Manipulation And Abuse Confirmed In $350 Trillion Market

Tyler Durden's picture

Just over three years ago, Zero Hedge first pointed out some dramatically meaningless inconsistencies in one of the world's most important numbers (which also happens to be "self-reported" and without any checks and balances) - the London Interbank Offered Rate, better known as LIBOR, which is the reference rate of a rather large market. Following that, we made a stronger case that the Libor, should really be abbreviated to LiEbor in "On the Uselessness of Libor" from June 2009, which alleged that this number is essentially manipulated, potentially with malicious intent. That alone got us a very unhappy retort from the British Banker Association (BBA) which is the banker-owned entity set to "determine" what the daily Libor fixing is based on how banks themselves tell us their liquidity conditions are. Well, as has been getting more and more obvious over the past two years, our allegations were 100% correct, and have now manifested in a series of articles digging through the dirt, manipulation and outright crime behind this completely fabricated number. And yet this should be the most aggravated offence in the capital markets, because LIBOR just so happens is the primary driver in determining implicit risk as a reference rate for $350 trillion worth of financial products. That's right - that one little number, now thoroughly discredited, has downtstream effects on $350,000,000,000,000.00 worth of notional assets. That's a lot. And while we are confident that nobody will ever go to prison for LIBOR fraud, which has explicitly been leading investors and speculators alike to believe that risk is far lower than where it truly is, what one should ask if the LIBOR rate is manipulated, and with is the entire floating and interest rate derivative market, not to mention CDS which are also driven off a Libor benchmark, what is there to say about the minuscule in comparison global equity market? In other words, does anyone honestly think that with the entire fixed income market pushed around by individuals with ulterior motives, that stocks are ... safe for manipulation?

Here is the mainstream media explains it:

Nine separate enforcement agencies in the US, Europe and Japan have been probing whether US and European banks manipulated the London Interbank Offered Rate or Libor, the benchmark reference rate for $350tn worth of financial products, and other interbank lending rates.

 

So far, only Japan’s Financial Services Agency has formally sanctioned banks in connection with the probe. In December, regulators found that two former Citigroup employees in Tokyo attempted to pressure colleagues and employees at other banks involved in the rate-setting process for the Tokyo Interbank Offered Rate, or Tibor.

 

While the regulator did not publicly name the traders involved, people familiar with the case identified them as Thomas Hayes, a trader of yen-related products, and Christopher Cecere, his former boss.

 

According to those people, the alleged attempts to influence Tibor were uncovered after another Citi employee in London reported the activity. Citi took a $50m loss when it unwound the traders’ positions and reported the matter to regulators, according to people familiar with the case. However, other Citi sources suggested the losses were significantly in excess of that amount. The investigation into possible manipulation of global interbank lending rates has accelerated in recent weeks, with more than a dozen traders at banks including Royal Bank of Scotland, Deutsche Bank, UBS and JPMorgan Chase fired, suspended or placed on administrative leave.

And some more:

When the news first broke in March 2011 that big US and European banks were being investigated over whether they manipulated a crucial global lending rate, regulators appeared to be focusing on one of the most persistent rumours of the financial crisis.

 

For years, analysts, academics and bankers have believed that, as fears of an impending banking collapse escalated in late 2007 and into 2008, some of the weakest institutions tried to conceal the fact that they were having to pay more to borrow from other lenders.

 

US regulators and prosecutors wanted to know whether banks were lowballing their daily submissions to the panels that set the benchmark interest rate that banks charge to lend money to each other, known as the London Interbank Offered rate – “Libor”. The Libor setting process is public and closely watched, so a bank that put in relatively high rate estimates could spark investor concern about its strength.

 

Critics have long claimed that the rate-setting process lacks transparency and could be subject to abuse if banks tried to co-ordinate their submissions.

...

“This is just another example of the slow drip of sleaze across the industry,” said one senior industry figure. “How much more can it take?

Much more, sir. Much, much more. Because the fate of the entire status quo and its $100 trillion or so in fake wealth is at stake.