Bill Black: The Most Dishonest Number in the World: LIBOR

Lambert here: Ahem.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

The FDIC has sued 16 of the largest banks in the world plus the British Bankers Association (BBA) alleging that they engaged in fraud and collusion to manipulate the London Inter-bank Offered Rate (LIBOR).  BBA called LIBOR “The most important number in the world.”

LIBOR is actually many numbers that depend on the currency and term (maturity) of the loan.  The collusion involved manipulating most of these rates.  A vast number of loans and derivatives are priced off of these “numbers.”  Estimates of the notional dollar amount of deals affected by the collusion range from $300-550 trillion in deals manipulated at any given time.  The LIBOR frauds began no later than 2005 and continued through 2011.

The BBA and the banks claimed to the world that LIBOR was simply the prices (interest rates) set by the market for what it cost the world’s largest banks to borrow from each other.  The banks would report to the BBA those interest rates and, after excluding outliers, the average reported cost to borrow for X days in Y currency would be reported as the LIBOR “number.”

The system was not regulated.  The theory was that the banks self-regulated.  LIBOR was the City of London’s “crown jewel” and theoclassical economics predicted that the elite banks’ self-interest in their reputation and the value they gained from having LIBOR as the global standard would ensure that the banks would report honestly.  As my readers know, any discussion of the “banks’” interests is dangerously misleading.  The key question is the interests of the banks’ officers, particularly those that control the banks.  The “unfaithful agent” (bank officer) is the leading threat to the banks.  Theoclassical economists assumed away the “agency” problem.

The fact that the FDIC “only” sued 16 of the largest banks in the world does not indicate that the other elite banks were run honestly.  The other elite banks were not part of the group that set LIBOR so they could not join in the cartel.  The LIBOR conspiracy could only succeed and persist if none of 16 elite banks was controlled by honest officers and no regulator acted to end the collusion once they became aware of the collusion (which happened no later than April 16, 2008).  We ran a real world test of the ethics of the leaders of 16 of the world’s most elite banks.  The scorecard according to the U.S. government agency that investigated the matter (the FDIC) reports that each of the leaders failed.  Our twin emergencies are financial and ethical.

According to the FDIC investigation, the three largest banks in America (including the world’s two largest banks), the four largest banks in the U.K, the largest bank in German, the largest bank in Japan (plus one of the handful of surviving “main banks”), the third largest bank in France, the two largest Swiss banks, the second largest bank in Canada, and the second largest bank in the Netherlands conspired together to manipulate LIBOR and not only lied about it but also covered up the cartel and the fraud scheme it used.  The 15 surviving banks’ total assets were nearly twice as large as the U.S. GDP as of September 30, 2013.

Here are the data on the banks sued by the FDIC

Bank ($ billions, IFRS, as of 9/30/13)
Bank of America Corp 3063^
Barclays PLC 2275
Citigroup Inc 2693^
Credit Suisse Group AG 1643^
Deutsche Bank AG 2420
HSBC Holdings PLC 2723
JPMorgan Chase & Co 3678^
The Royal Bank of Scotland Group PLC 1829
UBS AG 1160
Rabobank 908
Lloyds Banking Group PLC 1409
Societe Generale 1698
Norinchukin Bank 846
Royal Bank of Canada 825
Bank of Tokyo-Mitsubishi UFJ 2469
Total: 29639
Source: SNL Financial

^Data for banks that follow U.S. generally accepted accounting principles (GAAP) (yes; that includes Credit Suisse) adjusted to the International Financial Reporting System (IFRS) basis to make data comparable.  (The difference is how financial derivative positions are measured.)

*I excluded one of the banks the FDIC sued, WestLB AG, because the (infamous) German Landesbank was sold as part of a German bailout during the crisis.  It had over $400 billion in total assets before its collapse during the crisis.


