LIBOR 2.0: Is the Biggest Manipulation Yet to Come?

EB's picture

Submitted by Bob English (EB), guest contributing editor here and at

Is LIBORgate the crime of the century? Or is the real crime yet to come?  As has long been alleged at, the biggest manipulators of short term rates are the central bankers themselves.  Yet, they (unfortunately) have been ignored by the MSM in this mess--even the Bank of England, which appears to be directly culpable.  (See also this article from Business Insider, which reveals that the Fed itself already killed the LIBOR market long ago.)


Nevertheless, the central banksters,who never let a good [appropriately planned] crisis go to waste, apparently have an even more manipulated scheme to follow.  We discussed this [yesterday] on RT's Capital Account with Lauren Lyster (link below), along with a diversion into the timing of the whole LIBOR scandal, which happily coincides with the potential court-ordered release of Eliot Spitzer emails that might publicly exonerate Hank Greenberg and AIG (don't worry, CNBC is already on board).  If there were ever a moment when Wall Street and DC diverged in recent memory, it is now.


Last week, Chairman Bernanke spoke off-the-cuff to the House in a Q&A session and mentioned three potential  alternatives to LIBOR.  It seems the global central bankers have already planned a September 9th meeting this year to discuss exactly that.  And, while details are sketchy at present, whatever replaces the benchmark--to which approximately $500 trillion in notional financial products are pegged--is guaranteed to have the most powerful of influences behind it.  

According to Bloomberg, this meeting, to be headed by Bank of England Governor Mervyn King, will be conducted [behind closed doors], only to be followed up by another [semi-secretive] meeting amongst the policy-makers at the international Financial Stability Board.  

To date, the only central bankers talking are Bernanke and his Canadian (Bank of Canada Governor) counterpart, Mark Carney.  Mr. Carney, echoing Mr. Bernanke, laughably said, "There is an attraction to moving toward obviously [sic] market based rates if possible," he said.  

Market based indeed.

Both Bernanke and Carney mentioned repos (repurchase contracts, presumably of Treasurys/T-Bills) and OIS (overnight indexed swap rates) as replacements, and a third addition by Mr. Bernanke is actual T-Bill rates.  Remarkably, there have been few discussions (though see this Stone & McCarthy report at ZH) of this game changing event--which could literally decide the fate of not only money markets themselves, but the life and death of the largest financial institutions (their living wills now cemented in the Eccles Building archives).  

The principal problem with using either T-Bill or repo rates (or any secured rate, for that matter) is that a premium must be charged.  So, who gets to determine the premium? (And, if some other concoction is devised that requires a discount, who determines the discount?)  Even if algorithmic in nature, someone must write the algorithm (just as some nameless face wrote the computer program supervised by NYU interns that has bought literally trillions of dollars in securities on behalf of the Federal Reserve).

The Fed's OIS Conundrum.  

If one delves into the OIS alternative, even more decidedly non-"market based" potential for manipulation exists.  First, OIS is a derivative rate based on an average of the Federal Funds rate--the rate the Fed prefers to manipulate to "target" short term interest rates.  However, the "Fed Funds" market is drastically different than years past since the Fed committed to near-ZIRP policy (since December 2008) and since having gained the ability (in October of 2008) to pay banks interest for the money they "keep out of the system" by parking it at the Fed (so-called Interest On Excess Reserves, or IOER).  

According to the Fed itself, the largest lenders/sellers of Fed Funds are the Federal Home Loan Banks and other GSEs (principally, Freddie and Fannie).  This is because, as non-deposit taking institutions, they are not eligible to earn the 0.25% interest the Fed pays to banks.  Instead, they earn income on their extra cash by lending it to banks, which, in turn, deposit it at the Fed to collect IOER.  Further, according to an email sent by a senior Fed economist to an EPJ reader, the GSEs prefer to lend only to a few banks (presumably JP Morgan, Goldman Sachs, and the usual suspects).  Here is the quote (emphasis ours):

Anecdotal evidence suggests that all of the housing-related entities are willing to lend to the same few banks, which limits the possibility for competition to raise market rates.

Thus, a LIBOR "alternative" that uses the OIS rate as its substitute switches from (a) an average of declared rates by 14 or so banks to (b) an average Fed Funds rate determined by back-door dealings between the largest government sponsored failures (GSFs?) in history and the compromised TBTF banks with whom they prefer to transact.  At least the Fed (and the administration) can sleep knowing this scheme limits competition to push rates to the upside.

None of this is to discount the fact that the large banks wantonly manipulated LIBOR for their own gain on a day to day basis.  Nor are we are not attempting to mitigate their culpability for such.  Were we given the chance to indict the banksters for LIBOR or for nothing at all, guess which we would choose (though, we'd insist throwing Corzine in for good measure).  

The point is that after all the show trials and show hearings on LIBOR, all we are guaranteed is that the central planning oligarchy will have its tentacles more firmly entrenched in its manipulation scheme of the entire finance sector.  The question is only which power centers will be directing the circus.


Our Capital Account appearance begins approximately twelve minutes in (though don't miss the must-hear comments by Marc Faber regarding China and other matters):

If the embed does not appear below, click here:

EB: Also, don't miss "The Sandy Weill--Jamie Dimon War Continues" also at EPJ today.

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koncaswatch's picture

Am in the middle of a negotiation for business equipment $1.88m to be financed. This type of finance used to be a LIBOR linked rate. The "salesman" stated that manufacturer finance would be at a 9.0+%. we flipped! (we were expecting a 7% quote, and then we would bitch). His Boss comes back with 8.05% "variable in accordance with swap rates". We were horrified wondering, what swap rate; some CDS?!

