I’m shocked and appalled that the Libor fiasco could even occur in our modern, highly ethical, and transparent financial sector. Banks misreporting anything…. unheard of. Nevertheless, it occurred. Not just once, but from get-go. And everyone and his dog, even Treasury Secretary Timothy Geithner, back in 2008 when he was still President of the New York Fed, knew about it.
And it’s not just some theoretical thing. Libor, or the London interbank offered rate, is figured daily in London when banks submit their estimated costs of borrowing from other banks—not actual costs, by design so that they could submit whatever. It is used to set interest rates on $800 trillion (not billion) worth of financial instruments, from student loans to interest rate derivatives (by comparison, US GDP is about $15 trillion). As Libor gets manipulated, so does the cost of loans, interest income of lenders, the outcome of all sorts of trades, and the apparent health of banks that are judged by it.
The world’s largest banks—among them Barclays, HSBC, RBS, Lloyds, Credit Suisse, UBS, Deutsche Bank, Rabobank, Dexia, Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, Royal Bank of Canada, and Mitsubishi Bank—are under investigation or have been named in lawsuits alleging that they’d rigged Libor, and the list will likely get longer. In June, Barclays agreed to pay $453 million (not billion) in fines. Peanuts, given the magnitude and duration of the scam. Bob Diamond, Barclay’s CEO, and some other folks at the bank, lost their jobs. The US Department of Justice is expected to file criminal charges against a number of banks and bankers later this year—with perp walks perhaps before the election in November.
“You know, Libor is being set too low anyway,” a banker at Barclays told an analyst at the NY Fed on December 17, 2007, according to a transcript in the NY Fed’s data dump on Friday. “We know that we’re not posting um, an honest Libor,” another banker at Barclays told a Fed analyst on April 11, 2008.
Geithner, as President of the NY Fed, was informed—as must have been just about everyone at the Fed. So, according to emails in the data dump, he hounded the Bank of England to do something about it. Well, not exactly hounded. In June 2008, he sent an email with recommendations on how to preserve Libor’s credibility to BoE Governor Mervyn King, who passed it on to the British Bankers Association (BBA)—the banking group in charge of Libor—but obviously not much has been fixed since then.
Bankers regulating bankers—who would have thought that it could lead the industry astray? Just shocking and appalling.
“The revelations broadly are another episode that is damaging to people’s confidence in the financial services industry and that’s a shame,” Richmond Fed President Jeffrey Lacker admitted in an interview.
Because “confidence” is what this really is all about … a con game … and people have started to open their eyes a bit and don’t buy it anymore, not lock, stock, and barrel like they used to before the financial crisis and before the multi-trillion-dollar bailouts that were bestowed upon banks and other central-bank cronies around the world, including companies like GE and our very favorite Uncle Warren Buffett.
Maybe they (the Fed, the BoE, the BBA, etc.) didn’t know how to replace Libor, which clearly was beyond repair, but they could have let some sunshine hit the process, by announcing, for example, that the rate was rigged, and that people shouldn’t rely on it. But sunshine is anathema in banking as it destroys “confidence” and brings banks to the brink of collapse, where they’re bailed out again—a nasty distraction from the game.
But collusion and interest rate manipulation, the very misdeeds that the Libor players are being accused of, are standard practice and, in fact, public policy with central banks. Driving rates to absurd lows, and into the negative even—a form of confiscation where investors are made to lend money to governments at a guaranteed loss—is often the stated goal of all major central banks, as is printing money and buying up debt to control and manipulate the credit markets.
The consequences of these actions are far deeper and broader than Libor manipulation. They destroy the functioning of the capital markets, contaminate price discovery, lead to massive misallocation of capital, and undermine a large segment of market participants. They create this silly notion of a policy put in both credit and equity markets. And they allow elected officials to believe that they can run up deficits ad infinitum. But it’s unlikely that central bankers will ever be held to account for these activities—and perp walks are even more unlikely. Those will be reserved for a few sacrificial lambs in the Libor scam.
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I've just recently begun to follow your on line articles and find them very interesting and informative. The LIBOR price fixing mess and it's implications have certainly proved, if nothing else, entertaining. However, if you think LIBOR is a problem for banks, then consider this. A few days ago I received an e-mail from my brother who has a friend in the DOJ in California.
It seems the feds have just settled a case in Manhattan federal court, which found three Muni bond traders guilty of fraud on a massive scale. All…all the money center banks in the U.S. were implicated. The con involved…fixing prices for new issues of Muni bonds going back decades!
If this completely unreported verdict ever sees the light of day the markets are done for, i.e., liability would be greater than all previous settlements combined!
I've been in the banking and investment business since 1979 (no longer) and have seen more criminal behavior than you or most anyone can possibly imagine.
kmt – Thanks for the info. The muni price fixing scandal in CA may not have gotten the coverage it should have, but it was reported and I've read about it regularly. As far as fraud in financial institutions is concerned, I believe you!