LIBOR

The Fed has released the first of its Lieborgate treasure trove: "Attached are materials related to the actions of the Federal Reserve Bank of New York (“New York Fed”) in connection with the Barclays-LIBOR matter.  These include documents requested by Chairman Neugebauer of the U.S. House of Representatives, Committee on Financial Services, Subcommittee on Oversight and Investigations. Chairman Neugebauer requested all transcripts that relate to communications with Barclays regarding the setting of interbank offered rates from August 2007 to November 2009. Please note that the transcript of conversations between the New York Fed and Barclays was provided by Barclays pursuant to recent regulatory actions, and the New York Fed cannot attest to the accuracy of these records. The packet also includes additional materials that document our efforts in 2008 to highlight problems with LIBOR and press for reform. We will continue to review our records and actions and will provide updated information as warranted."

Just because the market is so stupid it completely ignores what the news of the day is: namely that JPM engaged in what Jacob Zemansky on TV just called criminal behavior when it consistently mismarked its CDS book, as it itself admitted 10 minutes before releasing its earnings today, an act that in itself is nothing short of what Barclays is in the 10th circle of hell for due to blowing up Lieborgate sky high, here is a stark reminder of what happened the last time a trader was caught fudging his CDS book...

Peak oil is a phenomenon many will be aware of – peak gold remains a foreign concept to most. Peak gold is the date at which the maximum rate of global gold extraction is reached, after which the rate of production enters terminal decline. The term derives from the Hubbert peak of a resource. Unlike oil and silver, which is destroyed in use, gold can be reused and recycled. However, unlike oil gold is money, a store of value and a foreign exchange reserve and gold is slowly being remonetised in the global financial system and indeed may soon play a role in a new international monetary system. Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970. Peak gold may not have happened in 2000. Nor may it have happened in 2011. However, the geological evidence suggests that it may happen in the near term due to the increasing difficulty large and small gold mining companies are having increasing their production. The fact that peak gold may take place at a time when the world is engaged in peak fiat paper and electronic money creation bodes very well for gold’s long term outlook.

My Libor story

Back on May 30 we wrote "The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps" in which we made it abundantly clear that due to the Over The Counter nature of CDS one can easily make up whatever marks one wants in order to boost the P&L impact of a given position, this is precisely  what JPM was doing in order to boost its P&L? As of moments ago this too has been proven to be the case. From a just filed very shocking 8K which takes the "Whale" saga to a whole new level. To wit: 'the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the Firm is no longer confident that the trader marks used to prepare the Firm's reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end."

Yesterday, when discussing the forthcoming implications of the Libor scandal, we said that in the barrage of coming lawsuits, "the entity that will be sued by proxy is the Federal Reserve, whose Federal Funds rate is really the setter for the baseline Libor rate." This claim came at an opportune time, just hours before one of the Fed's most vocal critics (and gold standard advocates), Jim Grant, appeared on TV to discuss precisely the same thing. Best summarizing his position is a cartoon that appeared in a recent issue of Grant's Interest Rate Observer in the context of Lieborgate, and who is really at fault here.

Many Other Core Economic Figures Manipulated As Well

Remember when various students of the Econ. PhD persuasion (not to mention various paywall holdco-funded blogs, both desperate for namedropping-based page views), alleged that reading Zero Hedge makes one's money "vanish" (instead of focusing their brilliantly insightful googling efforts on such worthier topics as MF Global or its successor, PFG, or even Libor)? We were going to present a picture of your typical "testosterone" addicted reader below as a reminder, but instead we opted for a picture of MBIA's intraday price, which is up 8.5% from where we broke news that the company may soon be worth much, much more. And to facilitate these same academics in their abacus-based pursuits of truth, justice and the Keynesian way, we will even calculate the annualized return: 847,801,191% (we will withhold calculating what the return on various short-term call options may have been - we are confident even career Economists can figure that one out after several hours of consultations). But since when have facts ever been part of the status quo's arsenal...

