LIBOR

"Limor"

The Fed does everything it can to keep LIBOR low. The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds.  You can see that historically as Fed Funds was changed, LIBOR responded appropriately. That all started to break down in 2007 and re-ignited in the late summer of 2008 and peaked after Lehman and AIG. The Fed was blatantly clear that it wanted borrowing costs to go down.  They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn't follow, the Fed took further action. The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.

Three weeks ago, before Lieborgate broke and the world finally understood what so many had been warning about for so long, we noted something else: that not only was LIBOR manipulated and fudged daily between 2005 and 2008, but as the chart in the attached post shows, it has been gamed every single day in 2012 as well. More importantly, we noted something else - the transition at the top of the British Bankers Association: the organization responsible for compiling LIBOR submissions from member banks, and reporting what the daily Libor fixing is. Because in the second week of June, the BBA's new head became... the former head of lobbying for none other than Morgan Stanley, Anthony Browne, a firm which itself was just caught red-handed manipulating rating agency "independent ratings" to benefit its bottom line (and which itself miraculous was downgraded by less than what the market expected in order to allow it to avoid several billion in collateral calls). And what did Anthony do at Morgan Stanley until June 12: he was head of Government relations for Morgan Stanley for Europe, Middle East and Africa and was previously an economic and business adviser to London Mayor Boris Johnson.  That's right - "head of government relations" for a rather prominent TBTF bank, being put in charge of daily Libor fixing. But everyone is shocked, shocked, that gambling has been going on here for years.

UPDATE: *BARCLAYS SAYS HAS RECORDING OF DIAMOND, TUCKER CALL, SKY SAYS

We suspect the Treasury Select Committee hearing with Barclays ex-CEO Bob Diamond will have a few more fireworks than Jamie Dimon's congressional hearings. The Chairman of the committee noted "This is the most damaging scam I can recall" as the goal of the hearing is to ensure "the public know what went wrong and whether the perpetrators have been rooted out." While we will have our own fireworks on this side of the pond, we suspect the live stream below will contain more than a few as the independence of Libor remains in question.

Paul Tucker, the Bank of England executive at the center of the Barclays/Diamond trigger-conversation, has issued a statement requesting a Treasury hearing to show his "keenness to clarify the position with regard to the events" of that hanging chad of a phone-call. What is most troublesome (for every major banker and politician) is his apparent willingness to take more down with him. As the M.A.D. escalates, MNI reports that minutes from 2007 show Tucker (who was/is in line as we noted yesterday for the top-job once King leaves next year) was fully aware from the early days of the financial crisis that market participants believed Libor was rigged. The Group’s November 2007 minutes, from a Tucker-chaired meeting, state “Several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress.” The minutes show that not only was the issue raised back in November 2007 but that the BOE went to great lengths as the crisis deepened the following year to keep its finger on the money markets’ pulse. It seems that instead of mounting the 'plead-da-fif' defense Tucker is coming all-guns-blazing and is willing to drag more names into this miasma as a suicide-bomb of a hearing where the truth is realized could well bring every high ranking banking official to admit the continued unreality of Libor rates.

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Libor Manipulation Is Only One of MANY Types of Fraud Committed by the Big Banks

As was first reported two days ago, and confirmed today, Barclays' natural response to allegations it single-handedly manipulated the interest rate complex for up to $500 trillion notional in IR-sensitive swaps and other products (it didn't - everyone else did it too), was to drag everyone into the scandal, starting off with the Bank of England (and about to drag Whitehall into it too), and specifically the man who was next in line for governorship of the English Central Bank: Paul Tucker. What does this mean? Well, as we suggested also two days ago, now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs:  Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.) Yet the fact that Goldman is hell bent on global domination by stretching its tentacles into every monetary policy administration is no secret: it is only a matter of time before GS also runs the English CTRL-P macros. More interesting is that in addition to the BOE, Barclays today also dragged America's very own Federal Reserve into the fray.

