LIBOR

There is no point in recapping the ongoing vendetta between former SIGTARP Neil Barofsky and former head of the NY Fed, and current Treasury secretary and resident TurboTax expert Tim Geithner. One need but follow the former on Twitter for a quick and concise sampling of the sentiments harbored vis-a-vis the latter. However, in the following interview Barfosky does touch on some points which in the context of the recent Liborgate, should be brought front and center, especially since the increasingly apathetic US audience seems to not care about one bit (as opposed to their distant cousins across the Atlantic for whom Lieborgate has become a daily distraction). Namely, what Barofsky says is that Geithner and other regulators who allowed Lieborgate to proceed should not only lose their job but we should "see [Geithner] in handcuffs."  Sadly that will never happen as it would actually be a deterrent to future crime among the highest echelons of America: something which is just not allowed to happen in a system whose very survival is increasingly reliant on rampant criminality.

Readers know that Zero Hedge boycotts manipulated NAR data, which, just like Libor, is not only meaningless, and set by "insiders" who have skin in the game, but is also always totally wrong. Today we will make an exception, not so much because the just released pending home sales miss (-1.4% on expectations of +0.3%) confirmed what most people know: namely that the housing "recovery" has the same credibility as saying ZNGA has bottomed, and follows misses in New and Existing home sales, but because the below video of Larry Yun is a pure theatrical masterpiece and worth the price of admission alone.

Why a new LIBOR based on Fed Funds (OIS) is determined by back door dealings between government sponsored failures (Fannie/Freddie) and a handful of compromised TBTF banks

The guy who openly admitted he was getting notification from the BOE to manipulate Libor, and was advising his traders appropriately, Barclays' COO Jerry del Missier, and who quit the same day as his boss Bob Diamond, has finally had his pay package revealed. The payoff to get him out and shut him up? £8,750,000.

For the last two weeks here in the UK, TV stations have been running a documentary series called “Bank of Dave“, in which down-to-earth businessman Dave Fishwick attempts to establish his own bank. The premise sounds plausible: offer depositors 5% interest (as opposed to zero), and lend to credible small businesses that are otherwise ignored by the majors. But as the irrepressible Dave soon discovers, getting a new banking licence in the UK isn’t easy. ‘Bank of Dave’ has obviously been, albeit inadvertently, deliciously well-timed, arriving on television and computer screens accompanied by increasingly shrill coverage of interest rate rigging in the LIBOR manipulation scandal. Granted, the news of the world’s biggest banks colluding to manipulate interest rates to their own benefit has spark a major debate about banking. But what’s frustrating about the banking debate is how narrowly focused most contributors are.

Well not really, but it will be someone else's fault of course that there was gambling going on here. There is no way the head of the New York Fed at the time could have possibly known that Barclays was manipulating its Libor rate. Recall: : “Barclays: You know, LIBORs being set too low anyway, but uh, yeah, that-that is correct. Fed person: “Yeah.” Supposedly Geithner is not the Fed person. Anyway, the scheduled topic of today's hearing in the House Financial Services Committee is the annual report of the Financial Stability Oversight Council (FSOC) but the hearing seems likely to be dominated by questions about manipulation of LIBOR rate. Watch it live here.

• ECB's Nowotny - ESM banking license could be advantageous (Reuters) - just keep regurgitating headlines until they generate a short squeeze
• IMF Says China Downside Risks Significant as Growth Slows (Bloomberg)
• Moody's cuts outlook on EU stability facility to negative (Reuters)
• Rome places spending controls on Sicily (FT)
• Big banks' glory days feared to be gone for good (Reuters)
• China's CNOOC scoped Nexen, partnered, then pounced (Reuters)
• Germany backs Spanish austerity plans (FT)
• Are 2012 Games one too many for London? (Reuters)
• Euro Crisis Spreading East Damps Growth, Development Bank Says (Bloomberg)
• Japan Flags Yen-Sales Impact as BOJ Eyes More Easing (Bloomberg)

Since (at least) 2005, Barclays has been manipulating LIBOR, and their traders have been allegedly pocketing $40MM a day betting on interest rate derivatives. If the LIBOR, one of the most fundamental metrics of our banking system can be rigged, can you imagine what other elements of our financial system are a fraud? This morning's comments from European regulators appears to confirm that this story has a long way to go as ECB's Almunia states: "The evidence we have collected is quite telling so I am pretty sure this investigation will not be closed without results."

Lumber giant Universal Forest Products’ CEO Matt Missad said in the company’s latest earnings conference call, “We are watching our inventories closely and trying not to get too far ahead because we are concerned about disappointing employment figures and lack of  construction growth in the U.S.” Rather than observe the trends in the Mortgage Bankers Association’s headline Mortgage Applications Index, which includes refinancing, a far better gauge of economic conditions is the Mortgage Purchases Index trends. This weekly representation of demand for mortgages related to home buying is little changed from levels registered at the bottom of the housing market collapse. The level of residential housing construction is an important indicator, and has made little improvement since the apparent market bottom in 2009. The sunken pace of residential construction spending in May was $268 billion – essentially the same levels seen in 1997. This  profoundly low level of activity is not limited to the residential sector; spending on commercial structures is currently the same as in 1996. Since there is diminished activity, the need for workers in the construction industry has also stagnated. During June construction employment totaled 5.5 million workers – a near 30 percent decline from the peak in April 2006 and the same number as in mid 1996.