Just as we noted here, the analyst estimates for the potential impact of Libor (litigation and regulatory) liabilities have begun. Morgan Stanley sees up to a 17% hit to 2012 EPS (from $420 to $847 million per bank) in a worst case from just regulatory costs, and a further 6.8% potential hit to 2013 EPS if the top-down $400 million average per banks losses from litigation are taken on one year (considerably more if the bottom-up numbers of more than $1 billion are included). They see LIBOR risk in three parts: regulatory fines (we est median 7-12% hit to ‘12 EPS; litigation risk (7% EPS hit over 2 yrs); and less certainty on forward earnings. There are a plethora of assumptions - as one would expect - but the ranges of potential regulatory fine and litigation risk are very large though the MS analysts make the greater point that the LIBOR 'fixing' broadens investor support for more transparency in fixed income trading in addition to fixed income clearing leaving the threat of thinner margins as another investor concern.

Today's AM fix was USD 1565.50, EUR 1281.10 and GBP 1011.96 per ounce.
Yesterday’s AM fix was USD 1576.50, EUR 1284 and GBP 1012.91 per ounce.

Gold rose by 0.5% in New York yesterday and closed up $8.20 to $1,576.60/oz. Silver rose 0.93% or 25 cents to close at $27.09/oz.

Gold gradually ticked lower in Asian trading and has seen further slight weakness in European trading. Still robust physical demand is supporting gold at these levels and strong support is at the $1,500/oz level. 

The selling started as Europe opened last night and despite a few pull-backs to VWAP, has continued all morning. S&P 500 futures have crossed the chasm and are heading back to new cycle lows here as the major financials are being sold aggressively on the back of tomorrow's release of the NY Fed's Libor report (among other things we are sure) and have given up all their post EU-Summit gains. USD strength, commodity weakness (with Silver And Gold leading the charge lower this week now) and Treasury yields back to yesterday's post-auction spike lows. VIX up to 19.5% and correlation rising very systemically.

• If Hilsenrath leaks a Fed party line and nobody cares, does Hilsenrath exist? Fed Weighs More Stimulus (WSJ)
• Clock Is Ticking on Crisis Charges (WSJ)
• South Korea in first rate cut since 2009 (FT)
• Shake-Up at New York Fed Is Said to Cloud View of Risk at JPMorgan (NYT)
• Italy stats office threatens to stop issuing data (Reuters)... because Italy is "out of money"
• China New Yuan Loans Top Forecasts; Forex Reserves Decline (Bloomberg).. and here are Chinese gold imports
• Italy Faces 'War' in Economic Revamp, Monti Warns (WSJ)... says Mario Monti from Sun Valley, cause Italy is "out of money"
• NY Fed to release Libor documents Friday (Reuters)
• U.S. House Again Votes to Repeal Obama’s Health Care Law (Bloomberg)
• Germany May Turn to Labor Programs as Crisis Worsens, Union Says (Bloomberg)
• Ireland to unveil stimulus package (FT)

The second Barclays announced its $450 million Libor settlement, it was all over - the lawyers smelled not only blood, but what may be the biggest plaintiff feeding frenzy of all time. Which is why it was only a matter of time: "State attorneys general are jumping into the widening scandal over whether banks tried to manipulate benchmark international lending rates, a move that could open a new front against the top global banks. A handful of state attorneys general said they are looking into whether they have jurisdiction over the banks, and are starting preliminary discussions to determine what kind of impact the conduct involving the Libor rate may have had in their states."

Federal Reserve REWARDS Fraud By Throwing Money At Criminal Manipulators

We believe that we are in the early stages of what will happen with LIBOR.  As we wrote yesterday, we believe there are two distinct phases the pre-crisis phase which saw potential manipulation of small amounts in both directions, and the crisis phase where LIBOR was allegedly much lower than the rate at which banks would realistically lend to each other.  Much of this is supported by the FSA case against Barclays. If lawsuits start, banks have a few hopes, including "The 'central bank' made me do it" but banks will have to do everything they can to prevent being sued by 3rd parties.  If they cannot prevent that, this could get very ugly in a hurry for some banks.