Finance

The Economist | Jul. 10, 2012

The most memorable incidents in earth-changing events are sometimes the most banal. In the rapidly spreading scandal of LIBOR (the London inter-bank offered rate) it is the very everydayness with which bank traders set about manipulating the most important figure in finance. They joked, or offered small favours. "Coffees will be coming your way," promised one trader in exchange for a fiddled number. "Dude. I owe you big time!… I’m opening a bottle of Bollinger," wrote another. One trader posted diary notes to himself so that he wouldn’t forget to fiddle the numbers the next week. "Ask for High 6M Fix," he entered in his calendar, as he might have put "Buy milk".

What may still seem to many to be a parochial affair involving Barclays, a 300-year-old British bank, rigging an obscure number, is beginning to assume global significance. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.

Over the past week damning evidence has emerged, in documents detailing a settlement between Barclays and regulators in America and Britain, that employees at the bank and at several other unnamed banks tried to rig the number time and again over a period of at least five years. And worse is likely to emerge. Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. "This is the banking industry’s tobacco moment," says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America’s tobacco industry more than $200 billion in 1998. "It’s that big," he says.

As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged. The scandal also corrodes further what little remains of public trust in banks and those who run them.

Like many of the City’s ways, LIBOR is something of an anachronism, a throwback to a time when many bankers within the Square Mile knew one another and when trust was more important than contract. For LIBOR, a borrowing rate is set daily by a panel of banks for ten currencies and for 15 maturities. The most important of these, three-month dollar LIBOR, is supposed to indicate what a bank would pay to borrow dollars for three months from other banks at 11am on the day it is set.  more
Of course, they were fixing interest rates—it's what these guys do!
Mark Gongloff

New York Fed's Libor Documents Reveal Cozy Relationship Between Regulators, Banks

07/13/2012 8:34 pm

The New York Federal Reserve on Friday released documents showing it knew banks were manipulating a key interest rate more than four years ago.

The documents, which date back to 2007, show that the Fed became fully aware that banks were lying about their borrowing costs when setting Libor, and chose to take no action against them.

The documents will likely feed growing concerns about whether the New York Fed, its former chief Timothy Geithner and other market watchdogs did everything they could to stop the manipulation. The documents also raise more questions about whether the New York Fed and other regulators were too cozy with the banks involved, looking the other way in order to spare the banks too much pain at a time when the financial crisis was still brewing.

"We know that we’re not posting um, an honest LIBOR," a Barclays employee tells a New York Fed analyst in an April 11, 2008, call, "and yet we are doing it, because, um, if we didn’t do it, It draws, um, unwanted attention on ourselves."

The New York Fed representative expresses sympathy and understanding:

"You have to accept it," she says. "I understand. Despite it’s against what you would like to do. I understand completely." more
The death of investment banking, you say?
07/10/2012  Waves of Lawsuits Pending

Barclays Affair Rocks European Banking Industry

By Martin Hesse  REUTERS

The LIBOR rate-fixing scandal has sent a shock wave through the whole European financial industry. A number of other banks are suspected of having manipulated interest rates, and Deutsche Bank has already suspended two employees. Experts warn of a wave of lawsuits that could ruin some institutions.

Bob Diamond seemed nervous when he sat in front of the members of the Treasury Committee of the British House of Commons last week. He had been forced to resign as CEO of Barclays, a major bank, the day before. Suddenly Diamond, once such an important figure, seemed very small indeed.

He poured himself a glass of water, cleared his throat and wiped his mouth with a handkerchief. The banker seemed like a stubborn child as he described his view of the scandal over the manipulation of interest rates that had just cost him his job.

Yes, Barclays employees had behaved reprehensively when they manipulated interest rates for years, Diamond said. But he also insisted that he had known nothing about it, and pointed out that other banks had also fudged their financial records. "I love Barclays. History will judge Barclays as an incredible institution because of its people."

Historians are probably more likely to remember Diamond's appearance and the scandal as a milestone in the demise of investment banks. more  
Someone else who believes LIBOR was working as designed.

LIBOR Was A Criminal Conspiracy From The Start

Raúl Ilargi Meijer, The Automatic Earth | Jul. 11, 2012

So far, everybody who's said anything about the Libor rigging affair appears to have been lying. And if Nouriel Roubini can call for "somebody hanging in the streets", I can at least call for all the Libor liars to go to jail for it. AND lose all their money, benefits, pensions, everything.

And while we’re at it, why not also throw in jail anyone who suggests that Barclays "might not" have been the only bank rigging the rates. Might not? As if Barclays could have manipulated Libor significantly all on its own?! Against scores of other major banks reporting their daily rates?!

Look, when calculating Libor rates, the British Bankers Association (BBA) throws out the 4 highest and 4 lowest of rates reported by 18 banks. Hence, one single bank cannot possibly manipulate rates down; that is, not on its own. The only way this could have worked, it's pure and simple math, is if a substantial number of banks were involved. A majority of them, to be precise.

Indeed, it is worse than that: all the evidence over the past week, if not long before, suggests that Libor was set up the way it was, BECAUSE the idea was to make it prone to manipulation. It was a criminal conspiracy from the start, and a whole slew of regulators and politicians were in on it. And still are.

Bankers were left free, legally, to call each other every morning and set Libor rates where it suited them. There was no outside control. None. more

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