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Bloodletting
London has always been the center for the Euro dollar deposit market, but most banks had NY operations that also made markets in Euro depos. For a time, I sat on one of those desks. This was way before the Internet and live-streaming prices. Brokers communicated market prices over squawk boxes that were piled up on every desk. There was constant drone of background noise. I can still hear the voices :
.
Mostly we just called the players in the market and told them where we were bidding/offering strong. We even sent out faxes and telexes (I was in charge of the faxes). One day the desk got short six-month money and had to pay up to get it back. So the calls (and my faxes) went out. About an hour later the “Big Boss” comes out to the desk and says:
I heard that you are bidding ¼ over the Libor fix for six-month money. What the fuck is that about?
Someone mentions that there was demand and that the Libor “fix” was not the price that cleared the demand, so we had to pay a higher price. The boss responds:
That’s your fucking problem. Don’t make it mine. Don’t show prices to the street that are over the fixing. It makes us look stupid or desperate.
The only thing interesting about this story is that it’s 30++ years old. People have been sandbagging Libor quotes since the concept of Libor was originated.
I don’t believe that there is a money pro on either the buy or sell side over the past thirty years who didn’t understand that the Libor Fixing was “fixed”. If they claim to be “shocked” today, they are either lying or stupid. The same goes for every central banker and treasury official that knows the way to the bathroom.
As far as any consumers who took out a Libor based loan are concerned; they have no claim at all. If Libor hadn’t been “fixed” all these years they would have paid substantially more on those loans. Libor has always been jimmied down, not up.
The world has been looking for an excuse to hang some bankers (and a few regulators). Liborgate looks like it could be the opportunity for the bloodletting. I’m convinced that this is the wrong issue to bring out the nooses.
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I don't understand the fuss over LIBOR fixing by Barclays et al when the grandest "fixing" by far is done by, and has always been done by, central banks.
The Fed sets the Discount Rate which puts an upper limit on interbank rates and only fails in that regard when access to or flows from the discount window are impeded (as we saw in 2008 and which the Fed promptly rectified with the PDCF). Interest on excess reserves (IOERs) modifies the spread between the Discount Rate and LIBOR for the simple reason that a bank with surplus reserves is less inclined to lend in the interbank market.
Fluctuations between reality and the LIBOR rate caused by official-fix shenanegans are really small fry compared to fluctuations between reality and markets caused by the Fed's setting of the discount rate over the years. The real scandal is that *global* interbank rates (hence consumer rates) are so utterly controlled by such a few number of people at the Fed, that the Eurodollar environment is so closely tied to the domestic dollar environment, and, as is always the way, when so much power is concentrated into the hands of so few, they screw things up terribly for the most people possible.
What a different place the world would be if central banks had never attempted to manipulate the price of debt in the first place.
I know a lot of contractors in Federal pen for bid rigging of far far far less impact on markets.....Bruce is saying laws against fraud and bid rigging are for little people not for financial traders or oil companies, because oil companies get away with, so should finacial traders, because police hired to patrol Wall Street knew about this and did nothing, then it's not a crime, it's not wrong. Well what does average working person reporting to a corporation who can't even cheat on his time sheet because his corporate badge reports his every movement, the average small business guy who lives in deathly fear of an IRS audit even tho he takes no chances with his taxes, the , subcontractor sitting in Federal pen, think of this logic Bruce?
When finacial guys lie cheat and steal they say lying cheating and stealing is okay, when little people violate the most petty of laws, they are swooped away by a draconian criminal justice system...just ask those high buck thieves get stopped and frisked everytime they walk in their black NYC neighborhoods.
One of the bedrocks of democracy, rule of law is equal protection under the law. Needless to say we are no democracy, laws protect Wall Street, and tyrannizes regular folks, nothing equal about it. In this case, Bruce, you are in a bubble. I challenge to sit through a half day of sentencing at you local county courts. You will see how much time and money is spent on petty petty shit, lives are ruined, but traders don't know what a criminal court looks like, not becuase they aren't criminals
The issue is moral rot. With fish and central banks, it starts from the head down. The 'losers' are all the civilized folk who don't steal and commit fraud for a living. When trust dies, civilization dies with it. The fact that the crime has gone on, in full view of the regulators, and apparently with the full support of major governments, for many years, tells you that the head is now rotten. When normal working people see that the government is corrupt, and that crime pays, and that saving and planning for a better future is pointless, the moral fabric of civilation tears, and a lot of rotten fish guts spill out. BK, you can't apologize for widespread corruption; you can't condone it just because it was ordered at the highest levels. Either we have a nation of laws, and honest people dealing fairly and voluntarily, or we let evil win, just because 'everyone else was doing it'. btw, I like your posts, your technical analysis is excellent, and you bring some portion of insider viewpoint. And it takes a lot of courage and effort to put such a post together, only to be excoriated by those who don't share your conclusions. I don't share all your conclusions, but I feel that reading your work is always worth my time.
