Recent Items

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

Posted on by

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.

Devil’s advocates have also argued that while Barclays submitted improper Libor rates, there’s no evidence they influenced the rates. I read the FSA document quite differently.

Recall that (so far) we have two phases of activity: one from 2005 to 2007, in which derivatives traders at Barclays would lean on the Submitters on a regular basis to place bids that would help improve the profits of positions they had on, and a later phase, during the crisis, where Barclays felt its peers were submitting lowball figures to the daily fixings and it was getting bad press for being an outlier, and it went to posting what it though were competitive, as in artificially low, data.

The earlier period looks to be far more damaging, and the regulators may have gotten only the tip of the iceberg. Readers have told me this sort of manipulation dates from at least 2001; the Economist quotes an insider saying it goes back 15 years. And with so few banks in the end influencing the rate, it isn’t hard to imagine the gaming worked. If you have 16 banks on the panel, as you did in late 2008, the top and bottom 25% of the bids are eliminated and the ones left are averaged. So it’s the average of 8 that remained that would determine the rate.

First, the FSA document suggests that it has only partial information, and it quotes e-mails and some isolated instant messages. A lot, presumably most, of the communication was verbal. But even with what the FSA presented, the traders were often and aggressively working with the submitters to influence their bids, and the FSA found in the overwhelming majority of the time the submitters cooperated. The directions were often quite specific, to hit a certain number, even to submit a figure that would be so high or so low as to get Barclays’ data point excluded from the daily calculation. The enthusiasm and frequency with which the traders were pushing the submitters, as well as the reaction in the market, suggests these efforts were having an impact:

Other individuals with no apparent vested interest in the strategy commented on the EURIBOR rates on 19 March 2007. Trader D stated in an instant message to an external trader “look at the games in EURIBOR today [...] I am sure a few names made a killing”. A trader at a hedge fund communicated with Trader E, also on 19 March 2007, stating “it’s becoming dangerous to trade in 3m imms [...], especially when Barclays sets the 3m very low [...] it does draw attention to you guys. It doesn’t look very professional”

But how could this be? Barclays was only one of a number of banks putting in daily Libor prices.

First, the FSA account notes that Barclays was sometimes working with other banks. It would seem likely that this was more frequent than the paper trail thus far would suggest. Someone working with other banks to rig rates would probably be a bit more circumspect than in internal communications. The fact that the traders would sometimes try to have a rate put in that was intended to be knocked out of the final calculation suggests a collusive strategy.

Second, the derivative traders weren’t working just with the submitters. The report indicates that on at least on occasion, they got the cash desk to cooperate with the manipulation. And again, if the derivative traders sometimes worked with traders in other banks, they might have gotten those cash desks to play along with their scheme.

Third, their objectives for rate moving were to achieve single or a few basis points. Some examples:

Trader B explained “I really need a very very low 3m fixing on Monday – preferably we get kicked out. We have about 80 yards [billion] fixing for the desk and each 0.1 [one basis point] lower in the fix is a huge help for us.

..the Submitter responded positively on 10 November 2006, “of course we will put in a low fixing” and on 13 November indicated they would make a submission lower than the Brokers thought EURIBOR would set that day, “no problem. I had not forgotten. The brokers are going for 3.372, we will put in 36 for our contribution”

As the Economist points out:

The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars. In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America’s Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions.

And the idea that one party’s loss from the manipulation was another’s gain is irrelevant to those on the losing side:

….banks will be sued only by those who have lost, and will be unable to claim back the unjust gains made by some of their other customers. Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.

I expect the firms involved to face a locust swarm of litigation. Lawyers may accomplish what regulators and politicians refused to do: strip the banks of ill gotten gains and bring their preening CEOs and “producers” down a few notches. A day of reckoning may finally be coming.

Print Friendly
Twitter45DiggReddit0StumbleUpon0Facebook82LinkedIn1Google+9bufferEmail

126 comments

  1. Conscience of a Conservative

    Yes it was deriviatives but to a very large extent it was also the appearance of a being a good credit during the financial crisis. This story however does not seem to be getting main street traction and probaby because the media doesn’t get who is long and short libor with regards to the banks. The meia is focusing too muc on mortgages and libor based consumer debt and ignoring what’s traded on Wall Street. It may also be an agenda pushed by those who are pro-bank, as obfuscating the issue makes it a non-issue to most.

    1. Doug Terpstra

      For most people this is merely fractional point-shaving. When they can understand that banks can borrow money from the Fed Cartel for 0.25% and turn around and routinely charge commoners 33% on credit cards or in excess of 100% on payday and title loans, and $50 for an overdraft or late fee, they can’t quite grasp the significance of the LieMore scandal. It’s just not something that moves them to crank up the grind wheel to hone the machetes—at least not until they realize that their pensions have been looted and their water bills are doubled as a result of this.

    2. Ken

      The mainstream media bends to the will of those that are in control. Those in control have decided that this is an issue that does not need the scrutiny of main street. It’s just further evidence that greed is the engine that runs Wall Street!

  2. Ruben

    “I expect the firms involved to face a locust swarm of litigation. Lawyers may accomplish what regulators and politicians refused to do: strip the banks of ill gotten gains and bring their preening CEOs and “producers” down a few notches. A day of reckoning may finally be coming”

    Amen. The fabrication of LIBOR data doubtless had many many victims capable of suing. The class action bar has a great opportunity to make a lot of money. The image of a wounded T. rex being bitten away by a swarm of medium size predators comes to mind.

    http://dealbook.nytimes.com/2012/07/03/whats-next-after-the-barclays-settlement/

      1. Yves Smith Post author

        You need to define “rejected”.

        1. If it was put in moderation, there was a reason, like putting in more than 5 links (spammers will put up comments with large numbers of links). Right now I have someone in moderation (as in a person, I can put people in moderation if I’m not certain whether they are trolls, merely bumptious, or just like talking too much). I have someone in there who posts manically and the level of his comments has swamped my ability to even find comments in moderation by others. I’ve told him by e-mail to cut way back, he hasn’t, so he is getting banned.

        2. You might have been assigned an IP address by your ISP which is the same as that of someone who had been blacklisted. Really low odds of that happening but not impossible.

        3. WordPress sometimes eats comments.

  3. Richard Kline

    Yves: “Lawyers may accomplish what regulators and politicians refused to do: strip the banks of ill gotten gains and bring their preening CEOs and “producers” down a few notches. A day of reckoning may finally be coming.” It has been my view for four years (June 08), stated here, that this will be exactly the driver of change in the financial system. Governments are too compromised to intervene meaningfully, with politicos bought, regulators lip-locked with perps, and nominal ‘honest policy brokers’ intimidated re: “The system will crash, CRASH, do you hear?” to do more than wring their hands and avoid comment. We will get change when capitalists ripped off by oligarchs organized amongst themselves to tie down or do in the Brobdinagian slime buckets and their zombie corps.

    . . . That sounds rather like ‘liberal revolution,’ doesn’t it? Which, for interested parties, IS the political tradition of the societal vector which includes the bulk of the American socio-cultural macro-gestalt. It won’t be anarcho who’ll save us, though they’ll get the ball bearings rolling under the clay feet of the state. It won’t be ‘the best and the brightester’ out of academe, who can’t get near a lever of real power without having implicated themseveles in so many misdemeanors and propagandistic shennanigans as to have forgotten where they mislaid their conscience along the way. It won’t be the Next Prez Hope, who will king wave a wand and save us all the trouble. It will be the upper middle class and the actually wealth-creating technocracy (comprimsed tho’ it they be) who will mose probabaly cobble up a liberal revolution or active reform movement. And not necessarily for ‘the greater good’ but simply to kee _their own capital winnings_ from being siphoned off and consumed by the disaster-masters of financial capital.