Consider the ethical and political implications of what the FDIC investigation has confirmed.  The entire barrel of apples is rotten.  Every CEO failed the ethical test, and the ethical bar that they failed to surmount was set exceptionally low.  That can only happen when a “Gresham’s” dynamic has been allowed to persist for years because of the three “de’s” (deregulation, desupervision, and de facto decriminalization).  Such a dynamic can cause “bad ethics to drive good ethics out of the markets.”  No one should be able to view the facts the FDIC cites without a sense of horror combined with an urgent commitment to transform the industry that has done so much financial and ethical harm to our nations.  The twin emergencies are global.

Crony Capitalism and Politics

There are two possibilities:  the Obama administration knew for six years that the world’s largest banks were endemically led by frauds or the administration learned of that fact recently when it learned of the results of the FDIC investigation.  The LIBOR scandal became public knowledge with the Wall Street Journal’s April 16, 2008 expose, so the Bush administration also knew it was dealing with elite frauds.  If the Obama administration has long known that fraud was endemic among the leaders of the world’s largest banks, then its policies toward those CEO and the banks they control have been reprehensible and harmful.

If the administration has just learned from the FDIC investigation about the true nature of the CEOs that it has refused to hold accountable and allowed to retain and even massively increase their wealth through leading control frauds then we can doubtless expect a series of emergency actions transforming the administration’s finance industry policies.  The FDIC lawsuit provides a “natural experiment” that allows us to test which of the possibilities was correct.

Let’s review the bidding.  The U.S. government, through the FDIC, has found after a lengthy investigation that the leaders of 16 of the world’s largest banks conspired together to form a cartel to manipulate the LIBOR “numbers” and to defraud the public about the scam.  This should have led the criminal justice authorities to prosecute large numbers of senior officers of these banks – but none of them have been prosecuted.  It obviously poses a grave threat to the “safety and soundness” of the entire financial system.  The endemic frauds led by elite CEOs demonstrate such a pervasive failure of integrity and ethics by the leaders of the finance industry that there is a moral crisis of tragic proportions.  So here are some questions (along with the usual who, when, where details) I request that the media formally ask the administration:

  1. Did the FDIC brief the administration before it brought its LIBOR suit?
  2. Why didn’t Attorney General Holder and the FDIC leadership conduct a news conference announcing the suit and emphasizing its implications?
  3. Why didn’t the FDIC’s “home page” or press release site even note the suit?
  4. Did the suit cause the administration to transform its finance industry policies?
  5. When will the President address the Nation about fixing the twin emergencies?
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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. McWatt

    “Catch-22 says they can do anything we can’t stop them from doing.” Heller

    Go Get ’em Bill!!!!!

  2. Teejay

    You do realize ABC, CBS, NBC,CNN Fox, et al are not camped out at this web site hanging on your every remark much as you and I would like to believe, so perhaps forwarding your questions to the White House press corp might improve the odds they actually do that.

  3. Jeff Z

    Maybe he already did. Just because the questions appear in this context doesn’t mean he hasn’t sent them elsewhere. Besides, we need additional public pressure to follow up on this, so that it isn’t dropped when White House Spokesman Jay Carney trots out the “We can’t comment on an ongoing investigation or lawsuit” line, or “We will take it under advisement” line. I find it hard to believe that anyone in the current White House press corps would risk asking such important, real questions.

    If it does come out, it won’t be the result of a formal press conference. It will come about because some journalist that still cares about the craft does a buttload of legwork, to make sure that all the facts are checked and cross referenced, who then publishes the result. Of course, this depends on having an editor and publisher that will have the guts to actually run the story. How often do the American banks named here run ads in the New York Times or in other outlets?