There was a time when regulators caught red-handed abusing their privileges, aka, doing nothing in the face of glaring malfeasance, would quietly fade away only to even more quietly reappear, sans press release, as a third general counsel or some other C-grade menial role paying a minimum 6 figure compensation to the individual for years of doing nothing. This is no longer the case: it appears that the best such exposed "regulators" can hope for going forward is to get media positions. Such is the case with John Ewan. Who is John Ewan? None other than the director "responsible for the management of the setting of Libor" at the British Bankers' Association. In other words, the man whom The Sun of all non-captured publications (oddly enough, tabloids sometimes have more journalistic integrity than Reuters and the FT as we will shortly find) has dubbed Mr. Libor. The Sun continues: "In a staggering profile on the internet Mr Ewan reveals he joined the BBA in 2005 to “put Libor on a secure commercial footing”. That year Barclays traders began fiddling the figures they submitted for the Libor calculations. On the LinkedIn networking site Mr Ewan boasts of generating a “tenfold” increase in revenue from licensing out the Libor rate." He adds: “I introduced new products and obtained EU, US and Japanese trademarks for BBA Libor. "I successfully negotiated contracts with derivatives exchanges and all of the major data vendors." Well, in the aftermath of Lieborgate surely Ewan is going to someone receptive to his permissive and highly profitable tactics over the years, such as Barclays. Actually no: instead of a bank, the only place that is willing to accept Ewan is media conglomerate Reuters. And not just as anyone: "Thomson Reuters confirmed that Ewan has joined the company as head of business development for its fixing and benchmark business." We wonder how much revenue Mr. Ewan generated for Reuters?

There is one personality trait that no gold and silver investor should ever be without.

Gold edged down on Monday due to the pressure from a stronger dollar, as worries about the Eurozone debt crisis grew after Spain looked like the next candidate for a sovereign bailout. Spain has two regions seeking aid from the central government and El Pais reported that six Spanish regions may ask for aid from the central government while Spanish bonds yields continue to rise. As the 4th largest economy in the Eurozone Spain looks likely to follow Greece, Portugal and Ireland seeking an international bailout. Greece’s creditors meet this week as many doubt they will meet their bailout commitments. German Vice Chancellor Philipp Roesler said he’s “very skeptical” that European leaders will be able to rescue Greece.  China’s economic expansion may fall for a 7th straight quarter to 7.4% in the three months to September, said Song Guoqing, a member of the People’s Bank of China monetary policy committee.

For over four years, virtually everyone in the finance industry knew that Libor was manipulated. The stench of manipulation rose to the very top and thanks to a document release of formerly confidential information, we now know for a fact that even the Fed was in on it - recall that as part of production, the Fed provided a transcript of an April 2008 phone call between a Barclays trader in New York and Fed official Fabiola Ravazzolo, in which the unidentified trader said: "So, we know that we're not posting um, an honest LIBOR." And yet without any tangible, black on white evidence, there was no catalyst for pursuing legal action. That all changed when in a desperate attempt to protect its ass, Barclays decided to rat out everyone by settling with regulators, and "turn state" producing e-mail based evidence, most of it quite visual (after all what is more tangible to the common man that evil bankers sipping on Bollinger), which essentially threw years of quiet cartel cooperation under the bus. As a result, regulators, enforcers, and legal authorities, many of whom were in on this manipulation from the beginning, no longer had an excuse to not pursue civil and criminal charges against perpetrators, who until recently were footing the tabs at various gentlemen's venues and ultra expensive restaurants. And while the imminent waterfall of civil prosecution will force bank litigation reserves to go through the roof, here comes, with a very long delay, the criminal charges. As Reuters reports, here come the arrests.

Too Big Leads To Destruction of the Rule of Law

Two days ago we made the "missing link" connection between traders in Libor manipulating banks (all of which curiously had a hub in Singapore: something else for the media that has been about 4 years too late on this topic to focus on) and hedge funds (most of which curiously centering on the otherwise sleepy bastion of banking: Geneva, Switzerland). The immediate aftermath was the loss of trading privileges of one Michael Zrihen. We are fairly certain this is just the beginning of the hedge fund bust: when all is said and done, many more funds will have terminated traders they hired for reasons (and kickbacks) unknown over the past 2 years as Lie-bor manipulators sought to put a clean firewalled break between their old employer and current one. Because apparently sometimes the regulators are that stupid and can be confused by a simple job change. And while many have assumed (and even calculated based on completely groundless assumptions) that only BBA member banks have benefited from Libor manipulation, the reality is that hedge funds were just as complicit and benefited just as much if not more. What is worse, they took advantage of their whale client status with manipulating banks, and courtesy of Total Return Swap and other leveraged gimmicks, made far more money when they co-opted two or more banks to do their bidding. Impossible you say: hedge funds would never be so stupid. Oh very possible: we present exhibit A - Brevan Howard, a "fund, with assets of $20.8 billion as of Dec. 31, has never had a losing year and returned 14.4 percent annualized from its April 2003 inception through the end of 2008" as Bloomberg said in a made to order profile of the funds recently. Perhaps there is a very simple reason for this trading perfection: "Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg."