Barclays

Here’s a really wild hypothesis: if the LIBOR rate was under manipulation in 2008, is it not possible that the inter-bank lending rate spike (and resultant credit freeze) was at least partly a product of manipulation by the banking cartel? Could the manipulators have purposely exacerbated the freeze, to get a bigger and quicker bailout? After all, the banking system sucked $29 trillion out of the taxpayer following 2008. That’s a pretty big payoff. LIBOR profoundly affects credit availability — and the bailouts were directly designed to combat a freeze in credit availability. If market participants were manipulating or rigging LIBOR, they were manipulating a variable directly tied to the bailouts.

With Europe, the BBA, and virtually everyone shocked, shocked, that the global bank cabal schemed and colluded for years to manipulate interest rates, so far only America appears relatively blase, and totally ignorant, about the issue. Perhaps it is because the first bank exposed in the manipulation scheme so far is European, perhaps because it is just tired of all the endless crime coming out of the criminal complex known as Wall Street. It is unclear. Then again, America will soon have its own manipulation scandals to deal with: and if it is not the US BBA member banks, all of whom were just as guilty as Barclays, and the only question is which bank will be the sacrificial scapegoat whose CEO will have to demonstratively depart (to warmer, non-extradition climes), it will be the following story from Bloomberg which will likely pick up much more steam over the next weeks and months, detailing how the bank which just barely avoided a triple notch downgrade (wink wink) has had previous dealings with the very same rating agencies seeking to, picture this, artificially inflate ratings! So to summarize: Fed manipulates capital markets, HFT manipulates bid ask spreads, "self-policing" CDS pricing market groups fudge the prices on trillions in Credit Default Swaps, bank cabals collude and manipulate short-term interest rates, and now banks are confirmed to have manipulated the ratings on tens of billions of bonds using monetary incentives and threats. Is there anything in this "market" that was fair over the past several decades, and was actual price discovery ever actually possible? Because by now it should be very clear going forward all the things that actually make a free and fair market are forever gone, and that without endless fraud and manipulation by all the market participants who realize that anyone defecting the ponzi group means immediate and terminal losses for all, and all those calls for an S&P 400 would actually prove to be overly optimistic.

There is a saying that it is better to remain silent and be thought a fool than to speak out and remove all doubt. Today, the San Fran Fed's John Williams, and by proxy the Federal Reserve in general, spoke out, and once again removed all doubt that they have no idea how modern money and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation. To wit: "In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.Despite these dire predictions, inflation in the United States has been the dog that didn’t bark." He then proceeds to add some pretty (if completely irrelevant) charts of the money multipliers which as we all know have plummeted and concludes by saying "Recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised." And actually, he is correct: the way most people approach monetary policy is 100% wrong. The problem is that the Fed is the biggest culprit, and while others merely conceive of gibberish in the form of three letter economic theories, which usually has the words Modern, or Revised (and why note Super or Turbo), to make them sound more credible, they ultimately harm nobody. The Fed's power to impair, however, is endless, and as such it bears analyzing just how and why the Fed is absolutely wrong.

The chart below, via Stone McCarthy, shows the months with Fed intervention since December 2008. That in the past 42 or so months, less than one third have been intervention-free, should close any open questions about whether the stock "market" is anything but a policy vehicle used by the Fed to perpetuate a broke(n) status quo now entirely dependent on every market up (and down) tick. We dread to think what would happen to those record low US bond yields if the market were to be left on its own without the backstop of guaranteed Fed intervention in the interest rate market... ironically something which Barclays is in boiling hot water for right about now.

"I wish I could say that this was an isolated case... You will hear more on this in due course" is how the UK FSE's Director of enforcement described Lie-borgate to Reuters this weekend. It seems incredibly that the US regulators and investing public alike are shunning this interest rate rigging scandal as the UK goes to DEFCON 1 with more than a dozen other banks being investigated in the long-running global probe. The Barclays Chairman quit over the weekend (and we assume will not be the last casualty) as The Telegraph notes the 'dislocation of libor from itself' - since banks could not be seen borrowing at higher rates for fear of liquidity repercussions, as widespread. According to the trader the BBA asked for a rate submission but there were no checks and "everyone knew" and "everyone was doing it". What is incredible is the level of nonchalance that this illegal act had taken on with entire teams of people well aware as open discussion occurred (not clandestine blue-horseshoe-likes-low-libor-style). Indeed this widespread and well-known action of dislocating libor from itself (since in a trader's words "everyone knew we couldn't borrow at Libor, you only needed to look at CDS to see that... with real Libor rates 3 to 4 per cent higher than the BBA's submitted Lie-bor") has now led George Osbourne, as per the FT, to launch a 'Leveson-style' probe into standards in the banking industry - a full, public independent inquiry into the $504 Trillion market's underlying integrity. Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.

