David Kotok: LIBOR, the Fed and the TED

rcwhalen's picture


Great item from David Kotok of Cumberland Advisors.  When is the Fed going to reverse the self-serving decision by Gerald Corrigan and Alan Greenspan to end surveillance over primary dealers?  The Fed's unwillingness to admit fault is a national scandal.  Fed Chairman Ben Bernanke should be impeached if he does not restore Fed surveillance over primary dealers immediately.  Of note, the Herbert Gold Society wrote about Corrigan's deliberate efforts to end surveillance of primary dealers two decades ago in the monograph "Gone Fishing."  http://www.rcwhalen.com/pdf/Fishing.pdf

-- Chris


LIBOR, the Fed and the TED

July 9, 2012

David Kotok

Cumberland Advisors


“Insanity: doing the same thing over and over again and expecting different results.”  Albert Einstein


Somehow, the insanity of the present unsupervised system involving the Federal Reserve’s primary dealers continues.  The Fed had “surveillance” in place during the Drexel Burnham failure and the Salomon Brothers affair.  There were no market meltdowns attributed to either event. 


Then, in the early 1990s, under the Corrigan initiative and with the approval of the FOMC and Chairman Greenspan, the Fed ceded the surveillance issue to the other regulators.  Since this policy change, the toll of primary dealer casualties has grown to include Lehman Brothers, Bear Stearns, Merrill Lynch, MF Global, Countrywide, and now Barclays.


How many more market shocks will we have to endure before the Fed reverses one of the worst decisions it ever made?  Until the Fed ceases shirking its supervisory responsibility and restores a more formal surveillance and oversight role, there is no reason to expect things to be any different; and Einstein’s remark applies. 


Below is a direct quote from the website of the Federal Reserve Bank of New York.  Readers please note that the NY Fed sets the rules for primary dealers.  It does not take Congress to change this.  The Fed could make this change tomorrow if it chooses to do so.


“The Federal Reserve Bank of New York trades U.S. government and select other securities with designated primary dealers, which include banks and securities broker-dealers. Weekly transaction, market share data and primary dealer lists are updated periodically. Much of the information is submitted voluntarily. The Bank expects primary dealers to submit accurate data, but the Bank itself does not audit the data.”


The LIBOR affair gives the Fed a chance to restore some “audit” of the data.


Below is the latest list of primary dealers, as copied from the NY Fed website (July 8, 2012).  We have cross-checked this list against the list of institutions represented on the committee that provides data for the American dollar LIBOR rates.  Different institutions sit on other currency-setting committees.  Because this commentary is focused on the Fed, we are ignoring the other currencies.  In addition, readers may note that some of the firms on the NY Fed list are not banks and therefore would not be involved in setting LIBOR.


Where we could establish a connection between primary dealer status and LIBOR rate-setting status, we have marked a “YES” next to the institution name. If we are unsure of a connection or could not find one, we marked it “NO”.  (A special hat tip to Dick Bove of Rochdale Securities for excellent research on the LIBOR scandal; he provided the American LIBOR committee list.) 


Bank of Nova Scotia, New York Agency-NO;?BMO Capital Markets Corp.-NO;?BNP Paribas Securities Corp.–YES;?Barclays Capital Inc.–YES;?Cantor Fitzgerald & Co.-NO;?Citigroup Global Markets Inc.–YES;?Credit Suisse Securities (USA) LLC–YES;?Daiwa Capital Markets America Inc.-NO;?Deutsche Bank Securities Inc.–YES;?Goldman, Sachs & Co.-NO;?HSBC Securities (USA) Inc.–YES;?Jefferies & Company, Inc.-NO;?J.P. Morgan Securities LLC–YES;?Merrill Lynch, Pierce, Fenner & Smith Inc.–YES (through Bank of America affiliate);?Mizuho Securities USA Inc.-NO;?Morgan Stanley & Co. LLC-NO;?Nomura Securities International, Inc.-NO;?RBC Capital Markets, LLC–YES (through Royal Bank of Canada);?RBS Securities Inc.–YES (through Royal Bank of Scotland);?SG Americas Securities, LLC–YES (through Societe Generale);?UBS Securities LLC.–YES (through UBS AG)


That’s right, the majority of Fed’s primary dealers also set LIBOR.


Okay, where are we going with this?  We are going to the US dollar-based TED spread.


There is a widely reported global investigation underway into the LIBOR rate-setting mechanism.  Britain’s Barclays was the first revelation but is unlikely to be the last.  The British Banking Association is independent of the Federal Reserve.  BBA is investigating in conjunction with the Bank of England and the British Financial Services Authority.


We are interested in the US response.  We seek to track the behavior of primary dealers that are doing daily business with the NY Fed.  We are looking to see if players other than Barclays participated where one side of the trade was rigged.




Spreads between LIBOR-based rates and US Treasury securities’ yields are potentially arbitraged in large amounts.  Every student of financial markets learns the importance of the TED spread – it’s the differential between LIBOR and T-bill rates.  If one side of the TED is rigged, all of it is in doubt.  The TED is critical, or was critical.  It was (is) used to indicate the market-based assessment of risk in the global banking system.  A rigged TED was an unthinkable act.  So much for “unthinkability.”


Would Fed oversight and surveillance have prevented Barclay’s actions?  We cannot say.  Would the threat of losing primary dealer status been a sufficient deterrent?  We cannot say.  But we wonder what message would be sent if the NY Fed now took Barclays out of the primary dealer lineup for a penalty period.   And we wonder what the market will think if the NY Fed does nothing.


We cannot prove any counterfactual about what might have happened if the Fed maintained surveillance.  We can say that the record since surveillance stopped reflects poorly on the Fed’s decision.


In her Sunday column (“The British, At Least, Are Getting Tough,” July 8, 2012), NY Times journalist par excellence Gretchen Morgenson closed with this paragraph:


“With each new financial imbroglio, the gulf widens between Main Street’s opinion of Wall Street and the industry’s view of itself.  When Mr. del Missier, the former Barclays chief operating officer, took over as chairman of the Securities Industry and Financial Markets Association last November, he said: ‘We will continue to work on maintaining and burnishing the level of confidence investors have in our markets, in our financial institutions, and in the general economic outlook for the future.’ ”


That’s right; the new chair of SIFMA is one of the Barclays executives who just resigned over the LIBOR scandal.  SIFMA is a regulator of some of the brokers who are not bank affiliates but who are primary dealers.


Albert Einstein also said, “We cannot solve our problems with the same thinking we used when we created them.”  Einstein was at Princeton before Bernanke.  We can only hope that the elder Princetonian’s principles influence the younger one to re-impose meaningful surveillance and thereby restore confidence in a system that sorely lacks it.


David R. Kotok, Chairman and Chief Investment Officer

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SoNH80's picture

Supervise primary dealers?  Nah.  It's more fun to write bullshit white papers about how shredded cardboard is a natural hedonic substitute for hamburger, and press releases trumpeting that the Federal Reserve "continues to ensure the financial stability of our Nation."  Earth to Kotok, nobody along the Acela train line gives a fuck about mis/malfeasance at the Fed, that is, if they aren't actively supporting, or being supported, by it.

Widowmaker's picture

Paraphrase Whalen:  "The wolves need to start watching the wolves."

Organized fraud at the expense of the prudent and risk averse. 

Savers crucified = unsound money and record faggot bonuses in paradise.



fleur de lis's picture

The Fed by definition is a fraud. It exists in criminal violation of our Constitution. It simply cannot function like a bank because it was never intended to do so. It can only remain viable by fraud and theft to absorb and hide massive, unaccountable amounts of money, and have it funnelled into various fronts and slush funds.

Cursive's picture

This is not the David Kotok of recent years.  Maybe Chris Whalen was more convincing at that Maine fishing hole.

MrBoompi's picture

NY Fed sets the rules for primary dealers.

And who owns the Federal Reserve?  These are the people who determine FR policy and their positions are not usually beneficial to the majority of the American people.

trcarson's picture

SIFMA is a lobbying group not a regulator.  FINRA is the b/d sro.

Dingleberry's picture

My only question is:


"Is anything not rigged?"

Widowmaker's picture


Everything since Kennedy was assassinated all the way to the corruption that Nixon institutionalized makes the US dollar vapor-paper.


Snakeeyes's picture

At least he gets the point that The Fed is the driver (master manipulator) of the LIBOR.  But it is easier to find some sacrifiscial lambs to humiliate.


billporsche's picture

If and when the audit the FED bill is passed, you will find that Bernakubus was writting puts on US Treasury securities. Tell me would you take the opposite side of a trade if you knew the writter has a printing press? If your not writting to your bought and paid for representatives in the Senate to get this thing passed your a fool!

Uchtdorf's picture

The key words in your statement which indicate the very futility of following your advice are: your bought and paid for representatives in the Senate

Why write to confirmed traitors to correct an evil well known to them? Unless "write" is a metaphor for wishing that justice...karma...God...nature...drops a 500lb anvil on their pointy little heads?

neutrinoman's picture

The TED spread came about because, in the late 60s and 70s, the US began emitting large numbers of fresh dollars to pay for oil imports. In the 80s and early 90s, inflation was brought under control, and the TED spread became less important.

However, in the 90s, Greenspan stopped supervising the primary dealers and began elevating them to supreme status on global Wall Street ... because the US, once again, started emitting large numbers of US dollars (credit this time, not money per se). Someone has to be the gatekeepers of what happens to those extra dollars and shepherd them back into the US Treaury and other markets, and make a lot of money while doing so. These are the pimrary dealers. They're a Fed-backed cartel for handling dollar-based financial assets for foreigners holding dollars. It plays a crucial role in keeping the US in fiscal and current account deficit, because they benefit mightily from accumulating US debt. This was part of Greenspan's larger agenda of abusing Fed power to "financialize" the US economy.

The problem with LIBOR is more recent. Before the 2008 crisis, it was fully functioning as advertised. It stopped functioning in 2007-8 and broke down completely by 2009. Only central bank salvation (through QE) saved the day. One price is that LIBOR, except for very short-term interbank lending (less than a month), stopped meaning anything real. There's no interbank lending out the yield curve. The quoted rates have been fiction since the fall of 2008. The banks stopped trusting one another in 2007-8, and that situation hasn't changed.

P.S. Kotok is a good guy and should be listened to.

Widowmaker's picture

"The problem with LIBOR is more recent. Before the 2008 crisis, it was fully functioning as advertised. It stopped functioning in 2007-8 and broke down completely by 2009."


100% bullshit.  I know for a fact firsthand this ain't so, it's been a dirty secret well back into the late-80's, which implies it has been "encouragable" much longer.

Burticus's picture

Impeachment is a formal process in which a gubmint official is accused of unlawful activity.  Bernanke is not a gubmint official, but the figurehead of a private, for-profit corporation.  Criminal charges, not impeachment, would be appropriate.

Furthermore, the author laments that this criminal cartel that has debased the U.S. dollar by 97% over the last 100 years should have better regulated its own shareholder banks - ?  Pu(**ckin)lease!

The only real remedy is to "Shed the Fed" and criminally prosecute everyone associated with them who is still alive.

El Oregonian's picture


PARIS (AP) -- France's government has sold short-term bonds at negative interest rates for the first time, a sign of investor confidence despite concerns about French debts and the wider eurozone.


France is a little late on the LIBOR-gate... Did someone forget to send france the memo?

Geronimo66's picture

The Dutch by Rabobank according to http://nos.nl/artikel/393256-exraboers-genoemd-in-rentezaak.html

Two former Rabobank (2001-2008 and the other 2003-2008) employees are suspended. They worked till today for London based Mitsubishi UFJ.

And of course the Rabobank did not wish to comment.

Mark123's picture

In a world where all our bought and paid for politicians (and MSM) are screaming for the central banks to devalue the currency by creating ever greater mountains of fiat based debt out of thin air....this Liebor issue is laughable.


As many comments have stated, the only way out of this mess is to eliminate the banking cartel's central bank monopoly.  That will not happen without a serious revolution led by some serious people.



tony bonn's picture

it's  time to grow up kiddies - the supervisory transition was made to enable fraud. bear stearns and lehman were hit jobs.....it's time to give up the tooth fairy and become an adult....bernanke is not going to do anything assure fairness, legality, or probity.....

Miles Kendig's picture

David and Chris, the LAST thing the Fed or other policy makers desire is clarity and accountability as the concept of stewardship has been reduced to portership.


After all, maintaining confidence is a national security concern and calling into question the construct of reality being promulgated by monetary, fiscal and judicial authorities will be considered unamerican in some circles.  The entire edifice of banking is premised upon .. trust .. in making CO2 look like O2.  Impeachment?!!!  ROFLMAO

Prosecuting government officials risks a “cycle” of criminalizing public service, [Sunstein] argued, and Democrats should avoid replicating retributive efforts like the impeachment of President Clinton — or even the “slight appearance” of it.

- Cas Sunstein


Think a Romney administration would be any different on this score?

Huff away guys.  Yelling at the passing clouds does help lessen the effects of excessive CO2 exposure, but our social systems are now incapable of doing what you presently advocate.

Any other suggestions would be most welcome

proLiberty's picture

Which came first, the corrupt crony capitalist banker, or the corrupt crony government official? The answer is that while every human who ever lived is tempted from time to time to covet and steal, we set up government and give it a monopoly on the use of force so government can maintain justice. Further, we expect to hold government officials to the highest possible standard of ethics while they work to preserve, protect and defend the Constitution. So, while there will always be people who seek to be cronies of government, we allow government to make cronyism a CRIME and to enforce the law when someone is observed committing it. We do not give the same power to corporations because they have a different role in society and the political system. When we see crony capitalists, we should not conclude that capitalism is at fault nor should we justify replacing capitalism with socialism any more than we would say that marriage can be done away with when we see married people commit adultery.

12ToothAssassin's picture

There is no Rule of Law based on the Constitution.

fresno dan's picture

Insanity is believing, despite overwheming evidence, that the one and only purpose of the FED is to NOT allow bankers everywhere to F*CK everyone, about a trillion times.

The FED is pure evil and their ONLY purpose is to allow banks to rape, pillage, pillagerape and extra rapeing.  If your not suffering, the FED isn't doing their job... 


NotApplicable's picture

Yes, the author of this piece is drunk on fuckin' Kool-Aid. Why is it so hard for these people to let go of the facade of lies that surround us?

You'd have to "impeach" the entire governing apparatus in order to produce any meaningful change. Including the impeachers.

Nothing but a worthless, self-propelled muppet herder.

12ToothAssassin's picture

Impeach - Im not sure that word means what you think it means. To be impeached is to have the House of Reps vote in a simple majority of those present to charge a politician with an offense. If that vote passes then you have been 'Impeached'

Next those allegations go to the Senate for trial which ultimately is decided based on a 2/3rds vote. You could be impeached and then acquitted a la Slick Willy. Again, being impeached only means being charged by the House.


Doubleguns's picture

End the FED and the problem will be resolved.

bankruptcylawyer's picture

end the fed and the problem JUST BEGIN. 

but that is what kicking the can is all about. pretending we don't have to face the facts. so that the parasitic establishment can continue to drain the host.

vmromk's picture

Bernanke should be impeached, are you for real ?

That COCKSUCKER should already be serving time in Riker's Island.

Miles Kendig's picture


The ADX in Florence CO was made for Ben Bernanke

dcb's picture

in the banking system you pay your bribe after the favor, not before

Edward Gerald Corrigan (born in Waterbury, Connecticut, on June 13, 1941) is an American banker who was the 7th President of the Federal Reserve Bank of New York and Vice-Chairman of the Federal Open Market Committee.[1] Corrigan is currently a partner and managing director in the Office of the Chairman at Goldman Sachs and was appointed chairman of GS Bank USA, the bank holding company of Goldman Sachs, in September 2008.[2] He

chunga's picture

It's not safe to go swimming in MA, there is a shark on the loose.

Popo's picture

The TED spread?   The LIBOR scandal is a *tremendous* deal for a thousand reasons, and the TED spread is (maybe) reason number 1001.   It's frankly just not that important a metric anymore, and I don't know what Kotok is talking about when he refers to securities being set via the TED spread.  (Maybe at Cumberland... lulz).   TED is used solely as a predictive/indicative indicator and that was 10 years ago ... I almost never hear of it anymore.   (Which quite possibly is an indication of widespread awareness re: LIBOR's untruthiness).