Thanks to ZH we have an idea, (believe it or not the people we were talking to at the time did not know). However, I'm not sure I'm any more comfortable with the Fed's OIS after reading this post. Is there no mechanism that reflects the market? Or, is it just the reality of no unmanipulated market existing.

EB's picture

We were horrified wondering, what swap rate; some CDS?!

@koncaswatchLikely not CDS, since this is basically insurance protection on an individual company or entity, but you're right to be extremely skeptical.  It's probably a simple reference to an interest rate swap with a maturity similar to the term of financing.  So, you get 8.05% now, and if/when Bernanke earns his true helicopter namesake (the likes of which have not yet been demonstrated), you can count on going bankrupt, except that banktruptcy laws will have been changed to disallow discharge of debts based on LIBOR-related rates (note to 113th Congress: do this ASAP).

Don't expect the "salesman" or his "Boss" to be able to answer any pertinent questions.  Their job is to "sell" (duh) and the employer's job is to offload your loan such that it is securitized, tranched and sold to your town's municipal pension fund fifteen minutes after the ink is dry.

Disclaimer: This is not legal advice and I'm not a lawyer.  Thank God.

percyklein's picture

Once upon a time there was something very much like an unmanipulated market -- the NYSE and its continuous auction system after the SEC was created, knew a manipulation when it saw one, and put people in jail for engaging in it. The debt markets, of course, have never submitted themselves to such a system (an auction) and dealers hate it. We no longer have such a market, or even strive for one in something as simple as stocks, sad to say. And no longer have such an SEC. But the idea and its operation were pretty sound there for a while. IMHO.

zrussell's picture

It's probably sick buy so captivating- to be watching these crimes in progress, and being given access to the very details of what the criminals are doing. Forget novels! There is no fiction writer that could think up the evil that is underway- with complete impunity. Wow!

headless blogger's picture

From the sounds of Bernanke's shaky voice he must be having more and more nightmares about ropes. The guy seems literally scared to death.

zrussell's picture

It's not the public noose, it's the piano wire wrapped around his b@lls- for giving his soul to the global banksters! One wrong move or word..... poof!

brace_brace_brace's picture

case closed. They manipulate everything, fraud rampant. Get them out into the daylight.


falak pema's picture

this girl is a cool cucumber and cutesy pie.

She just thrives on bearish news and vice versa. She is the pot of honey for the mega bear! 

MrBoompi's picture

If the banks (and therefore their shareholders) are the counterparties on $500 trillion of interest rate derivatives, you can bet somebody will be manipulating interest rates and there's not a goddamn thing anyone will be able to do about it.



Catullus's picture

Two things:

I would use the eurodollar futures.  Though because they don't fall under the control of the Fed (hence the prefix "euro"), there's no way a CB would suggest it.


Wouldn't the banks need to re-contract all debt that's indexed off LIBOR?  Are they going to just rewrite my mortgage or student loans?

EB's picture

Exactly.  Who determines how the old contracts are re-indexed?  Just another avenue for a major power play.

RockyRacoon's picture

The link in the article should give one all the parameters of how this thing will be handled:

My mind is still reeling....

Mercury's picture

None of this is to discount the fact that the large banks wantonly manipulated LIBOR for their own gain on a day to day basis.

Really?  How does a mega-bank, which is both a massive payer and reciever of LIBOR based cash streams at any given time, manipulate to their advantage on a daily basis?

LIBOR manipulation is mostly about individuals or small groups of individuals manipulating the rate for their own book.

RockyRacoon's picture

The whole thing is jaw-dropping.   I can't even think of a place to start.  Just imagine the already clueless Congressfolk having hearings on this whole idea.   It would be like my dogs trying to figure out why a dark room lights up when I walk in.

falak pema's picture

they know you are rocky! 

RockyRacoon's picture

Well, yeah, there is that.   But I was more referring to the mystery of the electric light magic that happens.

LMAOLORI's picture


Glad ZH picked up this story!  I wish you would post this one also


The Sandy Weill--Jamie Dimon War Continues

disabledvet's picture

Continues? Sandy Weill is to finance what Robert McNamara is to war. CASE CLOSED. And in case Jamie Dimon "didn't get it"...he got reminded with his "London Whale." Excellent post above btw about LIBOR and "trading for your own account." if LIBOR surges to 8 or 9 percent you'll see a lot of wealthy people BITCHIN about their mortgage reset! For the rest of us "mere mortals" we'll just have to keep on using "the measly greenback." Now let's cross our fingers and hope that todays HORRIFIC housing report is the start of a GRAND FINALE of a double dip in that space. This whole "monetizing rental income" is the most INSANE THING i've ever heard. Right up there with "calling a poured concrete driveway a housing start."

spekulatn's picture

Great stuff EB. The winds of change are blowing hard.


Evans-Pritchard is wrong to argue for the faux-stimulation of paper money printing. The power elite that apparently wants to run the world has created the current monetary paradigm as well as the economies that react to it. But that does not make either state of affairs correct, only ubiquitous.


These kinds of articles and the feedbacks they elicit show us clearly that a new kind of monetary system is probably inevitable. The end result of such suasion as Evans-Pritchard wants to induce is not going to be stimulative but part of a larger crisis of confidence.

The import of these conversations lies not in their narrative but in the interaction itself and its sophistication. It leads us to believe significant changes may be closer than they seem.

Precious's picture

To them, manipulation is not a bad word.  It's their sole reason to exist.

Camera zooms in ...

HoofHearted's picture

As long as it is zooming in on Lauren Lyster....all is good...