    And said revolution of revulsion won’t begin in the the electoral political system, in my view, it will begin in the courts. Medium big money still thinks that it will win if it gets its day in court with all the proper documentation. Either they will be proved correct, and thus the thin end of the wedge is in, or they will be aghast to find that the courts simply shove them back to the do nothing regulatory system of misrule, forcing a higher stakes confrontation. I don’t know whether that scenario makes me feel chummy and eager. I do see this as the most likely avenue of real change, however. “Gentelmen, start your torts.”

    1. David Habakkuk

      It may not just be medium big money — it may be very big players fighting among themselves.

      Presumably, once one can identify occasions when Libor was manipulated, it is hardly insuperably difficult to identify who was on the losing end.

      What is not clear to me is how easy or difficult it is to identify those occasions in the earlier period of manipulation, when this was purely a matter of boosting trading profits. How much relevant information is already in the public domain — and how much could be forced out by capable lawyers?

      As regards the manipulations following the onset of the financial crisis, presumably there is already quite enough information in the public domain to make it possible to identify who lost.

      The argument that absent manipulation in 2008, all-out panic might have broken out may actually be plausible. It is not clear to me whether its plausibility, or lack of it, is relevant in civil actions.

    2. David Habakkuk

      ‘and nominal ‘honest policy brokers’ intimidated re: “The system will crash, CRASH, do you hear?”’

      But the ‘policy brokers’ may be being quite honest. It is not clear to me whether or not it is absurd to suggest that the breaking open of this can of worms may crash the system.

      This is a familiar problem in other contexts. It was hardly irrational of Soviet Communist Party officials to fear that exposing the truth about collectivisation would crash the system. When ‘glasnost’ was introduced, the system promptly collapsed.

      Apparently the EURIBOR panel consisted of at least 40 banks, with the rate calculations excluding the top and bottom 15%. If Barclays were also seeking to influence this, it would seem to make the issue of collusion still more unavoidable.

      Given that the FSA document is so fascinating, it would be interesting to read what the CTFC and DoJ have produced. Is any of their material in the public domain yet?

    3. Litvinenko's telomeres

      Word. The last vestige of pluralism in this kleptocracy is intra-elite. It won’t stop with litigation, though.

    4. JTFaraday

      I broadly agree with what you say. But I think wealthier investors and the people who lead the brokerages (if not necessarily their clients) are still trying to figure out where their raw advantage lies. They don’t seem to be hung up on clean markets just for principle’s sake. Meanwhile the upper middle class brokerage client is still O-botting and holding its nose for Romney.

      Assuming a critical mass decides its interests do not lie with the professional financial fixers, going through the courts is the standard libertarian propertarian solution. If this fails for even them, the next stop would be a narrow political reform agenda in the form of re-regulation with teeth this time.

      If that fails and someone still wants to pursue it, then they have to demagogue the broader public, after the classical liberal “revolutionary” tradition we have in the Anglo-American context. An appeal to the public may or may not issue in giving the broader public something it actually wants.

      I don’t think we’re anywhere close to this. And part of the problem is that so much of the upper middle class has been benefiting from the derogation of its social and economic inferiors, effectively undermining them in the real economy as business managers and consultants of various sorts, and actively baiting them into cultural and political projects that are not really in their own interests as members of the pundit and political class.

      So, while I generally agree that the divisions that could potentially produce change are those that exist amongst relative elites, I’m not sure what the path is to even full recognition of those divisions let alone the path to broad socio-economic change based upon them.

      1. JTFaraday

        In other words, if none of these people have any principles, then they first want to get cut in. It’s only if they can’t get cut in that they want change.

        So, then I would guess the question becomes, do the financial fixers and scam artists (who have captured the government) NEED to be parasitic on these other elites or can they cut enough of them in?

        1. Up the Ante

          “In other words, if none of these people have any principles, then they first want to get cut in. It’s only if they can’t get cut in that they want change.

          So, then I would guess the question becomes, do the financial fixers and scam artists (who have captured the government) ”

          Is it that the “cut in” changed and now we’re to believe the Justice Dept. has ‘found justice’ from their “captured” state ?

          Rest assured “drunk[s] under the streetlight” will not convince justice is being done until seen with mine own eyes.

          Rest assured Justice is “head above parapet” as is FSA, everyone knows these banks are corrupt. End justice result may turn out to be routine, and not total then it’s ‘drunken’, no excuses,

          http://www.nakedcapitalism.com/2012/06/quelle-surprise-barclays-settlement-on-liboreuribor-fixing-illustrates-bank-crime-pays-well.html

          “Heads should roll all right. But until the Just-US Department along with other alleged regulators and “law enforcement”, which have proved to be nothing other than lapdogs for the banksters, ignoring outright criminal conduct as a matter of business and refusing to bring criminal charges against both people and institutions, change their stripes and start enforcing the law I will not be expecting anything other than “more of the same.” ”

          http://market-ticker.org/akcs-www?post=208099

          The Just-US Quality of Life Department and its genteel forgettings

      2. Richard Kline

        So JTFaraday, while I don’t disagree with your remarks in the broad sweep, they strike me as too cynical (if not unjustified in that). Let me reframe two issues here.

        First, your inclusion of the _entirety_ of, say, the top 10% of in wealth in Anglo-America in a collusive acquiescene with the financial and media oligarchy isn’t supported by the public statements and donation patterns to the extent to which those perspectives are meaningful and meaningfully revealed in public discourse. Yes, a plurality certainly and likely even a majority of said thick-slice propertarians are more than happy to coat-tail with the financial gargantua so long as they can. There is a significant faction which advocates for ‘good governance,’ in the historically valid term, especially in the tech and entrepreneurial sectors. But my point is rather different. When those in the 10% feel that _their personally accumulated wealth_ is at hazard from the behavior of the rapacious behemoths, they get off the dime and try to save their personal wads. There isn’t a class solidarity, so to speark, to put their own money all in to keep the masses down: it’s just been good business. When the plutocrats proceed to rob the merely wealthy, that’s when ‘liberal revolt’ suddently finds a consituency. I’ll return to that point below.

        Second, I made no prediction regarding _when_ such a liberal revolt might happen, or even whether it would. I raised the potential of same from historical comparison; that is different. Such actions do not happen on a close>>>closer>>>there basis, however. Logically, one expects that, but that is not the dynamic of large-scale social transformations. One reaches more a (dry tinder) + (spark) X (Wind) formulation. Whether the precipitant occurs is the most variable and necessary condition. Accelerants are perhaps less necessary. Most ‘revolutionary’ situations DON’T occur because ‘someone decided to act.’ Again, that is the common expectation but exceedingly rare in human experience. The typical situation is just what we have now: grotesque and imbalanced abuses which governance will neither solve nor mitigate. These typically blow up because of ‘official stupidity,’ when the powers that be do something egregiously wrong, or alternatively fail to intervene when obviously required. And things go sideways and then *blooiee*. Are we, then, at a socially saturated state where the 10% are sufficiently uneasy that ‘disaster at the top’ can push a plurality of them into reform/save ourselves mode? Perhaps not, but we’re one Big Fail away, I’d say. The young and the poor are already past that point, but they are excluded from political participation.

        Returning to the point above, the key issue (and raised tangentially in Yves’ post) is whether the market and investment situation has become so compromised that a chunk of the 10% will be moved to save their wealth. I would argue that yes, the financial system IS that broken, but public perceptions haven’t caught up with that reality. Stop and think: there is literally _nothing_ that a financial oligarch can’t do at this point and have their corporation get away with it. Completely loot customer money; check. Obviously and massively manipulate ANY market to cheat other participants; check. Decieve, rob, and abandon ones own customers; check. Game or manipulate public markets and essential activity reporting; check. Shift huge sums offshore into enormously leverage speculation, _including ‘protected’ customer money and government-swapped funding; check. Disregard any law, accounting regulation, court mandate, or legislative diretive; check, check, check. That list could be extended, but the picture wouldn’t truly change. Oh yeah, a few CEOs may be asked to withdraw from the public eye when huge loseses or thefts happen to hit the media cycle—but the guys who replace then conduct themselves exactly the same way, i.e. institutional behavior remains unaffected in any way. My point here is that our markets and financial activities are largely a sham at this point: it is steal al you can, and game the rest. This goes far beyond behavior that ‘is not clean’ and far into behavior that is unreservedly deceptive theft.