Local Governments Which Entered Into Interest Rate Swaps Got Scalped

Despite this week's largest allotment to the ECB's 7-day tender in over 2 months, ECB collateral changes, a flat LIBOR, and endless game-changing summit conclusions, the market's most accessible source of term USD financing (the EUR-USD basis swap) has collapsed to its worst level in over three months. Even as the sovereign and bank spreads have compressed in the last few days, demand for this short-term financing has soared (i.e. banks are willing to pay quite a penalty for that access). Whether this is a cleaner signal than Lie-bor is unclear </sarc> but for sure between this and the fact that 2Y Swiss rates are reverting lower once again, all is clearly not well in Europe (despite what every talking head tells you) and these remain the two most critical stress indicators for now.

Wonder who was pushing Barclays to manipulate its rate? Why none other than the English Fed. From BBG:

• BARCLAYS SAYS BANK OF ENGLAND CALLED ON OCT. 29, 2008 ON LIBOR
• BARCLAYS SAYS DIAMOND MADE NOTE OF CALL
• BARCLAYS SAYS DIAMOND RECEIVED CALL FROM PAUL TUCKER
• BARCLAYS SAYS TUCKER SAID `CERTAIN' BARCLAYS DIDN'T NEED ADVICE
• BARCLAYS SAYS TUCKER SAID DIDN'T ALWAYS NEED TO BE SO HIGH (Supposedly LIBOR)
• BARCLAYS SAYS DEL MISSIER CONCLUDED INSTRUCTION HAD BEEN GIVEN
• BARCLAYS SAYS DEL MISSIER TOLD RATE SETTERS TO LOWER RATES

In other words, a central banks was directly and indirectly involved in manipulating interest rates. Say it isn't so. Fast forward two months when the BOE's Tucker testifies that the Chairsatan made him do it.

Fundamentals (inflation expectations, longer-term savings and investment objectives) should be driving current demand for gold coins. And, this is exactly what we are seeing. In June 2012, the US Mint sold 54,500oz of coinage gold, up on 53,000 in May 2012. Total for H1 2012, US Mint sales of gold coins in terms of total weight sold are down 41.3% on H1 2011 and it is down 49.8% on H1 2010 and 50.3% on H1 2009. Dramatic? Sure, when one disregards consideration of drivers for 2009-2011 demand for coins being coincident with extreme risks in other markets. Total H1 2012 demand was at 338,000oz still well ahead of H1 average demand for 2000-2007 period when it was 165,679oz, but down on 531,750oz average for H1 2008-2011 crisis period. Exactly the same picture - return to fundamentals - is seen in the number of coins sold. Consistent with still robust demand drivers, H1 2012 average coin sold contained 0.60 oz, while H1 2000-2007 period average was 0.51oz and H1 2008-2011 period average was 0.76oz.

Anyone wondering if the reason why Diamond resigned less than 6 hours ago is because he suddenly grew a conscience, will be disappointed. The real reasons are two: on one hand politicians were concerned he would make it public where all the bodies were buried as reported last night, in the process taking down at least half the English political establishment, obviating his departure from the public eye immediately, and, more importantly, as BBC's Robert Peston reports, the English Fed, that "impartial" and "apolitical" institution known as the Bank of England, got involved. From Peston: "I have learned that Bob Diamond's departure was encouraged by the Governor of the Bank of England, Sir Mervyn King, and the chairman of the Financial Services Authority (FSA), Lord Turner."

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A bottle of Bollinger has brought down Bob. This is just the beginning, because one knows Barclays by definition was not alone. Many, many more banks will emerge, hopefully their bankers were not quite as dumb as Barclays' henchmen to discuss in retainable, email format their plans for interest rate manipulation, although we doubt it. In which case many more executives will fall as all those "conspiracy theorists" over the past 4 years are proven right once again, and as politicians scramble to cover up all loose ends which may expose them as instrumental (and bribed) in the fact that the "market" is once big farce. In the meantime, courtesy of the WSJ, here are the shocked, nay stunned, reactions to Bob Diamond's resignation.