Fishhawk
You MUST be joking. Did you conclude that lying (no matter how widespread or common) is not a worthy of prosecution? SERIOUSLY? Well, there are a few energy traders in prison who would agree with you. I do not. A cornerstone of free societies is honesty. I could write a book about how absured your conclusion is but I will spare you my righteous indignation. It is enough to simply inform you of your lost credibility.
They got Al Capone for tax evasion. Bankers are a slippery bunch. Prosecute them for any illegal act, no matter how minor. Because they get away with all the big stuff.
We're dealing with criminal fraud here, Bruce, not civil fraud. Prosecutors do not need victims to make a case from criminal financial fraud. Damages are not an element of their case. They only need to prove intention, false statements and financial gain.
Intresting article and take on the "scandal" Its intresting because I did not know how deep the rabbit-hole went. My only arguments against your view point is that it may have been common knowledge with "insiders" but judging from the public's reaction it was not common knowledge to them. My only question is wouldn't this rigging be the same thing as price fixing, and if so which type? IE OPEC can legally set the price of oil but its illegal when it is done by companies (Exxon, Shell).
In your town all of the local gas dealers have an "understanding".
I'm betting that 95% of all Americans have no clue what Libor is, and it never had any consequence in their lives.
I agree on Libor, but think until now, it might have been at least 98% instead of 95%
Detroit, has ha, in the last few decades, a substantial "Arab" emigration. During the 70's and 80's, the Christians in the middle east, in general and Iraq in particular were being gradually driven out, Moderate muslums apparently sometimes felt pressure as well. They were quite entrepreneurial and able to work well in extended family groups. Many gas station and party shop locations that the white populace had given up, were taken over and made to work by people from the middle east. Many were educated, well spoken and worked long hours To a limited extent, they were fully equal to the "tough" enviroment. Some of these guys are as nice as you will find anywhere but you won't be able of get close. They work because they have spousal and family support and no other option. And in many cases, they are very financially successful.
During WWII, and during the Korean War and the "Cold War" period with Russia, the feeling of "entitlement" or right to immediate gradification, did not exist in this country as it does today. And I am old enough to remember that period very well.
5 years ago a lot of Americanshad no idea what Libir was, they do now, they either have variable rate mortgages and started paying attention to it, or they read Rolling Stone. Both conservatives, liberals and the guy in shipping at my work in Midwest have mentioned Libir gate to me
but is that "understanding" legal. I do not wish to argue on your second part but if your correct how do you explain the outrage?
You are insane. Is your argument that because gas stations lie and manipulate prices via deception that is is ok for all of us to do the same? How is it that the let you on this blog at all? Is this a prank?
Ohhhh....i get it. good one. you got me. I totally fell for it.
Easy, ain't it?
So LIBOR rigging saved people money? I fell off my chair when I read that one!
Comments from Simon Johnson re: LIBOR
http://baselinescenario.com/2012/07/12/the-market-has-spoken-and-it-is-r...
"
In the aftermath of the Barclays rate-fixing scandal, the most surprising reaction has been from people in the financial sector who fully understand the awfulness of what has happened. Rather than seeing this as an issue of law and order, some well-informed people have been drawn toward arguments that excuse or justify the behavior of the Barclays employees.
This is a big mistake, in terms of both the economics at stake and the likely political impact.
The behavior at Barclays has all the hallmarks of fraud, pure and simple – intentional deception for personal gain, causing significant damage to others.
...
Third, Libor-rigging is defended as a “victimless crime.” This is untrue. Traders at Barclays and other banks gained from this series of manipulations, so someone else lost. That may have been investors, who received lower returns than they would have otherwise. Or it may have been borrowers, who paid higher interest rate and related costs than would have been necessary in an honest market. Other losers are presumably everyone who was effectively overcharged by all the intermediaries involved in crooked behavior. Some local governments have also lost heavily – and at a time when these losses put pressure on essential services and will tend to increase taxes.
...
"
I don't think we really need a reason to hang banksters beyond that today is a day that ends in "y".
"I’m convinced that this is the wrong issue to bring out the nooses"
Shades of your "pool boy/illegal immigrant" post Bruce....
This is not going to go down well on ZH either, and rightly so!
"That’s your fucking problem. Don’t make it mine. Don’t show prices to the street that are over the fixing."
What a (typically) charming fellow you worked for...
How much of that ethical shake did you swallow over the years Mr K?
I don't write things for ZH or any other mag to make new friends.
You should see the crap I took for a piece I did on global warming (440 comments at ZH). I'm still getting hate mail.....
"You should see the crap I took for a piece I did on global warming"
well, into every life, a little crap must fall, I suppose...
on balance I appreciate most of your insights and contribs...but you seem to possess an institutional nostalgia that VERY few others here can match....
You've got spunk, kid.
I HATE spunk.
- Lou Grant
"One day the desk got short six-month money and had to pay up to get it back. So the calls (and my faxes) went out. About an hour later the “Big Boss” comes out to the desk and says:
Someone mentions that there was demand and that the Libor “fix” was not the price that cleared the demand, so we had to pay a higher price. The boss responds:
This is the sentiment that is the source of all the corruption and rot in the London style Clearinghouse market system.
If the Bid has to go higher than the "fix" to enact a real trade, then the fix is bogus. Fucking Duh.
If my 10 year old son is selling lemonade from stand on the sidewalk, and is asking $10 per cup, then no one has the right to tell him "the 3 kids down the street are selling theirs for 50 cents a cup, so that's the REAL price of lemonade."
Valid, legitimate PRICE can only be determined at the point that a bid meets an ask.
"Fixes" are completely fucked. There is no single declarative "price" that can clear ANY market in ANY substance or service for ANY period of time.
The auction process and open outcry is the only valid measure of real and true price discovery.
If you want what I've got, then NO ONE can tell me how much I should or should not accept for it...
Fuck the fixes - all of them. Burn London to the fucking ground.
"Libor is an index. The three highest and lowest quotes are eliminated. After that, it is an average.
There is no law broken. I don't think there are any "laws" about it."
- If it is just an idex- then why are the "statistical outliers" discarded...? If it is "just an average" then why not include all data points in the calculation..?
Sorry Bruce- you sound a little too much like an apologist on this topic. Traders should be able to bid/ask whatever the hell they feel they need to in order to clear a legitimate trade; regardless of whether they are hyping the bid from a position of strength, or whether they are cratering the ask from a position of sheer terror that they are about to send all their co-workers to the financial morgue.
The volatility that would ensue would be fierce, scary, and completely unnatural for a period- after that, the queiscent state would be found, and the markets would neutralize themselves.
This isn't a fucking poker game - this is the livelihood of Billions of people who DESERVE to know what their financial well being is really worth (in real terms)...
Since I posted this piece bot Geithner and Bernanke have come out and admitted they were aware of the flaws in the Libor fixing process as far back as 5 yrs ago. Obviously nothing was done about it. The concerns that Treasury and the Fed had back then were not made public.
Who you going to blame on this one? The chickens, or the guys running the hen house?
"When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed."
- Ayn Rand
The attitude that a trader can not conduct himself/herself without moral or ethical prudence seems to fade the farther you get from Wall Street or the City of London...
How long this has been taking place is irrelevant - there is no statute of limitations on the negligence of ethical behavior.
I repeat my earlier point- If a trader can not find a bid above the fix price, then the fix is BOGUS, and the Boss should not be running in screaming at the traders or holding them responsible for the market's glaring REALITY. The boss should be escalating to THEIR boss that the fix is BOGUS and that the market is setting the price on its own (just as it should).
This morning I had to pay (offer, or bid) $50 over the London Spot price of Gold to purchase 5 Canadian Maple Leaves... and I KNOW FOR A FACT those coins did not cost 50 bucks apiece to stamp and ship to my local coin dealer.
Silver "premiums" (which is as stupid a term for dealer mark-ups as I've ever heard) are moving north of $4 the ounce in my neck of the woods.
Should "the boss" at the local coin shops all be screaming at their employees for quoting prices that are higher than the London fix...? Does it make them look stupid?
They are only quoting REALITY.
and, nothing was done about it 5 years ago because Bernanke and Giethner both KNOW that they are more financially and legally literate than the buffoons in Congress (and the White House) that they are supposed to be "accountable" to; and I personally believe that back then they really, actually believed that this thing would all blow over the same way Oct87 did, and the same way the 90-91 S&L crisis did, and the same way Sept2001 did...
Let's all hope that as a result of this mass-psychosis, the people begin electing the type of intellectually capable, yet emotionally and morally responsible people necesary to clean this mess up...
Bernanke and Geithner are shills - they haven't any more a clue on how to fix this than Steve Liesman or Jim Cramer would.
I fear that as Wall Street has endured 4 years of down-sizing, that the people left are becoming the most sociopathic of the sociopaths. The culture of corruption is feeding greedily on its own increasing concentration...
Eventually the Bizarro World will become real, and we actually will need Superman, Wonder Woman and the rest of the fucking Hall of Justice.
Personally, I blame public demand for eggs and chicken meat.
If Joe Jackass wasn't willing to pony up for omelettes and McNuggets, there wouldn't even BE a hen house to steal from.
With commerce comes theft. Every hand comes complete with potentially sticky fingers.
Was he clearing 10 trillion of lemonade however? A DAY...
Funny, but I don't remember G.W. Bush pushing Fannie and Freddie. I do remember a video of a House committee Dem members, blasting a Bush emissary, who was imploring the House to rein in F&F, led by Barney Frank, and a black member accusing Bush of trying to pull an "electronic lynching of Franklin Raines". But what the hell do I know?
Well, he was quite happy to pat himself on the back in speeches about the high rate of home "ownership".
" If Libor hadn’t been “fixed” all these years they would have paid substantially more on those loans. Libor has always been jimmied down, not up."
True, but all those who swapped fixed for float got clipped.
Anyone who ever did a fixed-floater swap knew what Libor was about. Everyone. That was the point of the story.
Who gives a shit if some swaps guys at Bear Sterns got clipped a few years back? I don't. They knew full well the sand box they were playing in. No way to cry foul today.
If only it were contained within a mythical sandbox, then your point might have meaning.
Personally, I think your analysis is way too focused on the micro, rather than on the macro level, where it matters today.
I understand your "It's no big deal" logic, and find it convincing at that level. However, in light of the entire systemic disease it's helped to foster within the financial system, then I find that it's an extremely big deal.
The fish rots from the head down. To accept fraud in any one institution, is to accept them in ALL.
Like I said, you're right in your details, but you're absolutely wrong with your conclusion.
NA,
"You're right on the details" comment is 'dead-on' regarding BK - who we well know is a master of the well-reasoned micro-distraction. (unless the topic is polar bears)
BK is likely the most dangerous ZH regular contributor, IMHO.
Dangerous? How am I dangerous?
If anyone fears me (I don't think anyone does) it would be the Fed,Treasury,Administration,CBO,FHFA, FHA,SEC and a few others.
Any time you make somebody think for a change, you make yourself dangerous.
Upset too many patterned reactions at once and you become a target.
"Dangerous? How am I dangerous?"
May be because you bring reports from experience and truth/reality always win despite how many thousand times a lie was repeated. It may take a long time but eventually Truth comes out.
Veritas Filia Temporis
Bruce - While you may be correct that rates were too low, in any transaction there are 2 parties - buyer and seller. If rates on mortgages were too low, then you are correct the consumer likely does not have a case. On the other hand the seller of the mortgages does - they received too little interest on all mortgages for 30+ years.
Any time there is manipulation in a transaction, one side gets burned and one side gets a bargain. This is the reason the Libor manipulation is far, far bigger than any of the MSM are making it out to be. The potential damages are in the trillions of dollars. It may only be a few bucks here or there but take that x 100's of millions of transactions over decades and it adds up to massive numbers.
The ones doing the manipulating are rarely the victims of the manipulation in terms of losses. Meaning the large banks are likely the benefactors of most of the manipulation otherwise why would you do something to purposefully harm yourself and cause a loss of money?
Seems to me the rates had to be set "too low" primarily because at the root, the currency in question is not "money" in the traditional sense, but is the conjured material offered in exchange for public debt. When the last vestiges of coined money left the building, the only thing left to establish value was this elementary "fix".
And of course the "fix" will be "too low". This is the dilemma Ben is facing now and Japan has been enjoying for lo these many years.
End the fed. Return to lawful and constitutionally defined money and this silliness will end. imho.
Bruce,
Thanks. For years I had a squawk box on my desk and heard the incessant chatter. Brought back memories.
But the story is now shifting to phony pricing on CDS's and other derivatives, which is a reason for bloodletting.
These stories all have a common theme -- that being the markets are rigged. That's the BIGGER PICTURE. And the more exposure on each of these topics that educate the masses the better. They are already pissed, disenfranchised, and now poverty stricken. Each victim in each country, probably has someone who will bring this stuff up in conversation.
Truly a toxic brew is being developed, and much of the world in watching and learning a little more each day / week.
imho, it didn't nor doesn't matter if the fix was higher or lower, it matters that it is rigged. The whole system is corrupt.
So your premise is that the LIBOR rate, and therefore global money market, has been gamed or rigged for 30-odd years at least and then claim you know what rates would be at today if the manipulation hadn't taken place?
Complete BS. You change the inputs that affect the whole system for that amount of time and your ability to project the "True" rate now goes out the window. That's like telling me you could accurately calculate what the temperature would be today if North America had received two extra inches of snow every year since 1980. It's a complex system, change the inputs and you change the output for every iteration.
Go read up on Julia Sets and then tell me how much you know about what the rates would be today. Accountants know math like 5th graders know creative writing.
Just a question. Where did I say anything about "knowing" what "true" rates would be today? I looked. Didn't see it.
And what does this have to do with snow in 1980?
----- I’m convinced that this is the wrong issue to bring out the nooses. -----------------------------------
well that is one hell of a way to end the story my man. What is the ISSUE that you have in mind??
How about George Bush who pushed Fannie and Freddie to boost lending as a way to offset the cost of the war? I have always believed that Fannie and Freddie coupled with congress and the White house inflicted more harm then any banker did.
How about Greenspan? Action after action to boost the S&P. His active intervention in monetary policy created the opportunity for the fall in 2008.
To me, there has to be proof of harm. And any harm must be directed against defenseless orphans.
I don't see that in Libor gate.
okay so here's your orphans. Many of the large capital pools lending into the markets at LIBOR are pensions, who support
widows and orphans. Those pension funds getting clipped an 1/8th or a 1/4 are all harmed and their beneficiaries are all
the elderly, widows, orphans.
Hows that?
There is not a single pension fund manager in the world who would get on the stand and swear that they had no knowledge that Libor was a flawed yardstick. In spite of those flaws, they relied on it while investing those widow's money.
The Libor based paper went into money market funds. By itself, it created a new investment opportunity for millions. There was a demand for money that was priced off the short end. There was a supply of money that wanted a reasonable return for cash. Libor was the rate at which those interests crossed.
Those orphans who parked cash in a MMF did very well the past 35 years. Today, it is a Fed policy (ZIRP) that is screwing those poor widows.
BTW - Those pension fund managers have been "clipping" those orphans for multiples of what Libor did. They have been doing that the last 35 years. How do you think one buys a house in Aspen? You clip 1/8th and 1/4rs for a couple of decades.
Hows that?
Reliance is presumed under the "Fraud on the Market" doctrine. Anyone lending via a MMF fund is entitled to rely on the market pricing. It's not like one of the risks disclosed was that the LIBOR component of the interest rate may have been set fraudulently by a cabal of dishonest bankers...
Even with the manipulation, LIBOR tracks the US fed funds rate pretty tightly. Fed funds is an official rate set by a branch of the US government and is part of their ZIRP and near-ZIRP policies which will screw just about everybody in the end.
LIBOR is essentially just a mechanism of US government ZIRP. Your (all of our) contention is really with them.
double click ooops
Amen.
Since almost no one actually transacts exactly at LIBOR rates anyway, the real market is the spread on top of LIBOR.
I think the real issue here is that LIBOR is looked at as something approximating the true cost of money.
In reality, the true cost of money is a spread on top of LIBOR, or an offer rate on top of an offer.
In other words, we should be using LIBOROR.