Libor Perp Walks Before the Election, but No Perp Walks for Rate Manipulation by Central Banks

Wolf Richter's picture

Wolf Richter

I’m shocked and appalled that the Libor fiasco could even occur in our modern, highly ethical, and transparent financial sector. Banks misreporting anything.... unheard of. Nevertheless, it occurred. Not just once, but from get-go. And everyone and his dog, even Treasury Secretary Timothy Geithner, back in 2008 when he was still President of the New York Fed, knew about it.

And it’s not just some theoretical thing. Libor, or the London interbank offered rate, is figured daily in London when banks submit their estimated costs of borrowing from other banks—not actual costs, by design so that they could submit whatever. It is used to set interest rates on $800 trillion (not billion) worth of financial instruments, from student loans to interest rate derivatives (by comparison, US GDP is about $15 trillion). As Libor gets manipulated, so does the cost of loans, interest income of lenders, the outcome of all sorts of trades, and the apparent health of banks that are judged by it.

The world’s largest banks—among them Barclays, HSBC, RBS, Lloyds, Credit Suisse, UBS, Deutsche Bank, Rabobank, Dexia, Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, Royal Bank of Canada, and Mitsubishi Bank—are under investigation or have been named in lawsuits alleging that they’d rigged Libor, and the list will likely get longer. In June, Barclays agreed to pay $453 million (not billion) in fines. Peanuts, given the magnitude and duration of the scam. Bob Diamond, Barclay’s CEO, and some other folks at the bank, lost their jobs. The US Department of Justice is expected to file criminal charges against a number of banks and bankers later this year—with perp walks perhaps before the election in November.

“You know, Libor is being set too low anyway,” a banker at Barclays told an analyst at the NY Fed on December 17, 2007, according to a transcript in the NY Fed’s data dump on Friday. “We know that we’re not posting um, an honest Libor,” another banker at Barclays told a Fed analyst on April 11, 2008.

Geithner, as President of the NY Fed, was informed—as must have been just about everyone at the Fed. So, according to emails in the data dump, he hounded the Bank of England to do something about it. Well, not exactly hounded. In June 2008, he sent an email with recommendations on how to preserve Libor’s credibility to BoE Governor Mervyn King, who passed it on to the British Bankers Association (BBA)—the banking group in charge of Libor—but obviously not much has been fixed since then.

Bankers regulating bankers—who would have thought that it could lead the industry astray? Just shocking and appalling.

“The revelations broadly are another episode that is damaging to people’s confidence in the financial services industry and that’s a shame,” Richmond Fed President Jeffrey Lacker admitted in an interview.

Because “confidence” is what this really is all about ... a con game ... and people have started to open their eyes a bit and don’t buy it anymore, not lock, stock, and barrel like they used to before the financial crisis and before the multi-trillion-dollar bailouts that were bestowed upon banks and other central-bank cronies around the world, including companies like GE and our very favorite Uncle Warren Buffett.

Maybe they (the Fed, the BoE, the BBA, etc.) didn’t know how to replace Libor, which clearly was beyond repair, but they could have let some sunshine hit the process, by announcing, for example, that the rate was rigged, and that people shouldn’t rely on it. But sunshine is anathema in banking as it destroys “confidence” and brings banks to the brink of collapse, where they’re bailed out again—a nasty distraction from the game.

But collusion and interest rate manipulation, the very misdeeds that the Libor players are being accused of, are standard practice and, in fact, public policy with central banks. Driving rates to absurd lows, and into the negative even—a form of confiscation where investors are made to lend money to governments at a guaranteed loss—is often the stated goal of all major central banks, as is printing money and buying up debt to control and manipulate the credit markets.

The consequences of these actions are far deeper and broader than Libor manipulation. They destroy the functioning of the capital markets, contaminate price discovery, lead to massive misallocation of capital, and undermine a large segment of market participants. They create this silly notion of a policy put in both credit and equity markets. And they allow elected officials to believe that they can run up deficits ad infinitum. But it’s unlikely that central bankers will ever be held to account for these activities—and perp walks are even more unlikely. Those will be reserved for a few sacrificial lambs in the Libor scam.

But enough is enough. This is a weekend, and we need to have some serious fun ... driving like a maniac—a phenomenally skilled maniac—in a rally car through the stunning San Francisco urban scenery with smoking tires, airborne stunts, and donuts around moving cable cars. An adrenaline-charged video of the awesomest ride ever.

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ebworthen's picture

Mobsters in wool suits with PhD's and corner offices.

Being riddled with bonuses instead of bullets.

Crimelords of the 21st century.

Walt D.'s picture

LIBOR is a spread over the manipulated treasury spread. So manipulated LIBOR is a manipulated spread over an already manipulated rate. However, the size of the manipulation in the treasury rate is huge in comparison to the manipulation in the spread.

hooligan2009's picture

quite right...we had a golden age for a while where INDEPENDENT central banks in Europe were supposedly going to keep a check on inflation by adjusting rates to above inflation when it got out of hand and reduced it to close to level with inflation when it was c. 2%. 

We can thank Volcker in the 70's for putting that inflation genie out of the bottle when commodities (oil) went from 5 to 8 bucks then 12 then 20. The wage inflation from unions seeking to correct a collapse in living standards was throttled with 15% Fed funds rates. 

Now we have central banks like the Bank of England allowing inflation to track above 4% for years with just a letter of explanation to their politicial owners who told them to ignore the mandate to control inflation so as not to impoverish voters.

But you are right. We are living in a regulated interest rate environment where supply and demand for money are not determined by the demand and supply of capital. allocation decisions are dictated by polticians and a federal reserve who hs not made any real product to a required quality standard in their lives, without tax payer funding.

hooligan2009's picture

Let's get a little more specific here. LIBOR is used in swaps. Most swaps by volume traded for the last thirty years or so have been interest rate swaps. These are issued for terms between 1 and 50 years and are mostly 3-5 for US nd 3-50 years ofr Europe. These swaps consist of a fixed leg for the term (many terms) and a floating rate tied to 3 or 6 month LIBOR for all of them.

All participants have been able to trade either side of this market, paying or receiving fixed rate in exchange for receiving or paying LIBOR. That's all banks at all times. All companies at all times and all pension funds at all times. 

In order to figure out whether fraud was involved we need to work out who consistently benefits and who consistently loses. This would involve identifying who would lose.

It ought to be apparent who the major payers of LIBOR are. Pension funds seeking to match liabilities with swaps. These liabilities extend to annual anniversaries of cash flows in real and nominal terms. Each of these swaps has a pay leg (LIBOR) and a receive leg (nominl and real).

To repeat, pension funds with deficits use swaps to match known future cash flows. Because they have deficits, they must use leverage to cover their (unfunded) liabilities. These swaps are used extesnively for European defined benefit schemes. Its called Liability Driven Investment. 

Here is the rub. The banks know that these pension funds are always paying (floating) and receiving (fixed or inflation). Pension funds are always borrowing floating. If you always increase the borrowing cost of LIBOR, you will make more money. The pension funds will PAY ANY RATE OF LIBOR as defined by banks. 

Over the long term, the receive leg (received at the expiry of each inflation or nominal date), will get marked...once to market, by rolling into the LIBOR terms of up to 18 months. 

Short term, bank staff get large bonuses because of the swaps they write. Long term, the pension funds are paying the odd 1/8% to 1/4% p.a. extra ON THE ENTIRE AMOUNT OF THEIR LIABILITIES. For a trillion euro defined benefit market in Europe nd a similar sized one in the UK, a 1/4% represents (on 2 trillion euro) the odd 5 billion a year. Enough to pay the odd 160 people in charge of setting LIBOR a nice fat bonus. 

Definition of CUI BONO

1 : a principle that probable responsibility for an act or event lies with one having something to gain 2 : usefulness or utility as a principle in estimating the value of an act or policy

disabledvet's picture

i think this is spot on. "the fraud" as it were relates to the payment and receiving of bonus's based up the "fixed rate" and my eyes...the fixed rate itself. of course if you want to "un fix the rate" go right ahead. you'll be paying a lot more than just "that guy's no longer existing bonus" i bet. i'm all ears for "any ideas on how to recapitalize the banks" of course. "let it all collapse" is an option in my book btw.

OutLookingIn's picture

Circuses and bread for the "no minds,"

The embedded video at the end of the article is case in point.

Keep their small minds occupied and their fat guts full.

Pay no attention to the man behind the curtain.

Knowledge and an awakening go hand in hand ~ as in taking the "red pill,"

Most would rather carry on, blissfully unaware within the matrix.

This is what the financial/politico machine want.  

MillionDollarBoner_'s picture

"Because “confidence” is what this really is all about ... a con game ... and people have started to open their eyes a bit and don’t buy it anymore"

Fuck it! I used to enjoy life, bumbling along in my own happy way, safe in the knowledge that TPTB were looking after the detail.

Ever since I took the red pill, nothing is the same.