• The Real Victor in Brussels Was Merkel (FT)
• German Dominance in Doubt after Summit Defeat (Spiegel)
• Euro defeat for Merkel? Only time will tell (Reuters)
• The Twilight Zone has nothing on Europe: European Banks Bolster Capital With Shunned Bonds (Bloomberg)
• Krugman is baaaaaack and demands even more debt: Europe’s Great Illusion (NYT)
• Republicans See Way to Repeal Obamacare (FT)
• Hollande Ready to Tackle Public Finances (FT)
• China’s Manufacturing Growth Weakens as New Orders Drop (Bloomberg)
• Protesters March in Hong Kong as Leung Vows to Fight Poverty (Bloomberg)

… But Receive Only a Light Slap on the Wrist

Three weeks ago we mocked, rightfully so, the utter joke that is Liebor, which had been unchanged for just over 3 months. Nobody cared, certainly not the British Banker Association. This was not the first time: our first allegations of Liebor fraud and manipulation started over three years ago. There were others too. Nobody certainly cared back then. Now, in the aftermath of the Barclays lawsuit, and "those" e-mails, everyone suddenly cares. And a few days after the first public exposure of Lie-borgate, the first victim has been claimed: as numerous sources report, Barclays' Chairman Marcus Agius wil step down immediately. From the WSJ: "Political and investor pressure has mounted on the management of U.K.-based Barclays since the settlement was announced Wednesday. The announcement of Mr. Agius's departure could come as soon as Monday, said one of the people. Mr. Agius, 65 years old, a British-Maltese banker who formerly worked at Lazard Ltd., has led the bank since 2007, steering Barclays through the 2008 financial crisis and avoiding the direct state bailouts that were needed by many of its global peers." While the sacrifice of a scapegoat is expected, what we don't get is why the Chairman: after all by the time Agius became Chair of the British bank, the bulk of the Libor fixing alleged in the FSA lawsuit had already happened. And of course, with Bob Diamond having succeeded John Varley as CEO in 2010, one can easily claim that in this first (of many) confirmed Liebor transgression there really is nobody at fault who can be held accountable. Of course, Barclays is merely the first of many. We fully expect Lieborgate to spread not only to other British BBA member banks, but soon to jump across the Atlantic, where CEOs who have been with their banks for the duration of the entire Libor-fixing term will soon find themselves under the same microscope.

While the Lieborgate scandal gathers steam not so much because of people's comprehension of just what is at stake here (nothing less than the fair value of $350 trillion in interest-rate sensitive products as explained in February), but simply courtesy of several very vivid emails which mention expensive bottles of champagne, once again proving that when it comes to interacting with the outside world, banks see nothing but rows of clueless muppets until caught red-handed (at which point they use big words, and speak confidently), the BBC's Robert Peston brings an unexpected actor into the fray: the English Central Bank and specifically Paul Tucker, the man who, unless Goldman's-cum-Canada's Mark Carney or Goldman's Jim O'Neill step up, will replace Mervyn King as head of the BOE.

"A massive cesspit."

... and Regulators Have Become “Cops On the Take”

With everyone scrambling to buy into the bathsalts rally, and shorts rushing to cover with a panic bordering on a QE-announcement, it is somewhat ironic that today's voice of muted reason comes from none other than Liebor expert extraordinaire: Barclays, whose suggestion is simple: lock your profits: "We remain bearish on EURUSD, expecting it to grind slowly down to 1.15 over the next 12 months. We therefore suggest investors look to fade this morning's European currency strength versus the USD and non European commodity currencies such as the AUD and CAD." Why? They have their listed reasons. The unlisted ones are the same that every other bank has for becoming bearish recently (we have recently listed Citi, Goldman, SocGen and DB to name but a few): for a real fiscal and monetary policy intervention to take place (i.e., a rescue package that lasts at least a few months, as opposed to today's several day max rally): the market has to be tumbling. That, as we have explained repeatedly, is the only way to get a powerful response. Everything else is (quarter end) window dressing.

• Funny WSJ headline: Berlin Blinks on Shared Debt  (WSJ)... sure: if XO hits 1000 bps tomorrow, Eurobonds in 2 days
• Barclays $451 Million Libor Fine Paves Way for Competitors (Bloomberg)
• Fed officials differ on whether more easing needed (Reuters)
• China Local Government Finances Are Unsustainable, Auditor Says (Bloomberg)
• Just because the NYT is not enough, Krugman has now metastasized to the FT: A manifesto for economic sense (FT)
• Merkel dubs quick bond solutions ‘eyewash’ (FT)
• Yuan trade settlements encouraged in SAR (China Daily)
• Katrina Comeback Makes New Orleans Fastest-Growing City (Bloomberg)
• European Leaders Seek to Overcome Divisions at Summit (Bloomberg)

While it is seeming common knoweldge that the state of the economy has a significant bearing on the outcome of the presidential election in the US, Barclays notes that in the case of an incumbent running, economic performance appears to be most important. The three presidents who failed in a re-election bid in the post-war period (Gerald Ford in 1976, Jimmy Carter in 1980 and George Bush, Sr. in 1992) did so against a backdrop of weak growth, high unemployment, and low consumer confidence. These same factors all pose significant headwinds to the current incumbent. To overcome them, history suggests that unemployment would need to keep trending down and consumer sentiment would need to strengthen prior to the vote in November.

"On 26 October 2006, an external trader made a request for a lower three month US dollar LIBOR submission. The external trader stated in an email to Trader G at Barclays “If it comes in unchanged I’m a dead man”. Trader G responded that he would “have a chat”. Barclays’ submission on that day for three month US dollar LIBOR was half a basis point lower than the day before, rather than being unchanged. The external trader thanked Trader G for Barclays’ LIBOR submission later that day: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger"