Sunday, July 8, 2012

This LIBOR scandal just keeps getting "better"

There is a LOT about the LIBOR scandal that just seems hopelessly arcane.  While the LIBOR rate is incredibly important and affects the daily lives of billions, how the rate is set, while hardly a secret, is not widely known either.  We at real economics will be focusing careful attention to this scandal because it affects so many people.  But I should warn everyone—the LIBOR rate-rigging scandal is not being reported because some poor suckers paid too much for their mortgages or credit cards.  No. No. No.  This has become a story because other INVESTORS got hurt, got cut out of ill-gotten gains, or whatever makes those people angry.

Of course, this inter-Predator fighting is precisely why the rest of us should be so interested.  The only time we little guys have ANY chance to get our agendas heard is when the big guys start beating up on each other.

Anyway, we start with some basic definitions.

What Does London's LIBOR Mean To The U.S.?

Listen to the Story
July 7, 2012

Many of us were introduced to the term LIBOR for the first time this week, when it was revealed that some banks might have been manipulating the dull but vital interest rates to gain an edge in the market.

LIBOR – the London Interbank Offered Rate – is a series of interest rates determined by a handful of representatives from the biggest banks in London. The rates are what the banks would charge other banks to borrow on different loan categories, which determines the global flow of billions of dollars and perhaps even the interest rate on your savings account or home mortgage.

"We're talking about the reference rate by which ... the most complex derivative to the credit card in your pocket is actually set," says Mark Blyth, an economist at Brown University.

The scandal forced chairman Marcus Agius and CEO Bob Diamond of British banking giant Barclays to resign, and the company has agreed to pay $455 million in fines to regulators in the U.K. and U.S. It was at Barclays that emails appeared to show bankers willing to manipulate the rate, but several other banks — including American ones — are now under investigation. more
The story grows.  The scandal simply could NOT have stopped at Barclays.

Another Domino Falls in the LIBOR Banking Scam: Royal Bank of Scotland

POSTED: June 29, 7:06 AM ET

Another one bites the dust. The Royal Bank of Scotland is about to be fined $233 million (£150 million pounds) for its role in the Libor-rigging scandal. It joins Barclays as the first banks to walk the plank in what should be, but so far is not, the most sensational financial corruption story since the crash of 2008.

Many of the banks implicated in the Libor mess have also been targeted in the various municipal bond bid-rigging investigations, and RBS is no different – its subsidiary Natwest is also a defendant in the major civil lawsuit in the bid-rigging case. The cases aren't related, except in the sense that they both involve manipulation and anticompetitive cooperation. It's going to be harder and harder to make the case that the major banks do not routinely cooperate at the expense of the public when it serves their purposes to do so.

The news that RBS is involved comes with a perverse twist. This is from the Times UK:
The bank, which is 82 per cent owned by the taxpayer, is preparing for a political firestorm over the affair because it believes that it has no power to claw back bonuses from the traders responsible. Instead, the expected fines would be borne by the shareholders — largely the Government.
Libor manipulation is a crime that already robs the public to create bonuses for bankers. By artificially lowering interest rates, the banks caused cities, towns, countries, and other public entities to receive smaller returns on their variable-rate investment holdings. If it turns out that taxpayers end up paying the fine for RBS's crime of robbing taxpayers, how perfect would that be? more

LIBOR Banking Scandal Deepens; Barclays Releases Damning Email, Implicates British Government

POSTED: July 4, 11:35 AM ET

This Libor-manipulation story grows crazier with each passing minute. We have officially disappeared now down the rabbit-hole of the international financial oligarchy.

Former Barclays CEO Bob Diamond is testifying before parliament in London today, and that's sure to bring some shocking moments. But there's already been one huge stunner. In advance of that testimony, Barclays released an email from October 29, 2008, written by Diamond to then-Chairman John Varley and COO Jerry del Messier (who also stepped down yesterday). The email from the CEO to the other two senior Barclays execs purports to detail the content of the conversation Diamond had with Bank of England deputy governor Paul Tucker that same day.

In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from "a number of senior figures within Whitehall" – that is, the British government – expressing concern about Barclays' high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were.  more

Bob Diamond would have known about Libor rigging, claims whistleblower

Former senior Barclays employee says bank executives would have been told about interest rate fixing concerns in 2008

David Batty, Saturday 7 July 2012 11.02

A former senior Barclays employee has claimed that the bank's ex-chief executive Bob Diamond would have known that his traders were involved in the interest rate rigging scandal.

The whistleblower's accusation comes after the bank announced on Friday that it had begun a formal investigation into attempts to fix Libor, meaning that criminal charges could be brought against implicated traders.

The banker alleged that Barclays executives would have been informed about Libor concerns in 2008, adding that staff knew they faced the sack if they failed to inform senior managers of untoward behaviour. more

Yes, Virginia, the Real Action in the Libor Scandal Was in the Derivatives

FRIDAY, JULY 6, 2012

As the Libor scandal has given an outlet for long-simmering anger against wanker bankers in the UK, there have been some efforts in the media to puzzle out who might have won or lost from the manipulations, as well as arguments that they were as “victimless” or helped people (as in reporting an artificially low Libor during the crisis led to lower interest rate resets on adjustable rate loans pegged to Libor; what’s not to like about that?)

What we have so far is a lot of drunk under the streetlight behavior: people trying to relate the scandal to the part that is most visible and easy to understand, meaning the loan market that keys off Libor. As much as that’s a really big number ($10 trillion), it is trivial compared to the relevant derivatives. From the FSA letter to Barclays:
The Eurodollar futures contract traded on the CME in Chicago (which is the largest interest rate futures contract by volume in the world) has US dollar LIBOR as its reference rate. The value of volume of that contract traded in 2011 was over 564 trillion US dollars.
This is only one blooming exchange contract, albeit a monster of a contract. There are loads of OTC contracts in addition to that:
Interest rate derivative contracts typically contain payment terms that refer to benchmark rates. LIBOR and EURIBOR are by far the most prevalent benchmark rates used in euro, US dollar and sterling OTC interest rate derivatives contracts and exchange traded interest rate contracts. more
Meet the Bankster

The Decline of Barclays


There is a putrescence coming from the banks of what Londoners term ‘The City’, an intense odour of disgust suggesting old tricks from the seasoned and the crooked. The resignation this week of Barclay’s CEO Bob Diamond should not have been the bombshell it became but even after years of banking mismanagement, the public has yet to be desensitised to the antics of the bankster.

The former Barclays chief executive, who quit on Tuesday under pressure from the Bank of England and the financial regulator, more or less conceded that Libor, or the London Interbank Offered Rate, had been manipulated by the bank with frequency. Such behaviour has earned Barclays fines from regulators on both sides of the Atlantic in the vicinity of $441 million. Rigging the rate, it seems, was a banking motto.

A spate of resignations have ensued – chairman Marcus Agius, formerly of Lazard, went on Monday, Diamond on Tuesday kept company with chief operating officer Jerry del Missier. For his part, Diamond unconvincingly claimed before the Treasury Select Committee that he had no knowledge of the interest rate fiddling in October 2008. more
And if this is too much reading, we have a nice video that explains a great deal about this scandal in about nine minutes.

1 comment:

  1. Jonathan--glad the move seems to have come off well, and what a great welcome back posting.

    Remember a few months back when it was reported in the UK that some Sir Lord Fauntleroy head of some UK banking commission was complaining that some bankers were refusing to accept the proposed banking regulations and wondered aloud in the media about what might be done?

    I think that, combined with these two statements from the posting--
    "...the public has yet to be desensitised to the antics of the bankster..."
    " outlet for long-simmering anger against wanker bankers in the UK..."
    --provides answer for us (and his Lordship) where this LIBOR scandal comes from and what might be done when banksters refuse to bend voluntarily to remain as part of a greater society.

    Of course too...we all wonder aloud like Matt at how little outrage these scandals cause. How it is left to Rolling Stone and high cable channels and blogs to cover this; that this scandal is poorly reported and virtually unexplained in the mainstream media--at 7 minutes into the video they explore why a bit.

    It seems partly the MSM insults us (while attempting not to insult our intelligence) by their inference that 'we can't handle the truth' if it can't be wrapped into a 10 second soundbite that fits between the drug company ads and celebrity divorce infotainment gossipnews, of course for the viewers and advertisers sake, right? Mostly the media dumbs us down and controls the message to keep us out of the street, exactly from freaking out and demanding reforms, or attacking these institutions of evil, purposely, or at least to keep conversations cool in the coffeehouses and restaurants.

    So it seems there are several insights here--
    --turns out the financial masters of the universe ARE NOT the center of the MOTU realm (albeit close), and they can be spanked when the real masters so choose to dole out such punishment.
    --the mainstream media has fully dumbed down our society; it is fully insulting to anyone of intelligence, and it has no problem ceding any responsibility for journalism to the outstream media or blogosphere; none of the existing MSM channels has stepped up successfully and instead have reversed and yielded, and gone more into infotainment.
    --So when intelligent people question our greater society's priorities when it comes to decisions in a gov't budget crisis or with football stadium funding deals or lack of vision/leadership in solving healthcare issues or any issues for that matter...we are surrounded by the answer--only a small fraction of people (mini-MOTU types) are able to receive any of the factual information needed to make decisions.
    --Thus when MOTU screw up, intentionally or not, an important function of society is to grumble; and if the sound of grumbling grows beyond the dull cheers of the local sports team or whining about the latest celebrity divorce, then it is heard by (or dutifully reported to) even the MOTUs and they must act (at least in kabuki) to appease the masses.
    --Maybe all the internet is doing is providing an easier channel for grumbling.