Guest Post: The Real Libor Scandal

Tyler Durden's picture

By Nomi Prins and Paul Craig Roberts

The Real Libor Scandal

According to news reports, UK banks fixed the London interbank borrowing rate (Libor) with the complicity of the Bank of England (UK central bank) at a low rate in order to obtain a cheap borrowing cost. The way this scandal is playing out is that the banks benefitted from borrowing at these low rates. Whereas this is true, it also strikes us as simplistic and as a diversion from the deeper, darker scandal.

Banks are not the only beneficiaries of lower Libor rates. Debtors (and investors) whose floating or variable rate loans are pegged in some way to Libor also benefit. One could argue that by fixing the rate low, the banks were cheating themselves out of interest income, because the effect of the low Libor rate is to lower the interest rate on customer loans, such as variable rate mortgages that banks possess in their portfolios. But the banks did not fix the Libor rate with their customers in mind. Instead, the fixed Libor rate enabled them to improve their balance sheets, as well as help to perpetuate the regime of low interest rates. The last thing the banks want is a rise in interest rates that would drive down the values of their holdings and reveal large losses masked by rigged interest rates.

Indicative of greater deceit and a larger scandal than simply borrowing from one another at lower rates, banks gained far more from the rise in the prices, or higher evaluations of floating rate financial instruments (such as CDOs), that resulted from lower Libor rates. As prices of debt instruments all tend to move in the same direction, and in the opposite direction from interest rates (low interest rates mean high bond prices, and vice versa), the effect of lower Libor rates is to prop up the prices of bonds, asset-backed financial instruments, and other "securities." The end result is that the banks' balance sheets look healthier than they really are.

On the losing side of the scandal are purchasers of interest rate swaps, savers who receive less interest on their accounts, and ultimately all bond holders when the bond bubble pops and prices collapse.

We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%. Also, in the UK, as in the US, the government debt to GDP ratio is rising. Currently the ratio in the UK is about double its average during the 1980-2011 period.

The question is, why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP? One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate.

Why isn’t this happening?

PCR’s June 5 column, “Collapse at Hand,” explained that despite the negative interest rate, investors were making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower. 

What was pushing the interest rates lower?

The answer is even clearer now. First, as PCR noted, Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down. Thus, causing bond prices to rise.

Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices.

In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England’s low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it.

How long can the government bond bubble be sustained? How negative can interest rates be driven?

Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?

According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates.

The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments. We have learned that the Fed has been aware of Libor manipulation (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. The motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion.

Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.

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localpacific's picture

LIBOR Scandal Is “Huge”: Eliot Spitzer

i-dog's picture

LIBOR Scandal is "Diversion": i-dog

Al Gorerhythm's picture

LIBOR "Scandal" was Inevitable. Al guy.

strannick's picture

Libor scandal is the exposed icecube of the submerged iceberg of the quadrillion in interest rate swaps

Michael's picture

Libor scandal creates unintended consequences and accelerates the collapse.

Have you ever lived through a complete and total worldwide bond market collapse?

LMAOLORI's picture


I can imagine a much bigger case. Against this guy:


Keep in mind that for the most part LIBOR traded in line with Treasury bill rates and the fed funds rate. BUT the Treasury bill market and fed funds rate are manipulated on a daily basis by the Fed.

The LIBOR "scandal" will perhaps result in show trials,where some saps way down the elitist list totem pole will be hung out to dry, to create the impression that government is battling evil. It is doing no such thing. Government is the evil behind the real interest rate manipulations.

In full


Keep in mind the Chair Satan is allowing obama's spending to continue

WSJ: Fed Buying 61 Percent of US Debt
Zero Debt's picture

700 trillion of assets are at stake, so a low-odds prediction is that no heads will roll

sgt_doom's picture

Yeah, this is really an entire penultimate scheme of rigging.

And many people really have just little conception of these things, but then look at this:  conspiracy to ??????

Since most people go to jail, at least in America, for "conspiracy to ..." -- "conspiracy to traffic" --- etc., etc., and still the common response from David Ignatius types is always, "conspiracy theory, conspiracy theory" (they must get paid a bonus for repeating it twice in a row????).

So, the monumental conspiracy at global financial rigging.

Outstandingly explained, of course!

Which is why it's always preferred to know one's history.

History lesson for today, the Du Pont family (I get so damned sick of seeing American Enterprise Institute [founded by the Du Ponts] on CNN, NPR, etc., etc.):


Snakeeyes's picture

F*** Spitzer, the ultimate corrupt Statist.

Yes, part of the peril of ZIRP policy.

Quinvarius's picture

Or...No banks were transacting at the stated LIBOR rates because they are just a survey.

