Barclays LIBOR Scandal: Lions and Tigers and Bears, Oh My!

rcwhalen's picture

Update | Link below for CNBC "Closing Bell" ~ 3:30 ET to talk about the continuing crisis.  Chris

What do the rogue hedge fund inside JPMorgan Chase and the LIBOR price-fixing scandal engulfing Barclays Bank have in common?  Many things, but first and foremost they illustrate the impunity and recklessness of large corporations.  Once safely inside the warm cocoon of a management position in a public stock corporation, normal people become masters of the universe and it’s all bad from there.  Think Tilda Swinton in the Tony Gilroy film Michael Clayton.


The first thing to say about both scandals involves operational risk and management indifference to investor interests.  As former SEC head Arthur Levitt told Tom Keene on Bloomberg Radio, no bank CEO can possibly know what is going on inside these gigantic enterprises.  Even if the management of a large bank or non-bank stock corporation wants to do the right thing, admittedly a silly assumption, it is very difficult to embed good action in the organizational culture.


A colleague asked me today why large banks periodically burn through vast piles of investor money.  In the classic 1932 book “The Modern Corporation and Private Property,” by Adolf Augustus Berle and Gardiner Coit Means, the authors describe how stock corporations (as opposed to mutual organizations devoted to the service of their members) often diverge from the interests of their investors.                   


Berle and Means note most tellingly that stockholders have traded the position of owner for that of recipient of investment returns.  Comparing the position of the modern day investor to feudal times, the authors noted:


“The independent worker who entered the factory became a wage laborer surrendering the direction of his labor to his industrial master.  The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital.”


Thus when we hear people talking about “accountability” when it comes to large public banks like JPMorgan and Barclays, we know that those speaking just do not get the joke. Of note, the directors of a US public company organized under the equally feudal laws of the State of Delaware have a duty of care to the corporation, not to shareholders.   So when JPM CEO Jaimie Dimon lost a ton of money at the derivatives crap table this year, the bank’s directors are under no pressure to fire him.


The regulators are likewise complicit in the theft since the managers of the large banks are seen as clients.  Expecting regulators to prevent the periodic operational blowup at a too-big-to-fail bank is like asking the fire department to spray gasoline on a fire.   Only when the public, reputational risk to a big bank becomes critical, as in the case of Barclays, does the CEO  walk the proverbial plank.  Merely losing a lot of shareholder money is not sufficient cause for execution.


But the other thing that needs to be examined in this banking industry fire storm is the question of market manipulation.  Bob Eisenbeis of Cumberland Advisors ( notes: “[T]here is the implication that the falsification of LIBOR rates was not only being practiced by Barclays but also by other institutions. “  He also notes the reports in the media that there was pressure from certain institutional investors for months to “adjust” LIBOR lower.


The first point to make about LIBOR is that this has never been a particularly transparent, market rate.  The LIBOR rate has always reflected the consensus indications of the participating banks.  Over the decades, many investors and parties in business agreements have used the LIBOR rate as a means of pricing risk.  This does not excuse the actions of Barclays and others, but it needs to be said that LIBOR is not a free market rate set via competitive price discovery.   Investors with long exposure to LIBOR surprised by all of this ought to wake up and smell the coffee. 


The second, related point is the market environment for LIBOR.  Given the degree of market manipulation by global central banks and finance agencies over the past two decades, getting into a heated argument about private banks manipulating market rates seems a little surreal.  Commercial banks are also used by governments as mechanisms for official market manipulation, thus begging the question again as to whether the actions of Barclays in manipulating LIBOR are really so remarkable.  


In a market where the fact of government manipulation is the rule rather than the exception, how can we get overly worked up about Barclays manipulating LIBOR or JPMorgan manipulating the entire market for credit derivatives?   Reading the Big Media you might think that the world is about to end.  AP reports:


“Two leading credit rating agencies took steps Thursday toward downgrading Barclays in the wake of a trading scandal that's seen three senior Barclays executives, including CEO Bob Diamond, hand in their resignations.” 


Once again, Moody’s and S&P are shown to be trailing indicators of asset allocation change points.   But what has really happened in the Barclays mess is that the tawdry reality of the banking world has run smack dab into the nasty political environment in the UK.  While professionals in the financial markets have for decades known that LIBOR was at best an indication of where the London clearing banks might be willing to lend money, politicians have jumped on the opportunity to berate the bankers in a loud voice. 


But so what?  


The proof of whether the Barclays scandal causes real change will be if we move to a LIBOR rate that is a function of actual trades.   The UK clearing banks could aggregate all LIBOR transactions and report a public high, low and average for each trading day.  That simple solution could turn LIBOR from an opinion into an indicator of market rates. 


But the key question is whether the politicians yelling at the banks today will take steps tomorrow to affect real change in the collusive behavior of the same large banks.  The politicians are the "wage slaves" of the big banks, right?  Just as in the market for OTC derivatives, the largest banks prefer not to report actual trades in the short-term money markets.  We need to gather data for every trade every day, IMHO, and negotiate terms for public reporting of that data to make LIBOR a real market rate.


My friend George Washington is right when he calls the LIBOR scandal “The Biggest Financial Scam In World History,” but this is banking we are talking about, right?  Please do be angry and hold that thought a long while.  But please don’t tell me that you are surprised that Barclays was “manipulating” LIBOR.  

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AnAnonymous's picture

Nobody could have expected that coming from US citizens'finest.

michigan independant's picture

The solution is on the way with the 30

  • 1-56708-156-8
  • Governance, Supervision, Risk, Financial Stability
  • Drawing lessons from the financial crisis, the G30 calls on boards of directors of financial institutions to do far more to strengthen governance. The report stresses that values influence the behavior of those with governance responsibilities and the key to reform is to promote changes in the ways in which these individuals think about their responsibilities.
  • fresno dan's picture

    I would say the author is exactly right. The FED sets interest rates (and the Europe and British FED goes along)

    But the question is: If the banks are really just another part of the Federal government, why aren't the people who run them paid government salaries and get government bonuses, instead of millions in compensation and tens of millions in bonuses??? I mean, they're jobs are as secure as government jobs - you can lose billions and you keep your job. Only when it is an international incident like LIOR are you made to resign - and you keep all the money, even though demonstrably you didn't know what you were doing.

    caustixoid's picture

    While anyone on this site is probably shocked by very little, the point is that this manipulation was not common knowledge and as GW pointed out it is MASSIVE.   It is a common technique amongst the corrupt to deny, deny, deny and then claim "everyone knew it was going on -- why the surprised face?"   So Mr.Whalen, forgive us our simpleness to be outraged for a few days about multi-trillion $ manipulations.    Predictable behaviour? ok, sure.  Shocking all the same?  ABSOLUTELY!   

    Mark123's picture

    From another blog, but may help some understand the significance of LIBOR:


    Some Know. Many do not.

    LIBOR = London Inter Bank Offered Rate.

    The LIBOR is the interest rate guide at which banks lend to each other. Many other interest rates are calculated using the LIBOR, such as mortgage rates, forward rate agreements, futures contracts, interest rate swaps, floating rate notes, syndicated loans, currencies, (especially the US dollar) and over-the-counter derivatives.

    Every day, the British Bankers Association (BBA) surveys a panel of internationally active banks, asking them to provide the rates at which they could borrow “reasonable amounts” in a particular currency and maturity at 11:00 GMT. The BBA then eliminates the highest and lowest quartiles of the distribution and averaging the remaining quotes, to arrive at the LIBOR fix rate.

    Around $350 trillion of lending and derivatives is priced of LIBOR. If misconduct by banks caused LIBOR to increase by a mere one tenth of one basis point (0.001%), this amounts to $35 billion a year in extra interest.

    Barkleys, RBS and the Bof E are just the tip of the iceberg. More revelations to come.

    Watch the LIBOR over this next month as it is now under the global financial microscope, as rates will invariably rise, which is not good for the fragile global economy that is showing concrete signs of slowing down.

    jonjon831983's picture

    Just because "everything" is manipulated and nobody is pissed off about them (yet) does not excuse one thing.  If this is the spark, all the better.  Ride the momentum, but it needs to be sustained.

    The Alarmist's picture

    To paraphrase Max Keiser, that 17 year old hooligan who stole that 2 litre bottle of soda during last summer's riots needs to go to jail ... those banks that stole a few hundred billion?  Never mind.

    Shizzmoney's picture

    Innocent til proven Guilty?

    Hell no.

    Innocent til proven that you can afford for a really good lawyer (or you are super famous).

    See: OJ, Angelo Mozillo, the majority of sports superstars NOT named Michael Vick.

    ptolemy_newit's picture

    pure and simple rackettering

    DelusionalGrandeur's picture

    I hope all the ones guilty puss out and shoot themselves before the trials commence. Do the world a favor for once you useless fucks and put some small pieces of led to good use!

    hedgehog9999's picture

    We need a revised Webster Dictionary entry to reflect what is actually going on.

    SCANDAL  = "Criminal acts and malfeasance resulting in widespread media coverage of moneys stolen or otherwise misappropriated by senior corporate executives or their companies under the watchful eye of regulators who have casually abrogated their role for political or personal gain reasons"

    Ned Zeppelin's picture

    As we even see today on our very own ZH, people have picked up the mass media plant, the NewSpeak, that the LIBOR matter is a "scandal," as in like, the Prime Minister was porking a prostitute, or some other silly trifling matter, some momentary dalliance that is a shock to polite society that will soon be forgotten. 

    Substitute "widespread criminal conspiracy at he highest levels of our banks and government" next time you read this euphemism and the story will read a little differently.  Was Watergate a "scandal?" Please. 

    hedgehog9999's picture

    Coming to a country near you in the near or far future .....................

    Rule of law is timeless..................

    Document the facts, document, document!!! not hard to do in this information age....

    All we need is a government willing to uphold the vast amount of existing laws in place in the western world....


    The Limerick King's picture

    Hey Chris! Why aren't you screaming bloody murder? Why aren't you naming off the conspiratorial crimes likely involved in this type of massive fraud involving the TBTF banks?? Why are you on CNBS joking about how the LIBOR fraud saved you money on your floating rate mortgage??? Why aren't you and other perceived "Bad Boy" members of The Street calling for heads to roll???? Why are you helping to perpetuate the meme that TBTF CEOs can't know what's going on in their shops because they're too big????? Massive fraud gets approved at the highest levels Chris! No underling is stupid enough not to cover their ass regarding massive frauds (or massive prop trades!!!)

    Things that make you go hmmmmm.... 

    verum quod lies's picture

    LK: Don't be too hard on members of the "tribe", wink, wink, on downplaying crime committed by members of the "tribe", in a sector dominated by members of the tribe. Also, as Whalen says, "don't be surprised". Remember, if caught, just keep it all in the family/tribe, make light of it all, and never ever talk about jail time. Finally, if al else fails, we have comfort of knowing we have the best lobbyists, lawyers, and media that fiat can buy anyway.


    Ned Zeppelin's picture

    Hey it's only a scandal, not anything important.  Nothing to see here, sez M. Whalen, who does make noise but never quite makes it noisy or convincing enough.  A shill, it seems, at the end of the day.

    The boys on Surveillance chuckle, and move on to discuss the next "decidedly celebratory tape."

    disabledvet's picture

    Chris has to eat. I'm still wondering how i can actually. Good thing "their primary belief is in murder."

    GlassSteagall's picture

    The only surprise is that they actually got caught and that anyone in the MSM cared.

    Michelle's picture

    The surprising part is not that Libor has been manipulated for years, but rather why has it become a "crime"? Timing seems suspect.

    One question I keep asking myself over and over about all these discovered "misdeeds" is "Why now? Why is this relevant now?"

    Today's question is: "Who stands to benefit the most in a rising rate environment, who are the players, and is there a sinister motive?"

    disabledvet's picture

    Revenge for Lehman. Move along!

    MrBoompi's picture

    I would love to be the beneficiary of a "rounding error" on $350 trillion over a 7 year period.

    That clown on the video says this is a small thing.  How about some numbers to back that up?

    TooBearish's picture

    Where does the 450bil in fines go?

    catch edge ghost's picture

    The narrative developing around this LIBOR thing, that is, the narrative being disseminated through the Left Gate, leads me to conclude that this is yet another conspiracy within a conspiracy. Another macro-crisis demandng more centralized, coordinated intervention. Codified, systemic, price fixing - as opposed to the sleazy emails, phone calls, or Tea... that have accomplished the same thing for decades.

    Not that there's anything (too) wrong with that.. sigh.. but it means that no actual bad guys will be harmed in the filming of this Refomation, so long as they play well their roles.

    I watched an Al Jazeera report on it yesterday, via Ritholtz. The narrator reported the rigging would impact "Deals" valued at 350 Trillion dollars - and loans I think he said, of 10 Trillion. He said $350.000,000,000,000 like it was just any other number and the 10 Trillion may as well have had an asterisk.  Now, according to GW,  it's up to $800 Trillion when you include this, that, and the other...

    What's the fucking point in using numbers anymore? They make no sense to the bleating sheep the numbers are supposed to impress. For the Finance Professionals who know how large these number really are and what they really mean, it just signals more 'Liquidity' and Stimulus (tm). Woo & Hoo for them I guess...

    So while We work on being not surprised by these crimes, sorry, SCANDALS... so too must We be not surprised by the lack of justice in the Official Response to them.

    janus's picture

    great article, CW!

    no...not suprised; and i doubt any serious ZHealot is otherwise.

    what makes this scandal so fuckin foul is the fact that it's been systematically perpetrated against passive market participants -- good, honest folk.  goddam widows in fuckin kansas.  bond & pension holders.  the salt of the earth.    

    my rage stems from the realization that this will, inevitably, elicit some muted and meaningless response from our political-class.  it will be carefully crafted to 1) acknowledge the vast and sweeping crime 2) not punish any institution or individual that could cost said political class present or future donations 3) pass new laws that will make this particular theft undetectable and open up new arenas for their averice...tell me i'm fuckin wrong.

    for now, gangs of new york just popped on the tele -- thanks BBC.

    just the right inspriation for ole janus right now.

    now, allow me to soak in a bit of the ole ultra-violence while i meditate on our ruling-class.

    and, of course, this lil closer...

    that, my friends, is the minorty vote,

    janus (relic of the Ancient Law)

    partimer1's picture

    There is a law in the book and this is clearly a security fraud. Barclays got fined. The real problem is that we do not punish those criminals, we just ask them for money. Until some outrageous crime is committed, and we shoot a few of them, they will keep doing it. There wont be recovery.

    Downtoolong's picture

    Even if the management of a large bank or non-bank stock corporation wants to do the right thing, admittedly a silly assumption, it is very difficult to embed good action in the organizational culture.

    But, isn’t this in fact what a senior manager is supposed to do, and supposedly why they get paid the big bucks? They’re supposed to manage other people.

    I remember when I was in business school getting my MBA how students vying for a Management Degree were mostly looked down upon as second class classmates. They were slotted for Mainstreet corporate middle management or even government jobs. It was if to say, real people-management skills didn’t count for squat. If you wanted to get to Wall Street and make the big bucks, you had to major in finance. At that time, this essentially meant that a) you had to be connected and b) you had to be able to understand and apply a single variable differential equation that crudely modeled financial performance, which I had already learned to do in my first year as an undergraduate engineering student.    

     The truth is, most senior managers in large banks aren’t good people managers. They’re super sales people and traders who rose through the ranks to their level of incompetence.

    Dingleberry's picture

    I think Libor was manipulated in order to scam the derivatives market. A lot of cities n' shit bought swaps and got their asses handed to them.  Banks can't make money doing conventional loans when rates are this low and their overhead is what it is.  They have to become gamblers in order to make real money, which to them is tens of billions or more.  

    Can I buy a call option for banksters never going to jail?  

    steelhead23's picture

    Yes, Mr. Whalen, when global financial decisions are shrouded in secrecy, we should not be too surprised when things that are "never supposed to happen", actually happen all the time.  As you say, the issue is secrecy.  If LIBOR was calculated based on actual trades, it would be honest, if CDS were marked to market each night on an open exchange ... we'd all have a Merry Christmas.  I don't expect such changes anytime soon.

    MrBoompi's picture

    In a market where the fact of government manipulation is the rule rather than the exception, how can we get overly worked up about Barclays manipulating LIBOR or JPMorgan manipulating the entire market for credit derivatives? -----

    Zero Hedge readers AREN'T surprised.  You know what will surprise me?  When our MSM starts educating THE MASSES about bank fraud, and the real reasons behind why more and more of us are becoming poorer, while income disparity becomes much worse, and why over $29 trillion of help to these people has not done much to help the American people.

    Panafrican Funktron Robot's picture

    "Given the degree of market manipulation by global central banks and finance agencies over the past two decades, getting into a heated argument about private banks manipulating market rates seems a little surreal."

    This.  Don't get me wrong, it's bullshit that (really) 6 banks control the universe, but they directly control both Fed funds and the LIBOR of every major currency (and by proxy, pretty much every other rate in the known universe).  People attempting to make that distinction have their heads deep, deep up various nether regions.  

    Benjamin Glutton's picture

    LIBOR is supposed to be a factual representation of member banks borrowing costs. This obvious criminal activity should be more than enough to invalidate the FED RES charter since most of the participants are FED RES board members.

    boogerbently's picture

    ...and, if LIBOR is a measure of risk, interest rates should be at about 20%.

    iDealMeat's picture

    Won't happen.  MSM is not news. MSM is for profit entertainment.. They will collude, lie, cheat, and steal to protect their interests and existence.


    Benjamin Glutton's picture

    a material misstatement of fact such as this is a lie not a "manipulation" and also criminal activity not a "scandal".


    it is not helpful to adopt the criminals language which is intended to mitigate their crimes.

    Ned Zeppelin's picture

    Tis the mass media NewSpeak term for this: a "scandal," rather than the more accurate "enduring and pervasive criminal conspiracy infecting our banking system and government." They picked a good word - "scandals" are the topic of parlor gossip and titters, not prosecutions - god forbid.  And it's been amazing how many media outlets use the same term. Coincidental, I'm sure.


    Roger Knights's picture

    This Libor scandal will make it harder to sneer at conspiracy theories. It should also prompt more people to put their trust in gold.

    Al Gorerhythm's picture

    This LIBOR conspiracy will make it... etc. Fixed.

    @ Chris Whalen. Chris, nothing in this facist model, except a perp walk, will surprise me. It's all a fraud and always has been. No moment of surprise here, even your apologist theme is unsurprising, now that you are getting more invites onto mainstream propaganda outlets.

    worbsid's picture

    What is the value of gold when the currency it is measured in is only an opinion of value.

    I have a well and a solar pump on it. I told my neighbors that in event of electrical failure I will sell 5 gallons of water to them for a dollar. Since I am giving them real water, I expect a real dollar in return.  How bout that ... bitchez? 

    takinthehighway's picture

    Damn glad I'm not your neighbor.

    Currently, a dollar gets me 282 gallons of water.

    Don't count on any of those neighbors to come runnin' when the Golden Horde shows up at your door. They'll be waiting for the chance to hook their hoses to your well after you're dead...

    worbsid's picture

    At the store, water is over a dollar for five gallons. 

    Al Gorerhythm's picture

    True capitalism. Capital employed, produuct meets market. 

    orangedrinkandchips's picture

    Surprised? Hardly.....they treat it like a golf handicap. I COULD go out an shoot 7 over but not likely. Or I COULD get $4,000 bucks for an old relic....

    coulda, woulda, shoulda...


    I weigh 172 lbs. My driver license says so!! You just write down what you weigh...


    The scale for the last 20 years has been wrong! 210 lbs my ass(es)!!!!


    mkhs's picture

    It's a conspiracy of the scale manufacturers.

    LawsofPhysics's picture

    Simply put, there are no real consequences for BAD behavior anymore for the majority of the paper-pushing fucks.  FAIL.

    philipat's picture

    And LIBOR is calculated from submissions by SIXTEEN Banks. The highest and lowest FOUR quotations are eliminated and LIBOR is calculated as an average of the middle EIGHT. So it is impossible for one Bank to "Manipulate LIBOR". Manipulate its own quotation, yes, but not LIBOR itself. So there must have been widespread manipulation by most, if not all of the LIBOR Banks to manipulate LIBOR irself.

    Which probably was the case and probably also involved the regulators and even central banks in a misguided attempt to "Save the system", a system we would have been better advised to let fail. As Chris points out also, it is surreal in this era of Central Planning and crony capitalism that anyone would be shocked by such behaviour.

    Ned Zeppelin's picture

    Shocked at the behavior? Hardly. Shocked by the lack of empaneled grand juries? Absolutely.

    Widowmaker's picture

    Wake me when someone looks at the incorporation-plague like an adult.



    Popo's picture

    Whalen nails it in the last paragraph:  "But this is banking we're talking about right?"


    The entire business *is* a scam. It is built on a scam.  And those who scam harder, earn more.  The entire industry is fundamentally dishonest.  It is organized crime masquerading as legitimate business -- ** AND ALWAYS HAS BEEN **