  4. susan the other

    If the interbank overnight rate were just between friends, aka banksters, it would be bad enough, but so many other securities are pegged to it the whole financial system is now an official farce. In an ironic twist for ecology, the way finance has evolved is looking like a natural environment (nevermind that it is totally synthetic) because the main nutrient, money, has taken on a life cycle of its own. It gets created and promised out in a loan, the big banks and insurance companies take their share right off the top, the rest of it trickles down into the bottom of the food chain where disaster always strikes first and hardest, keeping that lower level of the biome always at risk but always protecting the big guys, etc. And the “risk” ,as it is called, is thereby deflected away from the center to the edges. Etc. In a real biological biome this situation evolves so that the edges create their own defenses and can live with severe droughts and lack of nutrients. Just so, we should change the currency to insure our own survival. That is where we need to go because finance is just following a universal curve in a free market world. Not to sound too ecofreak, but sustainability is telling us the old ways and means of relative control of equity will no longer work on not just the “business” scale of human activity, but the survival scale. We can’t even think about using Obamafix on this one.

    1. HotFlash

      As I read your comment I remembered that sharks predate dinosaurs. ‘Swim, swim, hungry,’ seems to work, even in the very long run.

    2. Harold

      Susan, I think your comment hits the mark except for the assertion that the environment is synthetic. It only appears to be synthetic because it deals with non-naturally occurring abstracts. According to a hypothesis I’ve developed, the banksters (as well as other elites) are essentially letting their instincts drive them, using their capacity for rational thought to hone and justify the actions taken to satisfy these instincts.

      It’s something I’ve observed over and over, that a lot of people don’t think critically about the things they do – good or bad – and just shrug if you ask them about it. In the case of these monsters, they are acting on an overly acute survival instinct that drives them to take and acquire at any cost. The results on other people don’t matter – as long as they have their pile and keep it growing, they won’t be subject to “starvation.”

  5. steelhead23

    To most mere mortals, the term LIBOR is virtually meaningless. I understand that LIBOR is a big deal and that manipulating LIBOR is mega-theft, it isn’t all that clear how LIBOR affects me directly. Is it frequently used to set rates in adjustable rate mortgages? If so, it would be very useful to discuss how manipulating LIBOR hurts the ordinary Joe.

    Dr. Black, you use Gresham’s dynamic to describe a peer-pressure situation in which individual ethics are subordinated to the group goal (for the LIBOR 16 – to loot and steal) – and then suggest that U.S. political leadership work to break the system that creates that dynamic. Sadly sir, you are too late. Gresham’s dynamic is alive and well at the very pinnacle of U.S. leadership, with but a few senators and representatives having escaped the malady. I would guess (just guessing here) that Mr. Barack Obama will have seats on the boards of at least half a dozen Fortune 500 companies within 2 years of leaving office. And I would be willing to wager that one of those companies is on the LIBORgate list. He’s a made man.

  6. Pearl

    I have always kept this little “treasure”–I found it back in 2008/2009. But I just didn’t then, and probably still don’t now understand it quite well enough to fully recognize its potential for helping the FDIC with its lawsuits against these large banks.

    Could one of you smart folks help me out?

    The website from which I saved this December 2006 article/interview with IndyMac’s Head of Trading, Andrew “Andy” Sciandra, was from an industry blog, securitizationdotnet.

    (Sciandra was originally employed by that paragon of ethics and integrity, Washington Mutual’s Long Beach Mortgage, and was recruited away from Long Beach Mortgage to “work his magic” at IndyMac in 2004.)

    Speaking as an IndyMac executive, Sciandra explained how IndyMac ran its underwriting “syndicate” of sub-prime mortgages securitizations for IndyMac.

    Both of these articles/interviews are extremely brief–more like “blurbs,” I would say. The first one that I have linked, from December of 2006 is probably the most enlightening of the two.

    Also from securitizationdotnet in October of 2004, and probably not as enlightening:

    So, I was wondering how many of those in IndyMac’s “syndicate” and “rotation” are represented in the list of 16 banks above that are named in the FDIC lawsuit–what with mergers, acquisitions, shotgun marriages, outright failures, etc. My math might be off, but I see a lot of familiar names. (I’ve always thought so much of the financial crisis would work its way back to little ole Angelo Mozilo and Coutrywide, and, of course IndyMac was just Coutrywide on steroids.)

