Thursday, July 19, 2012

LIBOR update (3)

As someone who sincerely believes that the greatest single economic error of the past generation was the insanely high interest rates that have prevailed since 1979, there is part of me that rejoices over the fact that banksters were actually colluding to lower them.  Just remember, no one got this upset when it was obvious that interest rates were being manipulated to keep them sky high.  But there is something almost blasphemous about banks colluding to keep interest rates low.  And once again we see poor Deutsche Bank acting as if they were too hopelessly stupid to be one of the really bad guys.

Deutsche Bank seeks deal in Libor scandal

DW 16 JUL 12

Germany's biggest bank is reportedly cooperating with European investigators probing the manipulation of interbank interest rates. The bank seeks to limit the damage as regulators have started imposing penalties.

Deutsche Bank has asked the European Commission and Swiss authorities to give it the status of cooperating witness in an ongoing investigation of the rigging of the London Interbank Offered Rate (Libor), media reports said on Sunday.

According to the German weekly news magazine Der Spiegel, Germany's biggest bank had already offered investigators a pact in 2011, in efforts to "limit damage to its reputation and bottom line."

"Anxiety currently reigns within Deutsche Bank," a source close to the bank told the German weekly.

Deutsche Bank is one of some 20 banks alleged to have manipulated Libor - the key interest rate for daily interbank lending transactions, which include mortgages, loans and credit cards.

Libor is compiled daily by the British Bankers' Association from information provided by major banks on how much they assume they need to pay for borrowing from each other. The banks stand accused of having lied on their input for Libor between 2005 and 2011. more
Here Roberts and Prins attempt to explain why a banker would want to achieve such a counterintuitive outcome as low interest rates.
JULY 16, 2012
Is the Era of Rigged Bond Prices Coming to an End?

The Real Libor Scandal


According to news reports, UK banks fixed the London interbank borrowing rate (Libor) with the complicity of the Bank of England (UK central bank) at a low rate in order to obtain a cheap borrowing cost. The way this scandal is playing out is that the banks benefitted from borrowing at these low rates. Whereas this is true, it also strikes us as simplistic and as a diversion from the deeper, darker scandal. Banks are not the only beneficiaries of lower Libor rates. Debtors (and investors) whose floating or variable rate loans are pegged in some way to Libor also benefit. One could argue that by fixing the rate low, the banks were cheating themselves out of interest income, because the effect of the low Libor rate is to lower the interest rate on customer loans, such as variable rate mortgages that banks possess in their portfolios. But the banks did not fix the Libor rate with their customers in mind. Instead, the fixed Libor rate enabled them to improve their balance sheets, as well as help to perpetuate the regime of low interest rates. The last thing the banks want is a rise in interest rates that would drive down the values of their holdings and reveal large losses masked by rigged interest rates.

Indicative of greater deceit and a larger scandal than simply borrowing from one another at lower rates, banks gained far more from the rise in the prices, or higher evaluations of floating rate financial instruments (such as CDOs), that resulted from lower Libor rates. As prices of debt instruments all tend to move in the same direction, and in the opposite direction from interest rates (low interest rates mean high bond prices, and vice versa), the effect of lower Libor rates is to prop up the prices of bonds, asset-backed financial instruments, and other “securities.” The end result is that the banks’ balance sheets look healthier than they really are.

On the losing side of the scandal are purchasers of interest rate swaps, savers who receive less interest on their accounts, and ultimately all bond holders when the bond bubble pops and prices collapse.

We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%. Also, in the UK, as in the US, the government debt to GDP ratio is rising. Currently the ratio in the UK is about double its average during the 1980-2011 period. more
Of COURSE the Fed "noticed" that LIBOR was being fiddled with—mostly because they wanted that outcome.

The NY Fed Says It Noticed LIBOR Accuracy Problems By Fall 2007

Simone Foxman | Jul. 13, 2012

The Federal Reserve Bank of NY just released a slew of documents about the LIBOR scandal, both from the Fed and Barclays.

It also notes that it had started to see consistent inaccuracies in LIBOR reporting as early as fall 2007.

LIBOR is one of the most important financial benchmarks in the world, as it influences everything from home mortgages to complex derivatives like Eurodollar futures.

Barclays has been at the center of this scandal recently after it agreed to pay $453 million to U.S. and U.K. authorities after investigators uncovered traders' attempts to manipulate the LIBOR rate. But this fiasco probably stretches to many more important banks.

The most recent revelations have suggested that the world's central bankers knew about the rate manipulation before and/or during the financial crisis, and may have even leaned on banks to keep lending rates low.

These documents indicate that the Fed and the BOE had considered problems with the accuracy of LIBOR, and believed that Barclays was pushing down estimates of the rate at which it could borrow funds in order to appear more financially stable.

Here's the abstract on those documents from the NY Fed. More documents can be found by clicking here.
Attached are materials related to the actions of the Federal Reserve Bank of New York (“New York Fed”) in connection with the Barclays-LIBOR matter. These include documents requested by Chairman Neugebauer of the U.S. House of Representatives, Committee on Financial Services, Subcommittee on Oversight and Investigations. Chairman Neugebauer requested all transcripts that relate to communications with Barclays regarding the setting of interbank offered rates from August 2007 to November 2009. Please note that the transcript of conversations between the New York Fed and Barclays was provided by Barclays pursuant to recent regulatory actions, and the New York Fed cannot attest to the accuracy of these records. The packet also includes additional materials that document our efforts in 2008 to highlight problems with LIBOR and press for reform. We will continue to review our records and actions and will provide updated information as warranted.

An important and longstanding role of the New York Fed Markets Group is to monitor a wide range of markets for the purpose of understanding and reporting on market conditions and market functioning. Each day, analysts gather information on a nearly continuous basis by speaking with market participants and asking both general and specific questions about prevailing market conditions, the magnitude of movements in prices or the volume of activity, or any other issues in the markets. These analysts also review large amounts of market commentary they receive via individual and mass-distribution emails, and review a wide variety of data feeds.

Following the onset of the financial crisis in 2007, markets monitoring played a critical role by identifying the nature and location of rapidly mutating financial stress. Markets Group analysts engaged with market participants – including staff at Barclays - to better understand the nature of market stress. In the course of these exchanges, market participants reported dysfunction in the form of illiquidity and anomalous pricing across many different markets.

Among the information gathered through markets monitoring in the fall of 2007 and early 2008, were indications of problems with the accuracy of LIBOR reporting. LIBOR is a benchmark interest rate set in London by the British Bankers Association (“BBA”) under the broad jurisdiction of the UK authorities, based on submissions by a panel of mostly non-US banks. The LIBOR panel banks self-report the rate at which they would be able to borrow funds in the interbank money market for various periods of time. As the interbank lending markets dried up these estimates became increasingly hypothetical. more

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