        My point again with this last is that yes, on a day to day basis the wealth of the 10% is _completely exposed to predation or speculative destruction_ continuously conducted by the .01% to the detriment of all. As a commentor said below, when someone in the 10% gets stung by that, they invariably go to court or the first available alternative. And that is where, in my view, the discovery will occur for those in the 10% that even they, like the rest of us, have no institutional recourse against the crimes of the plutocracy. So I’m all in favor of the 10% getting their losses into court where they find out that not only are they as much cattle as the rest, they’re just fatter assed and more lawyered up on the way to the wealth abbatoir. There will be no ‘liberal revolt’ unless the 10% feel that their property is at threat, so as they are robbed I’m happy for them to find out the full extent of the situation in court.

        “Gentlemen, start your motions!”

        1. LucyLulu

          RK wrote: “I would argue that yes, the financial system IS that broken, but public perceptions haven’t caught up with that reality.”

          At risk of sounding stupid, aren’t a lot of adjustable rate loans tied to LIBOR? Don’t businesses get loans based on the the LIBOR rate? If a company is borrowing hundreds of millions, a few basis points are a significant amount of money. Is money that is earned “on the float” (e.g. insurance companies count on this income) tied to LIBOR? Perhaps insurance companies might be colluding with the banks, but one wouldn’t think that borrowers would be.

          Would the people involved not realize they may have been swindled out of money? If my company had borrowed 7-8 figures of money I’d be looking into it. OTOH, if my company had borrowed that kind of money, I’d quit while I was ahead. Park my money in G. Cayman, Luxembourg, or wherever Mittens suggested.

          1. skippy

            I would seem that most have only seen – a part or parts – of the – elephant and not the hole (if such a thing is even possible). And if that is not swell enough, what are the chances of people acknowledging such a beast, as more comes into view, when the imprinting one receives from birth is to deny such an animal could – ever – exist… at all.

            Skippy… Does Hallmark have a card that covers this? Something like – FYI before you die… We just wanted you too know… the joke is you you! xoxoxoxo The betters!

          2. enouf

            At risk of sounding stupid, …

            Don’t you dare ever let that thought enter into your existance! — Your innate sense of morality is what’s at stake; your Intelligence, but moreso your “belly-barometer” – so please; Trust your innate “sense”, your ‘instincts’ when you are not sure and feel misguided — we live in a world designed to thwart true love.

            Love

        2. JTFaraday

          So, when some investment portfolio sporting good government advocating member of the 10%–Robert Reich, let’s say–writes some weak, routine post about “financial reform,” you actually believe him?

        3. Fiver

          But Richard,

          The only problem with a “liberal revolution” such as you depict is that the “10%” (or even “20%”) as a whole has not been hurt, nor will it be, as its elite ranks’ support is critical to keeping the entire elite systems project, financial and non-financial, functioning in this globalized, uber-interconnected economy.

          How many in that group sustained damage to their overall social position (material and otherwise) caused by the crisis in 2007/2008, that has not in all important respects been made whole – or even advanced their “fortunes”? An exceedingly small number, in my estimation. These are the senior corporate/institutional professionals, managers, consultants etc.,who run virtually every large financial/non-financial corporation and all important public institutions, including the US Government. These are the people for whom Clinton, Bush, Greenspan, Bernanke, Geithner and Obama etc. believe they “work”. And they have since Reagan quite consciously decided that their constituency is best served by very large-scale market manipulation run largely by criminals far more like themselves than those a quintile lower, let alone the vast majority of Americans. They’ve also decided it’s time for some ritual sacrifice of a few bad apples for the popular circus and what will appear to be some more serious reforms, which is what the Barclay’s and JPM/Dimon and other recent “scandals” (how is it a scandal when it’s routine?) will generate – to oh-so-transparently assuage what remains of the “liberal” part of elite conscience.

          The reason why someone now in the “10%” in terms of wealth possesses multiples more than their own elite predecessors of even a generation ago in the first place is precisely due to financial/legal/government sector manipulation over the last 30 years and with it the return of massive unearned wealth for elite ranks beyond the hordes held by the Master’s. If you really take on the so-called “1%”, you automatically challenge the next 9.9%. They are on the whole every bit as morally and ethically challenged as the Overlords whose own “God’s work” made them spectacularly wealthy, and I see no evidence whatever that they’re interested in change.

          It is precisely the “10%-er’s” that have created and propagated the myth some miniscule group of Evildoers’ attack on the body politic is what ails the US, whereas it is anyone in a position of real responsibility not just in finance, but in Monsanto, or Big Pharma, or Exxon-Mobil, or Google, or Microsoft, or major pension funds, or in the Courts, or State governments, or the Pentagon and all their associated wealth/influence extractors who are the real power. Their relationship with the “1%” is symbiotic, not one of victim and predator. Victims don’t appear in any real numbers until one exits the top quarter of the population.

          Let’s also not forget there was something called the military-industrial complex, or the national security state created by that wonderful liberal post-war society of the ’60′s or ’70′s where everything was fantastic for the Anglosphere’s 7% vs the world’s 93%, and there were only tiny anomalies like an entirely unnecessary Cold War, or a Korea, Vietnam, Laos, and Cambodia or a real US poverty rate over 20%, or massive and toxic industrial conglomerate power and libraries of documented official crime. In other words, this didn’t just jump out of some lowly trading black box and bite us. It’s been built over a long period of time, and built with a mind towards permanency for the upper crust.

          What we’re seeing right now with respect to these politically timely “oopses” and “disclosures” of activities known to be happening as a matter of routine IS the 10%’s idea of a “liberal” revolution – mostly orchestrated in PR, a couple of hangings, some banks broken up (with the public eating the dead stuff) and all is as it should be – because the next ruinous-to-the-80% financial weapon/innovation is ready for deployment. The safest yet, they assure us.

          1. enouf

            Fiver said;


            … If you really take on the so-called “1%”, you automatically challenge the next 9.9%. They are on the whole every bit as morally and ethically challenged as the Overlords …

            (there’s no easy way to say this that i know of, …)
            yep; Satan has his/her/its minions to do his/her/its bidding

            Love

    5. Nathanael

      “Either they will be proved correct, and thus the thin end of the wedge is in, or they will be aghast to find that the courts simply shove them back to the do nothing regulatory system of misrule, forcing a higher stakes confrontation. ”

      Exactly. Given the endemic corruption in the federal courts (ever since the Republicans started deliberate court-packing in the Reagan era… but now Democrats do it too) the second is the scenario which will happen.

      The cheated upper and upper middle classes will always try the courts first. When they realize that the courts are not interested in giving them justice, they’ll try something else to get justice. I’m not sure exactly what they’ll try next; perhaps they’ll campaign on a “clean up the courts” platform of replacing the judges — using elected officials to replace the judges is the last peaceful, fully legal, democratic method available to fix the problem. What they’ll do if that doesn’t work I don’t know; secession might do it if the state courts were OK.

    6. Doug Terpstra

      The widespread fixing and fraud is as likely as sign of panic now as it is of greed, especially with the BOE and Criminal Reserve involved — trying desperately to keep the wheels from falling off the crony-capitalist bus. The derivative leverage alone is so laughable it’s not the least bit funny. The market is so tightly controlled and contrived now that the Central Committee dare not loosen a single string lest the entire edifice collapse like the WTC demolition caper. The slightest spark will set off a conflagration that not even Benny can douse with his counterfeit helicopter. Rank fear probably explains the rampant lawlessness today more than simple greed.

      But because these sociopaths are quite beyond rehab or redemption, the only hope for systemic reform is systemic collapse—when the peasant population is overhunted and the elite and zombie banks begin to cannibalize each other. That is probably not far off. Better to prepare for and expedite that than to try more baling wire and duct tape.

      1. enouf

        hahaha .. don’t forget the sheathing of plastic tarpaulines to use in conjunction with that ducft tape!

        and an even louder lmfao goes out to the “Benny” moniker – which immediately reminded me of Benny Hinn episodes (especially the intros and exits) :-)

        Love

  4. fresno dan

    I have read A LOT about everybody knowing that LIBOR rates were scammed (move along – nothing to see here).

    But the theory that colusion with the central bank(s) to keep LIBOR low so as to show that there really was no cataclysm in the banking industry, apparently so that there would not be such RADICAL actions as holding them to account for their incompetence and criminality, is the one rings true to me.
    http://www.democraticunderground.com/1002906772

    1. Jim Haygood

      For all the horror over banks fixing interest rates, that’s precisely what central banks such as Ben Bernanke’s do all day, every day with the Fed funds rate (though not for profit — the Fed’s annual profits are turned over to the Treasury).

      If rate fixing is bad when ‘wanker bankers’ [kudos!] do it, how much worse is it when central planners do it?

      Abolish the Fed already, for Bog’s sake! And put Bernanke’s PhD intellect to its highest and best use: serving as a parking lot attendant in lower Manhattan.

      Yo, here’s the keys Ben, I’ll be back in two hours!

      1. Nathanael

        It’s not actually the rate-fixing which is the problem per se, it’s the secretive nature of the rate fixing, so that it can be done for the benefit of a few people. (And YES, this is a problem with the Fed’s secretive rate-fixing meetings too. I’d be OK with rate-fixing by directly elected public officials with published meeting notes, though.)

        1. Up the Ante

          “It’s not actually the rate-fixing which is the problem per se, it’s the secretive nature of the rate fixing, so that it can be done for the benefit of a few people. ”

          Surely the ‘Anglophile’ Spy Alliance is capable of revealing who profited from the traders’ manipulations, so there’s two sides to the “problem” coin. The Spy Alliance is to be seen as a client to the govts.’ Justice/FSA and the secrets will not be divulged so THIS is
          “what’s traded on Wall Street”,

          http://www.nakedcapitalism.com/2012/07/yes-virginia-the-real-action-in-the-libor-scandal-was-in-the-derivatives.html#comment-752920

    2. Yalt

      How does that theory square with the established fact that the manipulation had started years before there was a financial crisis (three years is documented; up to a dozen has been suggested, per Yves, by insiders)?

    3. Fïrëan

      When requested, or advised, to move along one begins to suspect that there is more here than initially meets the eye.

      1. James

        Begin to suspect? I think we’re several orders of magnitude beyond that now. Corruption is pretty much assumed these days until proven otherwise. Which is probably by design as well. It’s a lot easier to be on the take when you’re swimming in a sea of it.

  5. Warren Celli

    Yves said; “I expect the firms involved to face a locust swarm of litigation. Lawyers may accomplish what regulators and politicians refused to do: strip the banks of ill gotten gains and bring their preening CEOs and “producers” down a few notches. A day of reckoning may finally be coming.”

    Sorry, but that’s a hope and change dream.

    Vanilla Greed for Profit vs Pernicious Greed for Destruction — Xtrevilism vs Evilism — they share a common trait in their sociopathic disease; a love of the ‘invisible hand’ which is in reality a mask for naked cannibalism. That aberrant love has cause them to destroy what could have saved them — the now scam ‘rule of law’. There is no going back for them. I too used to think there was. But neither faction will listen to rational reasonable arguments that could save us all, that is the nature of their disease. You can not project your normalcy into them. That is ‘our’ problem — gullibility.

    What will save us is for those of us in the greater majority, who have been forced into complicity with them and have been mildly flavored with their thinking, is to reject their ‘Greed and Evil Are Good’ meme and regroup and rebuild as they struggle.

    Are we ready for the election boycotts?

    Deception is the strongest political force on the planet.

    1. Nathanael

      No, we’re not ready for election boycotts. We have to go through several steps first.

      (1) The upper and upper middle classes have to have it shown to them clearly and convincingly that the courts are dishonest protectors of the privateers running the banking system. Naked Capitalism is doing well at providing this information, but it’s going to have to hit a lot of people’s pocketbooks.
      (2) Then, with the courts discredited, people have to make a serious attempt to fix the system at the ballot box — which means that there has to *be* a third party with massive support which is actually campaigning to fix the system (replace the corrupt judges, imprison the criminal banksters, etc.).
      (3) Then, if that party is shut out of elections, the elections are stolen, or it is elected and promptly turns corrupt, only THEN will we be ready for an election boycott, because we can convincingly and accurately demonstrate that we’ve tried everything short of that.

      1. smellslikechapter11

        Good luck on getting rid of the corrupt judges, epecially the Federal ones who have life tenure. Need to change the constitution to fix that one.

      2. James

        Good points all, but given Citizens United (among other factors), I’m not sure a third party could ever realistically get off the ground these days. Witness the Tea Party’s quick and total co-option by the GOP, although I realize they may well have been an in-house construct from the very start. I think the Big Two have been firing preemptive strikes on would be third parties for years, especially in the wake of Bush 41′s embarrassing take down at the hands of Ross Perot in ’92, which really set the table for Bush the Lesser and the take no prisoners style of campaigning we’ve seen since.

        1. dez

          Interesting points by all …Where, if at all, does ‘The Occupy Movement ‘ fit into this conversation? As time rolls on and more events ( of this sort ) occur globally and stirrings of voter revolts and boycotts and the like surface, is the raison etre of ‘Occupy’ any clearer ? Is it releveant? Or do the plebes trust in the criminal investigation(s) whose start at least in Britain, are reported today?

      3. Fiver

        That’s years at least that nobody on the planet can afford to waste just to get to exactly where it is now in real terms – because it isn’t just some fly-by rogue minority of criminals at the top, it is a far larger, ethically deformed elite as a whole, imperial in essence in both domestic and external outlook, that has made their own stupendous gains over the past several decades, intends to hold onto them, and pathetically (eg, the Economist, New York Times) point and wag tongues at the very financial criminals they quite deliberately unleashed with the bizarre admonition/plea: “Can’t you continue to steal money for us all with a little more subtlety and a little less fuss?”

    2. skippy

      Have not voted since leaving the military in the early 80s.

      Skippy… its like voting for the best dressed prison warren, color and cut of cloth being the only determining factor.

  6. fresno dan

    Oh, I forgot another point. This whole LIBOR mess reminds me of the paperwork associated with mortgages – people buying and selling houses have to go through quite a bit of effort, time, and expense to get all the paperwork correct.
    But when a bank wants to forclose, why, all the that stuff is just “paperwork” and it doesn’t matter if they have it or not, or if they have it, if they have forged signature on it. LAWS are for the little people.
    If LIBOR is so inconsequential, why lie about the rate?
    OH yeah, somebody was maing money at the expense of someone who naively thought it meant something.

  7. Charles Wheeler

    Perhaps inevitable when you have banks giving opinions on rates they are set to lose/gain from? Deliberately baked in to system.

  8. Warren Celli

    Yves Said; “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.”

    Putting the face of reality on it…

    …CAUSE and EFFECT.

    The effects caused by the aberrant sociopathic Xtrevilists that are most visible and easy to understand are those we see on the streets of America, especially the effects visited upon those who were conned into giving their all to allow the deceptions to take place. Where is the ‘giving back’ for our veterans? It is not there because ‘giving back’ is just another mass murderer Xtrevilist scam!

    http://www.google.com/search?num=10&hl=en&site=imghp&tbm=isch&source=hp&q=homeless+veterans+pictures&oq=homeless+veterans&gs_l=img.1.3.0l5.17848.23038.0.28528.17.9.0.8.8.0.305.1450.0j8j0j1.9.0…0.0.FMw9AG3byj4&biw=1019&bih=662&sei=pcv2T_eOPIOO8wSLg6n7Bg

    Look at the reality in the pictures and smile your charming little phony baloney smiles; Warren Buffet, Bill Gates, Bill Clinton, Ronald Reagan, Barrack Obama, Alan Greenspan, George Bush, Leon Panetta, General Stanley A. McChrystal, and on and on and on…

    Deception is the strongest political force on the planet.

    1. Fiver

      Put all those smiling bastards into a mirror array and let ‘em fry each other with their toothy malice.

  9. Joe

    Yves, great writings on Liebor recently. As a current futures trader at the CME, it strikes me as strange that everyone thinks this manipulation ended in 2008. There are many of us here that think this racket is STILL going on today. Look at the fixing in the 3m Libor this year. Barclays is still consistently one of the lowest fixes in the lot. They even fund under JPM(.41) in many instances. How about HSBC @ .27 for 3m borrowing? Really? This rate is a joke and will continue to be a joke until these banks have to post transacted rates!

    1. Canaryatthe Wharf

      I could believe the relative order.

      JPM riskier than Barclays riskier than HSBC so rates in that order too. (what’s the final cost of teh Whale episode for JPM?)

      Wouldn’t be a surprise either for HSBC to have a very low borrowing rate – it generally has a surplus of deposits and dosn’t need to borrow much if at all from money markets.

      1. Susan the other

        I was wondering about the whale. The pig in the python. How did it flush out all the conflicting interests?

  10. financial matters

    Spot on. I would imagine the large suit being brought by Schwab has to do with many of their customers getting ripped off in such things as the Eurodollar futures. Many other independent brokerages could get on this bandwagon, but good to see a deep pocketed firm like Schwab break some ground.

    And as you say then there is the OTC market such as the many interest rate swaps detailed earlier… Rate swap scandal: FSA review to reveal evidence of serious misselling Telegraph, http://www.telegraph.co.uk/finance/rate-swap-scandal/9351779/Rate-swap-scandal-FSA-review-to-reveal-evidence-of-serious-misselling.html

    And many other OTC products set up with various businesses and pension funds (think ‘rip your face off’ approach to their clients’)

    “”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.”"

    1. financial matters

      Also I would think this ties even more basically into the general repo/money market funds. Schwab has been apparently using it’s own ‘profits’ to support it’s customers money market funds to having a positive rate of interest.

    2. Nathanael

      And Schwab’s still run by Mr. Schwab, who’s a pretty old-school kind of guy; he’s not part of the criminal fraternity at the big banks.

  11. john

    > Lawyers may accomplish what regulators and politicians refused to do

    Heard it before.

    Investigations to be announced, fund-raisers to be scheduled, appointments to be named, settlements to be announced…and the band will play on.

    1. Capo Regime

      K street retained and reguatory lawyers play nice to gain a good paying job at a K street firm. Look at the major K street firms that see how many of their partners and of counsel used to be regulators or lawyers at house oversight, OCC, treasury, justice etc. Ticket punched, go after some nobodies be nice to big boys and then triple your salary…….Political appointees have to dance a bit to compy but for staff its much easier.. With Holder the opposite is true, K street went to Justice and then back again to command much higher hourly rates….

      Faith in U.S lawyers is a very thin reed upon to rest any hope.

      So yes, the dance will continue. Leonard Cohen’s “Everybody Knows” is a better anthem for U.S than star spangled banner.

  12. mitchw

    This stuff is too complicated for our audiences. Football and Kardashians? About that we’re experts. Just ask Martin Smith.

    1. David Habakkuk

      It may not be too complicated for the relevant audiences here in the UK. In particular, there is a large part of what was Thatcher’s core constituency — people who bought into the virtues of setting up a business, providing for one’s retirement, not depending on the state.

      As a consequence of levels of indebtedness, both public and private, which are the result both of Greenspan-inspired monetary policy and the resulting financial crisis, such people are confronting ‘financial repression’. Having to live with negative real interest rates on one’s savings, and a stock market which has turned into a casino, does not make people feel charitable towards the antics of Diamond and his like.

      1. Up the Ante

        “negative real interest rates on one’s savings” and we’re to believe regarding the perpetrators with clear vision is “creepy” [Rex] ? [ OUT !! ]

  13. Fraud Guy- Also

    Maybe I haven’t looked hard enough, but I haven’t yet read anything from a legal expert laying out the path to legal liability for the LIBOR manipulating banks and recovery for harmed private parties. I am fearful that this could end up like the quite similar ratings manipulation scandal, where the ratings agencies have been successfully able to claim that they had no duty to the people who relied on their manipulated ratings. Admittedly, the LIBOR scandal is different in that a subset of actors clearly have a path to liability, for example Barclays customers who bought LIBOR-based products have a clear claim regarding those products. But how does a non-Barclays customer who was scammed on a eurodollar futures contract on the CME establish a path of liability back to Barclays? I am not saying it can’t be done, I’d just like to see the legal theory layed out.

    Also, to be clear, as a matter of justice (as opposed to law), the LIBOR manipulators should be massively liable.

    1. Yves Smith Post author

      The DOJ apparently had it its recitation of facts some material that was deemed to be pretty damaging. And if you read the e-mails released by the FSA (only a subset of what they reviewed) both the traders in question and traders quoted at their competitors clearly believed the manipulation to be effective.

  14. vlade

    “Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.”

    This may just about kill the derivative market, if truly done en-masse (by implication, I assume they would walk away from the contract w/o compensation to the bank).

    Which is one of those “be careful what you wish for” things, as the Lehman would be a storm in a teacup if all derivatives that have a LIBOR leg would be unwound at the same time chaotically…

    Arguing that derivatives are dangerous is like arguing that opiates (or antibiotics) are dangerous – yes, if you saturate the world with them, they are. But in some circumstances they can be lifesaving (a friend has a small SME in US. he sells quite a bit of stuff to people in the UK, and around 2008 he hedged his FX on my advice – if he didn’t he wouldn’t have survived).

    But similarly to not prescribing antibiotics to everyone and their dog (or cow or chicken etc.) at any sign of any health trouble (or even before the trouble), derivatives use needs to be quite tightly regulated.

    Extremely more tightly than it is now.

    1. Capo Regime

      “Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.”

      Indeed–it may be one group of scammers against another group. Much like ancient bandits who denuded villages the bandits then go against each other as they think the other group may have gotten away with more. Almost like a Kurosawa movie.

    2. Up the Ante

      “Lehman would be a storm in a teacup if all derivatives that have a LIBOR leg would be unwound at the same time chaotically… ”

      A Manhattan Project-sized effort to fix, choose NOT and you WILL be seen as proposing Terror.

      Found Out.

  15. Jill

    Thank you for taking the time to analyze this in such detail.

    I was listening to coverage of this on BBC. While an MP stated openly that this could only be collusion, one of the commentators said that level of collusion was not possible. Why that kind of fraud would have taken the help of the govt! (And that could NEVER happen, right?)

    1. Susan the other

      One little fact jumped out for me: the manipulation of LIBOR (in this manner) dates all the way back to 2001. Laying the groundwork for war. And when it fell apart in 2007 and crashed in 2008, Hank Paulson threatened Congress with martial law unless they gave him the money to bail out the system. Indeed, we got martial law regardless of paying the extortion money because the law has clearly been suspended. The resolution of market manipulations will not end until markets themselves are defined. In legal terms through the courts and legislatures. But there is a stranglehold on the entire legal system right now. It is not our imagination.

      1. Jill

        Susan, you write: “But there is a stranglehold on the entire legal system right now. It is not our imagination.” I agree with this and it’s very scary.

        The prosecution of war and financial crimes is not optional under the rule of law, but clearly they are completely optional under this and prior regimes.

        Another example of lawlessness occurred in the Obamacare ruling. “Reports are now indicating that Chief Justice John Roberts initially sided with the Supreme Court’s four conservative justices to strike down the Affordable Care Act.” (from jonathan turley) Also from his blog is an entry showing that Obama called the health insurance fine a penalty. Obama does not believe it is a tax even though the administration argued that it was a tax before the court.

        What I see happening is that cases are decided according to the law in the lower courts. Once these cases are appealled, the “law” becomes whatever the strongest party involved in the process wants it to be. Therefore I do not see recourse from the law (at least in the US). Actual law, as opposed to “will of the stronger” no longer functions here. Contracts are sacred when it benefits the strongest to hold them sacred. Otherwise, contracts mean nothing.

        1. Susan the other

          Jill, you just jogged my memory. FDR used SS money to go to war in 1040. LBJ used SS and Medicare to go to war in Southeast Asia. We can discern a pattern of the same today. Why would Roberts OK the mandate tax and the inevitable medicaid tab (which will also be a tax)? Because that money can be siphoned off to various war efforts. Why don’t we even get to talk about single payer? Well, duh. That money is a savings and it is well spent, not stolen.

          1. F. Beard

            FDR used SS money to go to war in 1040. Susan the Other

            No. The Federal Government neither has nor does not have money. It creates its money by spending it. Thus there will ALWAYS be money for SS.

            You should learn some MMT.

          2. Susan the other

            It’s true Beard. In 1940 SS money went into treasuries. That money, in turn, went into the war effort.

          3. F. Beard

            The US Government has NO need to borrow in the first place!

            MMT tells you as a matter of first principles that taxes or debt do not fund government spending in a fiat currency system. The reality though is that national governments act as if they are still operating under a convertible currency (gold standard) where taxes and debt issuance were used to defend the gold reserves of the nation (that is, finance spending). from http://bilbo.economicoutlook.net/blog/?p=7299 [emphasis added]

          4. Susan the other

            but even under MMT our balance of payments are required to balance on the back of our imports… So add the exorbitant tab of a hundred nasty small and medium wars… and we start to wobble whether we are MMT or FFFudged.

          5. F. Beard

            A negative balance of payments means we give the world paper money and they give US real goods and services!

            Sounds like a great deal to me.

            And don’t we (US) deserve it? (Maybe not?)

          6. Susan the other

            OK Beard, you hit a nerve. I think we do need consideration because we did once have good intentions; don’t really know about now because the “leaders” have concluded that the people are idiots whose idiotic input is not to be tolerated. As a democratic (or “nominally” so, as the banking world terms it!) nation of people, it’s almost as tho’ we are living merely nominally as a nation of missionaries. And the amusing cheer of missionaries is: “We are America, we’re always on top!”

        2. enouf

          Ask yourself; What is “is”?

          Now that you’ve fallen off your chair and come to your senses, realize this, Human Independence is dead, and all this nonsense of ‘penalty v. tax’ is a carni side-show.

          Love

      2. Up the Ante

        You need a War on Fraud, and that includes the environmental fraud that China is.

  16. Capo Regime

    Of course what is missing in part from much of Ives great work is the role of the banks enablers. Namely, the K street law firms and lobbying firms. All manner of things can be suggested and agreed to but famously some of the major K street firms will write it up to be anodyne. The anger toward bankers and wall street is well warranted am though suprised that K street has escaped any major ire from Yves, Occupy or the likes of Taibi, Keiser etc….. Some takedowns of figures and the dubious nature of many clients and activities of K street would be quite enlightening. Think of the K street boys as the tip of the spear that makes all banking excesses possible. Seriously, they are.

    1. backwardsevolution

      Capo Regime – great point! Law firms and lobbyists are another arm of the squid.

  17. dez

    Yves, can anybody quantify the dollars scammed thus far in this globalized banking-opera? Is the IMF tainted? Can anyone say, with certainty, that the world-wide organized criminal network(s) which is circulating trillions of illicit drug-money ( to name one product line) daily, which must be laundered somehow and invested in ‘legitimate’ investments thur lawfully constituted institutions like Barclays, JP Morgan Chase, Unions, Pension Funds, Insurance companies , ( now political Super Pacs) etc etc, are not involved in this exponential fiasco?
    Virginia and Dez would like to hear u say what most pundits are too fearful to admit. Surely today’s journalistic media generally speaking has a role along with law enforcement to investogat the likelihood of this infection. When with the main media networks begin to call this thing for what it really is? Globalized ‘crime’ is the biggest unreported and distorted economic sector. It is only when the Econning gets discussed does this speculation become more plausible to the simple folk. It is time for all of us to know WHO really is running the Show and ruining the institutions law abiding folk no longer trust with their livelihood! I do not have to cite the hotspots and the dots are so many that it is impossible for many of them not to have connections. Any insights u care to share?

  18. mac

    Like many things “LIBOR” was probably invented when honesty and integrity were more than just archaic words.
    No where will you find bankers who know and practice the concepts those words once carried.

    1. F. Beard

      Banking is inherently dishonest. There is no such thing as an honest banker. The business of bankers is to lend stolen purchasing power, especially from the poor.

      Do a Google on “famous banking quotes” for verification, I suggest.

      1. Nathanael

        There are, however, degrees of dishonesty. Remember the famous definition of an “honest Congressman” — one who stays bought.

        1. Nathanael

          Another way of putting this is that bankers have recently gone from being dishonest to the people they *lend* money to, to also being dishonest to the people who lend money to *them* — the bankers are now disloyal as well as dishonest.

          1. Up the Ante

            “Another way of putting this is that bankers have recently gone from being dishonest to the people they *lend* money to, to also being dishonest to the people who lend money to *them* — the bankers are now [']disloyal['] as well as [honest]. ”

            fixed it for ‘ya

            And something tells me it’s related to ‘loss of private investors’.

  19. Mel

    Somebody tell me whether the derivatives affected by LIBOR rates would include the swaps sold to those poor municipalities who thought they were hedging their borrowing?

    Seems to me they could, but I truly don’t know.

    1. dez

      In order to know we need numbers and breakdowns . I agree that mucipalities amongs other categories may suffer as a consequence, but without bonafide numbers and full disclosure and crystal clear transparency, we are ‘in the dark here’….to borrow an icon Pacino turn of phrase.

      Data data data and analysis and competent thorough dogged gutsy investigative journalism (globally) is required . Tweets and bleets and facebook tomes and so forth including this blog space ain’t going to solve the issue. It does we hope push for the pros to get off their buts and dig dig !

      “Go Forward”

    2. Susan the other

      translation: if “derivatives” were truly derivativative products dispersing risk they would distribute the risk expense evenly all down the chain. So, clearly, the derivatives market is a market of fraud.

      1. dez

        Susan How right u r ! Any ideas on what practical steps should be taken to establish that a “fraud” exists? Is anybody out their knowledgeable about this subject ? R politicians , world wide, gutsy enough to admit that fraud is at issue and that crime of gigantic proportion may exist?

  20. parisblues

    It’s time to bring back that fine American tradition of the bounty hunter. For providing evidence leading to a conviction based on, say $100 million in ill-gotten gains, the bounty hunter gets to keep $15 million. The Circular Firing Squad of the Vanities would be endlessly entertaining.

  21. backwardsevolution

    “…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 about people who saved hard and didn’t partake in the fun? Low rates have hurt them terribly.

    Rates were held artificially low in order to supply mortgages to people with no down payment, no documentation, and at teaser rates by lenders who knew better. Because of this, house prices were forced higher and higher.

    Where was the RISK that should have been reflected in the mortgage rates, especially given the sub-prime borrowers? It was sloughed off onto the savers.

    While the two ends of the spectrum were having all of the fun (buyers and lenders), savers have been screwed. And still now, because both ends still want “something for nothing”, savers are screwed again.

    There is terrible inflation in prices, and yet rates do not reflect this.

  22. Greg Taylor

    Why would most or all of the Libor influencing banks artificially move the rate in the same direction at the same time? For this scheme to work, participants had to have derivative positions that would benefit by moving Libor in the same direction. This would take a fair amount of coordination between participants as they built these positions – or at least coordination between similarly structured banks after the fact.

    Since the trimmed mean used to compute Libor ignored reports from the top four and bottom 4 banks, there would arguably need to be at least five participants scheming in the same direction and none scheming in the other direction to create a substantial tradable movement in Libor. I can understand how five or more banks might collude but I can’t understand why others influencing Libor aren’t simultaneously colluding to move the rate in the opposite direction. How can some of these banks not realize others are scheming to fix the rate?
    These banks were mostly counterparties with each other on the derivative trades – some Libor banks had to be losers on the rate manipulations. Who were the other losing counterparties? Presumably, investors – but why are they all net exposed in the same rate direction at the same time and thus vulnerable to attack?

    As in the past, you might see fewer civil suits than you would expect because nobody wants to admit in public that they lost on these deals.

    There is a huge difference between the intent to defraud apparently shown in some trader memos and actually being defrauded by a specific amount of money. The lawyers will have to earn their money to get a court to award real damages. Most likely, these will be settled for pennies on the dollar as a cost of doing bank business and face-saving avoidance of investor shame – far, far, away from the day of reckoning envisioned here.

    1. dez

      Greg , that said incitefully I add, I infer that no one goes to jail and the lawyers get rich over the litigation which will take ten years more or less?

      Respectfully, can you paint scenario with a more satifactory impact on the body politic and the average reader?

      Somebody has to be acting with fraud in mind and criminal aforeknowledge …Lets call a crook a crook

      Any lawyer involved to get these guys off ought to be carefully scrutinized. Public hearings, like grand juries, should precede court cases. Question is : How to conduct same globally? This is a legal international cross jurisdictional quagmire and international law criminal investigation.

      Thoughts?

      1. Greg Taylor

        Someone will ask why we tie the returns on trillions of dollars in securities to an easily manipulated survey measure such as Libor. It appears as though these surveys were unaudited and accepted without any due diligence by the British Bankers Association.

        One positive outcome from this will involve the development of a trustworthy Libor replacement. It will be interesting to find out who will take responsibility for this task. I’m optimistic that you will see involvement and meaningful checks on abuses from bankers, regulators and investors.

        That’s the most satisfactory outcome for the public that I can foresee.

    2. LG

      “Since the trimmed mean used to compute Libor ignored reports from the top four and bottom 4 banks, there would arguably need to be at least five participants scheming in the same direction…”

      Not necessarily. Sure, the more banks the more you can move it but as a simplistic example imagine the “real” data for the 18 banks are evenly spaced.

      3.0%, 3.1%, …. 4.7%, 4.8%

      Now if the bank that’s real data point is 3.4% (the lowest included) changes and submits an excluded number to the high side the average still moves up 0.1% even though his new submission is excluded. My point is you don’t need to be reporting an included number to be effecting the average if your real data point *should* have been included.

    3. LG

      “These banks were mostly counterparties with each other on the derivative trades – some Libor banks had to be losers on the rate manipulations. Who were the other losing counterparties?”

      Do we actually know that? There are only 18 submitters. All other banks and hedge funds don’t submit but do trade and those markets.

      1. Greg Taylor

        Yeah, one bank might be able to move the rate down slightly by moving its submission from above the 25th percentile to below it. It could move it up the same way. However, four banks with rates below the 25th percentile will not be able to move the rate down no matter how low they submit. I should have said that to “guarantee” the ability to impact rates in a certain direction; you need at least five banks to collude.

        Do the Libor banks use each other as counterparties on derivatives trades for netting other exposures? I don’t know for sure but I was under the impression that over 90% of the gross notional derivatives in the US involved just a handful of banks (JPM, Citi, BAC, GS and maybe MS.) I assume this is the case internationally as well. Since banks try to reduce or “net” these exposures, I’m assuming that much of this trading is between the big banks where it would be easiest to find a reliable TBTF counterparty. I don’t really know if this is the case. It’s just hard for me to imagine the Libor banks not being highly exposed to each other on derivatives trades.

        I was a bit shocked to see on the BBALibor governance site that the BBA and their “designated distributor” Thompson Reuters rely on bank regulators to for “maintaining appropriate procedures for contributing, including the maintenance of internal Chinese walls.”

        http://www.bbalibor.com/governance

        It will be interesting to find out what procedures regulators use to ensure compliance. Since the bankers and regulators processes have not been effective or trustworthy, investors should demand a seat in the monitoring process.

    4. David Habakkuk

      “Why would most or all of the Libor influencing banks artificially move the rate in the same direction at the same time? For this scheme to work, participants had to have derivative positions that would benefit by moving Libor in the same direction. This would take a fair amount of coordination between participants as they built these positions – or at least coordination between similarly structured banks after the fact.”

      Your comments raise a series of fundamental questions about how these scams worked — and also, how they originated. On the face of things, one would indeed think that the need for coordination between so many banks would have been sufficient to ensure that Libor could not be manipulated in this way.

      What we need — and what has not so far been provided — is a coherent explanation of why this was not the case, and how a practice of routine collaborative scamming of Libor developed in the first place.

      And this is even more so in the case of the EURIBOR than in the case of US dollar LIBOR. According to the FSA document, the LIBOR panel consisted of 16 banks and the rate calculation excluded the highest four and the lowest four submissions.

      The EURIBOR panel, however, consisted of at least 40 banks, with the calculation excluding the highest 15% and the lowest 15%. So you have figures from 26, rather than 8 banks, involved. But those involved at Barclays did not, apparently, conclude that the EURIBOR panel was too large and diverse for scamming to be worth while.

      Why not?

      One significant qualification, however. It is not necessary for participants all to have a common interest in fixing a given figure for the scams to work. The picture that emerges from the FSA document is that of people, as it were, doing each other favours.

      A key may be the e-mail from a trader at another bank to a contact at Barclays: “Dude, I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

      I doubt that champagne was all the payment of the debt that was being suggested. It seems eminently plausible that the implication was that, if Barclays found itself in a position where it needed a rate fixed, the other bank would help it out.

      So all that is necessary for the scam to work is that a submitter in the originating bank should involve submitters in banks which do not stand to lose by the fix which will profit the originating bank.

      (From the very limited contact I have had with people in the City, this is how much of its business actually works — people do each other favours, in the expectation that they can call on the debt later.)

      All this bears upon another crucial question — that of how often those who stood to lose by a given fix where other banks who themselves habitually attempted to influence LIBOR and EURIBOR, and how often they were outside the charmed circle.

      Obviously, those inside the charmed circle of those who did each other favours, in expectation to see these returned, will not want this can of worms opened up — even if, in given instances, they lost substantial sums as a result of the fixes. Those outside the charmed circle, however, are likely to take a rather different view.

      The greater the extent to which the fixes involved were ones in which those who stood to lose were not inside the charmed circle, the more likely it is that we will see effective action in the civil courts.

  23. emptyfull

    Yves, How different are the potential litigants in this scandal from those who have failed to sue over MBS violations? I remember all the excitement about those potential suits possibly knocking the big banks on their heels and making them pay for their disregard for the rule of law, but little has come of it.

  24. JIm

    In a broader sense, the issue once again becomes the role of experts (in this case lawyers) in our modern structure of power.

    The role of experts(primarily from the middle and upper-middle class) is not usually discussed among Progressives, first, because lawyers( along with doctors, economists, accountants, professors etc.) do not fit comfortably into the reductionist narrative that the modern state is simply the pawn of Big Capital.

    Secondly, expertise (or specialized knowledge) is the key cultural capital of the upwardly mobile middle and upper middle class and professionals of all types tend to be uncomfortable with a focus on credentials, certification and a license to practice as an important pathway,in its own right and independent of Big Capital, to state and perhaps national power.

    But if the modern state is, in fact, more than a mere pawn of Big Capital (i.e. an autonomous force in its own right with its own set of interests and players separate from that of the majority of the population) then the role of experts becomes more understandable.

    Looked at historically(see writings of Galambos and Balogh) I would argue that during the period for approximately 1880 until the 1930s the legal profession managed to create(on a case by case basis)an administrate state (on both the federal and state level) in its own image which also served the interests of Big Capital(think railroad rates,interstate commerce and the labor laws of the 1930s)

    During the period of time it appears that a significant shift in authority took place—legal experts and professional expertise in general(think economists and accountants) began to become a part of our modern structure of power.

    As our crisis intensifies a key question becomes whether the professions and the upper middle class will be “Breaking Bad.”

    1. F. Beard

      a mere pawn of Big Capital (i.e. an autonomous force in its own right JIm

      Baloney! Big Capital depends on all sorts of government privileges including deposit insurance, government borrowing, a lender of last resort, legal tender laws for private debt, etc.

      Let’s not forget who is the fog and who are the fleas.

      1. JTFaraday

        Yeah, that’s what he said.

        But it seems that a lot of these people (politicians, lawyers, academic economists) have traded in their political power, as professionals, for their own personal enrichment by pledging themselves to (even the worst) private sector actors for whom they now bend the law, policy, regulation, etc.

        In the process, they will make what was illegal yesterday, legal tomorrow, eventually molding the state itself into a new form.

        For a while, I was given to saying that US Congress is the most powerful institution on the face of the planet. And it is. But that’s not the kind of power that most of our national “political representatives” actually want.

        1. skippy

          @JTF,

          Beardo still thinks w/o big government capital would follow suit, disperse, dilute, thousand[s of corporate issuers seeking validity via innovation, moral imperative, a consumerist selection criteria (see Bernays) and magically all would be well.

          Out of a few hundreds thousands years of humanity, some only acknowledge 5 thousandish and with only an eye to faith based human optics… sigh.

          Skippy…. for those that like it smooth: Crazy Train… http://www.youtube.com/watch?v=OMxAq0Ofupw

          1. F. Beard

            Beardo still thinks w/o big government capital would follow suit, skippy

            Wrong. I’m saying that without government privileges for the banks that Big Capital would be forced (by competitive pressure) to “share” wealth and power with the general population.

            You should Google “famous banking quotes”, skippy, to see that I am far from alone in hating banks.

          2. skippy

            “be forced (by competitive pressure) to “share” wealth and power with the general population.” – beardo.

            Skip here… please provide evidence to this claim, as history paints a different picture.

            Go read some history that pre-dates coinage, um Graebers book for starters (got to start some where), you – said – you were, what happened?

            Skippy… this is not a computer sim.

          3. F. Beard

            please provide evidence to this claim, as history paints a different picture. skippy

            There may be none but understanding of money has proceeded slowly. Heck, even some smart people today believe in shiny metals as money!

            As for Graebers book, it will have to wait. I just got two books by Keynes and I have never read the man!

    2. enouf


      Looked at historically(see writings of Galambos and Balogh) I would argue that during the period for approximately 1880 until the 1930s the legal profession managed to create(on a case by case basis)an administrate state (on both the federal and state level) in its own image which also served the interests of Big Capital(think railroad rates,interstate commerce and the labor laws of the 1930s)

      During the period of time it appears that a significant shift in authority took place—legal experts and professional expertise in general(think economists and accountants) began to become a part of our modern structure of power.

      — Jlm

      i know this isn’t really the crux of your argument, per se, but i need to go off on a tangent here concerning the Rule of Law — Yes, Adminstrative Courts are not only Unlawful, but Unconstitutional, and were setup to hear cases involving all the newer Acts/Statutes/Regs/Code imposed unlawfully via Municipal, State and Federal legislatures — to impose and collect ‘Fees’.

      – you know, all those non-violent ‘crimes’, the ones that “infringe” upon a Sovereign’s Constitutionally endowed and God-Given unalienable rights …all to collect “Fees”!

      ala; http://www.classwarfareexists.com/if-it-were-a-tax-wed-call-it-a-tax/

      But even much more so; Even way beyond the IRS, and the Fed, as the almighty sadistic mammon engine; DMV courts, Drug Courts; Traffic Courts; etc etc .. all Unlawful, all designed to slowly strip away a Sovereign’s ability to enjoy Life, Liberty, and Pursuit of Happiness (IOW — so long as no CORPUS DELECTI exists, no CRIME has been commited, capisce!?)

      ..anyways .. [/end rant]

      Love

    3. Fiver

      What so-called “Progressives” can’t admit because it puts them squarely in the spotlight as well, is that the professions at the levels (local, State, Federal) where they intersect wealth and power have been as thoroughly corrupted as finance, multinationals, or partisan politics.

      Which is why the “It’s all the fault of the ’1%’” is total bullshit. The 1% are nothing without the next 9.9% to manage the entire structure for the benefit of both strata.

  25. synopticist

    This blog is good on the LIBOR scandal, and particularly the developing Euro collapse.
    http://hat4uk.wordpress.com/2012/07/06/libor-rigging-the-slog-reveals-why-the-enquiry-must-be-judicial/

    He breaks quite a few stories this guy. Its pretty Brit-centric, and a few years ago he broke a story about Gordon Brown being on heavy duty anti-depressants, so he always has a pretty strong wingnut fanbase BLT, but it’s often well worth a read.

    The linked story is about the connections between the Tory party and the LIBOR rigging, which are VERY close.
    Also, the figures mentioned for party donations seem like peanuts in US terms, but over here they’re big, significant funds.

    1. LeonovaBalletRusse

      re link: N.B. “Sullivan and Cromwell” STILL – Champions of the Reich.

  26. Greg T

    Great comment. I’ve wondered if realignment might actually happen quicker if other elite factions in other industries lined up against the financial sector. As the scale of banker criminality widens and other businesses grow weary of being consistently scammed, not to mention having to experience disruptions due to repeated financial crises, they would align against the financial sector and ” allow ” politicians to corral the moneymen.

    Of course, a little activity from the public wouldn’t hurt either.

    1. Synopticist

      Yeah, it would be nice if they did, but so much of it comes down to coprporate tax avoidance, which obviously needs a crooked banking and finance sector.

      The elites know which side their bread is buttered, and it ain’t on ours.

      1. Greg T

        You may be right on that. I’m not sure how much damage the financial sector has to do before there is a sort of elite revolt against it. Others may not like what big finance is doing right now, but the dissatisfaction has yet to coalesce into an alignment shift. We’ll see what happens.

  27. phichibe

    There are a couple of things worth pointing out:

    1) the banks that are members of Libor may not have made that much money off each other from the deceptive/deceitful reporting of their interest rate costs, especially if there was collusion among them to move the Libor quotes in concert – ie, not a random mix of over and under stating interest rates but rather a concerted effort. the real “pigeons” were the non-Libor banks and others in the swap markets whose quants were not ‘clued in’ to the game. for people with long memories, think ‘Proctor and Gamble’ and Bankers Trust (for younger folks, Google it).

    2) Along those lines, a long time ago I read about the professional gamblers in Vegas. They exclusively made their money off wealthy amateurs, never off each other. Always in private games, never at public tables. Sounds familiar, eh?

    3) I used to accept that interest rate swaps, unlike CDSs, might have some justification, but was increasingly skeptical in part because of the potential for systemic instabilities due to the common use of martingale calculus and huge leverage. Now with this news that the banks have been gaming the system, I think that the whole shebang should be banned, or treated as a regulated insurance industry, with associated capital requirements, etc. Paul Volcker has said the last useful financial innovation was the ATM, and he was right. {Pity Obama picked Geithner instead of Volcker for Treasury).

    P

  28. mitchw

    Dumb layman’s question for you Yves: Did the manipulation of Libor in the years prior to Lehman08 deny markets and regulators accurate signals about the economy?

    1. Up the Ante

      Bankrupting states to save big banks. Geez, Officials, Representatives, are looking like Addicts.

      “the states .. were desperate, .. and couldn’t look to the Federal Government or Congress and had to turn themselves over to the banks. “

  29. kris

    Ms Smith
    That’s why I read you every day, you choose to have consciousness.
    You are some kind of God Fearing Atheist.

  30. Ancaeus

    It may be that there will be a ton of lawsuits from victims. I am skeptical, and here’s why:

    The banks will argue that others who tied their derivatives and other instruments to Libor, did so on their own — without encouragement or inducement from the participating banks. This argument seems (to me) compelling in all cases except where the bank doing the manipulation is also issuing the derivatives contract. Surely this is a small fraction of the total.

Comments are closed.