    When Mr. Andrew “Andy” Sciandra was interviewed for the article back in 2006, he mentions the following banks in IndyMac’s current “syndicate,” and those on the sidelines that are rotated in and out. Per Sciandra, IndyMac only liked to work with 5 underwriters at a time; here are the six that were just about to get whittled down to five for their 2006/2007 “syndicate” :

    1) UBS (Patrick Fitzsimonds)

    2) Lehman (Scott Stimpfel)

    3) RBS Greenwich Capital (Elton Wells)

    4) Credit Suisse (Adam Smith)

    5) POSSIBLY #5: Morgan Stanley (first Forchi Chen,who left Deutsche, followed by Albert Han)

    5) BUT PROBABLY # 5: Deutsche (Randall Stark, Randall Johnson)

    (According to Sciandra, Morgan Stanley would probably end up getting edged out by Deutsche in 2006/2007.)

    In the first (brief) article/interview linked above (from December 2006), Sciandra reflects upon prior years and predicts future years including:

    1) Sciandra’s reflection upon 2004: Deutsche was dropped from their (IndyMac’s) syndicate in 2004, but later goes on to state that, “They’re (Deutsche) definitely acting like a bank that wants to get back in the rotation.” (presumably for 2006/2007.)

    2) Sciandra’s list of “contenders” for IndyMac’s “syndicate” for 2007/2008 were the following: Bear Stearns, Goldman Sachs, and Merrill Lynch.

    If one were to list all of IndyMac’s “syndicate contenders” mentioned by Mr. Sciandra back in 2006, that leaves the following list:


    1) UBS
    2) Lehman (now partially owned by Barclay’s and partially owned by Nomura)
    3) RBS Greenwich Capital (Parent company is Royal Bank of Scotland)
    4) Credit Suisse
    5) Morgan Stanley (now Citigroup? Not sure. Help anyone?)
    6) Deutsche
    7) Bear Stearns (bought by JP Morgan Chase)
    8) Goldman Sachs
    9) Merrill Lynch (Parent is Bank of America)

    The FDIC is apparently going after these offenders due to losses when FDIC had to swoop in as receiver/conservator for IndyMac and WAMU.

    Anyway, all of the companies mentioned in the December 2006 article in securitizationdotnet article/interview seem to show up in this lawsuit. I was just wondering if someone at FDIC might want to track down Andrew Sciandra and get any other pertinent info from him. Perhaps Mr. Sciandra has a Linkedin or something, and wouldn’t be very difficult to contact.

    I imagine the other banks in the lawsuit were more closely related to the failure of WAMU and specifically to the Long Beach Mortgage Securitizations. (But that’s just a guess.)

    By the way–looks like all of the banks mentioned are Primary Dealers. Does that mean deeper pockets?

    Anyway–would really appreciate feedback and also was wondering if anyone could help figure out where some of these companies landed. (For example, Lehman seems to have gone to Barclay’s AND Nomura.) Are there any others like that which I have missed?

    And–as always–if there is anyone out there who feels this information is helpful–by all means go ahead and use it. We housewives may collect such information–but rarely know what to do with it! :-)

  7. allcoppedout

    I’m pretty sure Libor worked like any bent lottery or numbers game. Like any bent game you need to sucker in dolts who don’t know about the fixes. I see finance as a series of bunco scams and rackets, extending into some very murderous plays. Al Capone is riding out.

    The real plot is wider than we generally recognise. All sorts on non-financial regulation is failing too. There is a legitimation crisis. Our cops and all establishment institutions are lying to us and finance-economics-politics is now almost a total control fraud. We lack a forum of public scrutiny in which real evidence can be discussed. Some combination of incompetent media, ownership of it, libel law and actually being able to get cops in amongst the evidence in timely manner is screwing us over. The nearest we get to the truth is satire, but satire doesn’t hurt establishments if they pretend to laugh along.

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