Ned Zeppelin's picture

Maybe, but many if not all of their customers did, who then were induced to offset the "risk" of adjustable rates by purchasing interest rate swaps.

Squid Vicious's picture

OT: Barton Biggs, now hedge-hogging 6ft. under...RIP

GottaBKiddn's picture


The only thing new about the Libor scandal is the exposure of the crime. Price fixing is the oldest game in town. The New Financial System will dodge this exposure by removing the "Exposers".

Everybodys All American's picture

Collusion of the central banks to hold off the day of reckoning. Something we suspected for a while. Funny how the Krugmans and robotraders of the world have continually stated how much everyone wanted debt. Just continued buying with both hands. Now we know why.

For whom the bell tolls? It tolls for thee.

It will not be long before we find out how the Fed or central banks rig the stock markets as well. Something we all suspect.

qussl3's picture

"How negative can interest rates be driven?"

Ask Singapore.

tony bonn's picture

"...He believes that some inflation is a spur to economic growth..."

this belief is what makes bernanke a criminal and a quack.

thank god for paul craig roberts, one of a very small pool of economists who has his head screwed on right.....the irswaps story is quite true, but some jim willie has trumpeted for months.....the jpm story is not done - not by a long shot - and it will center increasingly on the irswaps...that is the story behind the story....

tonyw's picture

inflation is NOT a spur to economic growth but necessary for bank profits.


buzzsaw99's picture

It would seem to be only a matter of time before the bond bubble bursts...

Don't go out on limb. /sarc How much time? imo they plan to drive the 30y below 1%. Laugh if you want as everyone did a few years ago when the 10y was 3.5% and everyone was calling the top. A flat yield curve near 0% is where they are going.

vxpatel's picture



'Stressed' Bank of England official stabbed self to death A Bank of England manager stabbed himself to death due to the over-whelming pressure he was under at work, an inquest has heard.

Downtoolong's picture

One might think that investors would understand that they are losing money and sell the bonds

I've been doing this with my longer duration Treasurys for eighteen months now. Front running the banks and muppets. Does this make me a traitor? I'll settle for that, as long as I don't get labeled a terrorist too.

Nobody For President's picture

I must be missing something here - I thought it was the Fed's JOB to manipulate intrest rates...

Downtoolong's picture inflation is not the goal of the Federal Reserve chairman… his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates.

In other words, yes we are knowingly transferring wealth from everyone else to the banks.

I guess it’s a new perspective on that old proud motto; yes we can!

Arnold Ziffel's picture

On an $80 billion portfolio of swaps, a 1-basis-point move on one-month, U.S. dollar Libor could benefit a trader by about $667,000, according to data compiled by Bloomberg.

Budd aka Sidewinder's picture

"Why hasn't this scandal gotten more attention?"

Scandal fatigue - bullshit

The answer is that the public is so stupid and so out of touch with anything above the 10PM news blip on what the Dow did today that they can't even comprehend what LIBOR even is

web bot's picture

Brilliant analysis. +1000

Very ugly consequences if the bond market starts to unwind.

robertocarlos's picture

It can't happen without human sacrifices. Oh wait, that's what the middle class are for.

Edit: I've posted in the wrong article but my statement still stands.


TheBird's picture

LIBOR has nothing to do with the rate that "savers" get on their balances and everything to do with the funds rate on the short end and the various QE's on the long end.  And not all swaps are entered into to pay fixed. 


loveyajimbo's picture

Soetero and Holder are concentrating on REAL issues, like Mitt's wealth, maintaining benefits to illegals and promoting homosexuality.  LIBOR, Shmibor... thank god for great leaders, otherwise, this country would be in REAL trouble!!   :-)

dizzyfingers's picture



  • The NY Times reports the Justice Department's criminal division is "building cases against several financial institutions and their employees."
  • State Attorneys General in New York and Connecticut are investigating whether states incurred losses because of LIBOR manipulation which "could lead to a wider multi-state enforcement action," The WSJ reports.
  • Top officials of the British version of the SEC, the Financial Services Authority, will testify before Parliament on why regulators failed to respond to concerns about LIBOR rigging going back to 2008. Congress is set to hold similarly themed hearings later this week and Fed chairman Ben Bernanke is almost certain to be asked about the matter when he testifies on Capitol Hill Tuesday and Wednesday.More from The Daily Ticker

Sheila Bair Sees "Significant More Fallout" from LIBOR Scandal: "It's Outrageous"

LIBOR Scandal Latest Sign of Financial System's Rotten Core

Why the LIBOR Scandal Matters: 'Destruction of Confidence to the Nth Degree'

Banks Are Safer But "Not Safe Enough": Former FDIC Chair Sheila Bair

ali-ali-al-qomfri's picture

a fool and his money are soon Liborated