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SueInCa On July - 8 - 2012

I assume you may have heard about the recently breaking Barclays scandal on the LIBOR and many of you may have started to read about it and gotten lost in the economic terms and discussions.  I am going to try to break it down in laymen’s terms but I assure you, either way, it is important that you understand what has happened because in this big wide world what a few bankers did in London, New York etc. could have cost you money at some point and time.  To put it in the simplest terms they used the LIBOR not only to trade at generous terms to Barclays but they also used it to hide their true financial status.

In the forefront right now is Barclays Bank and their manipulation happened in two ways: first, Barclays’ traders attempted to steer rates up or down in order to benefit trades they had made to profit off of those rates. Separately, during the financial crisis, Barclays tried to counter reports that it had financial troubles by changing the interest rate it reported.  So they used it to make money and they also used it to fabricate their balance sheets.  Either way you look at it, you see deception but there is much more that was affected than just their activity

The current LIBOR interest rate scandal, involving hundreds of trillions in international derivatives trade, shows how the really big boys play. These modern international bankers are in a class of thieves unlike even the best that came before them.  The scandal over LIBOR which is short for London Interbank Offered Rate has resulted in a huge fine for Barclays but it also threatens to ensnare some of the world’s top financiers, including banks in our country.  And like I think most of us already assume, it reveals a continuing cesspool of corruption.  Will these guys ever do the time?  Mostly not because they also are in a position to rewrite the laws before they commit the crime.  And what was Barclays defense?  Every institution in their class was doing the same thing, JP Morgan, Citigroup, Chase, among others, are now being investigated.  To give you an idea of the scope of this, they were manipulating the LIBOR rate that is critical to a $700 TRILLION derivatives market, yes $700 trillion.  And now for the explanation of why and how they pulled this one off.

First you should know what these interest rates are and how one bank could manipulate them.  The LIBOR, or London Inter Bank Offered Rate, is a short-term interest rate that is meant to reflect the cost of borrowing between banks.  Banks frequently lend to each other. A panel of banks submits estimates daily to a trade group, the British Bankers’ Association, then Thomson Reuters, parent company of Reuters news,  compiles an average rate for them, discarding any very high or low submissions.  Basically like your credit score where a lender will take the middle number as the most true number. This average rate is used to set rates for financial products, all the way down to consumer loans and mortgages. This same process is done in Europe, Asia and the U.S etc..  It is estimated that those financial products could be worth some $360 trillion on any given day.  (It should be mentioned here that 4 years ago in March 2008, the Wall Street Journal exposed this scandal.  I have been involved in financial investigations and I know they take awhile.  You have to wade through a lot of documentation that while you may be a great investigator, you may not understand all the ramifications of any one entry or act or understand a full disclosure statement.  Perhaps that is why the DOJ has just now fined Barclays and is now investigating the rest.)

So you might ask why did Barclays traders want to mess with the rates?  Because the traders wanted to influence the rates in order to profit on positions they had taken in particular trades and to benefit Barclays’ derivatives portfolio as a whole. Evidence shows that this occurred frequently from 2005 to 2007 and occasionally until 2009. It’s not clear when, and by how much, the traders’ requests actually affected the rates, though the U.S. Justice Department says they sometimes did and the govrnment faults Barclays for not setting controls on how the LIBOR was submitted.  Staff responsible for submitting estimates for LIBOR were asked by traders to go high or low on a certain day and the reward was sharing a bottle of Bollinger with the trader.  Some of the attempts also involved former Barclays traders at other banks.  All the while, like the Chinese Wall at JPMorgan back in 2000-2002, management had to know what was happening but failed to take action.  You can read the full statement of facts here:

http://www.propublica.org/documents/item/394201-barclays-doj-statement-of-facts.html#document/p13/a62601

A lot of attention is being paid to the traders and their scheming but Regulators also point to how Barclays tried to shore up market confidence in the bank’s stability during the financial crisis with the same manipulation.   As the statement of facts detail, in 2007, Barclays started submitting higher estimates for the LIBOR, saying they reflected rocky market conditions. But relative to other banks, which were still submitting low rates, Barclays looked risky. The bank maintains it was hamstrung because other banks were going artificially low. Robert Diamond, Barclays CEO, told a committee of British lawmakers this past week that “A number of banks were posting rates that were significantly below ours that we didn’t think were correct”.  So, according to the regulators in this investigation, Barclays management issued a directive that “Barclays should not be an “outlier,” and that submitters should lower their estimates to bring Barclays “within the pack.”  The sad thing here is Barclays could have been the “GOOD GUY” to many people but they chose to follow the pack.  At one time, in my tenure with Wells Fargo Bank, I met with some bankers from Barclays.  They were looking to set up a Merchant division and were referred to us by Visa USA as one of the better banks in managing merchant accounts.  We were very conservative in our process and these bankers from Barclays had intentions of taking their business on the far side of conservative even from what we were doing.  The only department they agreed with was our Risk Management department that I was involved in showing them.  What a difference a few years makes.

Another repercussion of this practice is regulatory efforts.  By keeping rates low during the financial crisis, the banks were trying to quell concerns about the health of the banking system and “stave off calls for additional regulation.”  It is hard to say who and when investigators took action but again the repeal of Glass Steagal in this country was a major reason why this was able to be undertaken.  That and sloppy regulators at the SEC, The Fed, The Federal Reserve Bank of NY and the CFTC as well as regulators in Britian.  If you read this article from the Desert Beacon, you will get a better understanding of these continued issues with financial institutions but the bottom line is THERE IS NO SELF REGULATION, plain and simple.  The financial institutions will continue on their merry path until someone finally goes to prison.(You may have to scroll down to get to this article)

http://desertbeacon.wordpress.com/2012/07/06/libor-suction-ii-a-lack-of-institutional-control/

And this is a big deal . Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay’s making money by hurting you.

Donald MacKenzie, a sociology professor at the University of Edinburgh, described the process in the London Review of Books:

The calculation of Libor is coordinated by just two people, who work in an eswhich seemed utterly routine, a couple of years ago. Just after 11 a.m. on every weekday that’s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn’t sent in its estimates, and if the latter seem implausible – typos, for example, are fairly common – they’re checked, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? … Bit of a spread on the two month. Everyone else is coming in a good bit under that.’

A simple computer program discards the lowest quarter and highest quarter of the estimates, and calculates the average of the remainder. The result is that day’s Libor. The calculation is repeated for each of ten currencies and 15 loan durations (from overnight to 12 months), so 150 Libors are published daily: overnight sterling Libor, one-week euro Libor, one-month yen Libor, three-month US dollar Libor and so on.

The next question is why care about these numbers and the answer is simple, $360 trillion in assets worldwide are indexed to LIBOR daily, and a great deal of those assets are consumer debt instruments like mortgages, car loans and credit card loans.  I am sure you now see where this is going.  LIBOR high you pay more for that car, low you pay less.

In the United States, the two biggest indices for adjustable rate mortgages and other consumer debt are the prime rate (that is, the rate banks charge favored or “prime” consumers) and LIBOR, with the latter particularly popular for subprime loans. In 2008 almost 60 percent of prime mortgages and nearly 100 percent of sub-prime mortages were indexed to Libor, according to a study by Mark Schweitzer and Guhan Venkatu at the Cleveland Fed.  So you have to ask yourself did the bankers also modify the LIBOR in order to get the most out of the interest rates you were charged on any given loan?  The answer is more than likely they did.  You simply cannot trust them anymore.  You can read that study here:

http://www.clevelandfed.org/research/commentary/2009/012109.cfm

So this means that when LIBOR rises, so do the prices ordinary consumers pay to get a mortgage. Which means a bank that mucks with the LIBOR rate isn’t just playing around with esoteric derivatives that will only affect other traders: They’re playing with the real economy that most of us participate in every day.

So how did the manipulations by Barclay’s affect this rate?  According to Ezra Klein of the Washington Post this is how:

First, from 2005 and 2007, the bank allegedly varied the rates it reported to the BBA and Thomson Reuters so as to improve its margins on internal trades. For example, it could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This not only screwed the investors on the other side of the trade, but bumped up mortgage rates however infinitesimally – for consumers even when the risk of the loans hadn’t changed at all.

Second, in late 2008 Barclay’s– and, Diamond alleges, other banks – apparently low-balled the rates they reported for LIBOR averaging so as to make the banks’ finances look more stable than they were. The idea was to put out a false image of stability to prevent market panic and stave off calls for additional regulation or even nationalization, a solution that looked increasingly likely during the height of the financial crisis. The direct effect for consumers here was to make loans cheaper, but the indirect effect, or the intended one at least, was to lessen chances of government action against the banks. So the banks manipulating LIBOR weren’t just messing with peoples’ finances – they were trying to mess with the peoples’laws.

The LIBOR scandal, then, is something more insidious than the multi-billion dollar failed trade  that got JPMorgan into so much hot water.  Unlike the assets JPMorgan was trading on, the LIBOR rate has real consequences for average consumers, and its manipulation could hurt your typical mortgage-holder, however minimally.

Further, at least some LIBOR manipulation was an attempt to manipulate government policy by changing the very data that regulators use to make decisions. If the LIBOR games prevented governments from pursuing policies that could have made the financial system more stable, the main victims, again, are ordinary consumers.

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/07/05/explainer-why-the-libor-scandal-is-a-bigger-deal-than-jpmorgan/

So what other institutions are being investigated?  Revelations about other banks have been trickling out over the past year(from the Washington Post article):

UBS previously made agreements to cooperate with several international investigations in exchange for leniency on potential criminal charges.

Citigroup was also a target of investigation. Earlier this year, revelations emerged that a few traders at Citigroup and UBS tried to manipulate Libor rates for the Yen.

The Times of London has reported that Royal Bank of Scotland could soon be hit with a fine of up to $150 million for related charges.

Bank of America allegedly received a subpoena last year from regulators as part of the investigation. JPMorgan Chase, Credit Suisse, HSBC and others were on the Libor-setting panel during the period being investigated.

Last fall, European regulators seized documents from Deutsche Bank and others regarding manipulation of the Euribor.

Private lawsuits over Libor are already underway. Last summer, Charles Schwab filed a suit alleging anti-trust violations against many Libor-setting banks and at least one class action has been filed alleging that Libor manipulation meant banks paid “unduly low interest rates to investors.”

The sad reality is that they will probably get away with it. The world of high finance is by design as obscure and opaque as the bankers and their political surrogates can make it, and even this most recent crack in their defense of deception will soon be made to go away.  Perhaps that is why the powers that be reacted so strongly to Occupy Wall Street.  OWS was constantly in their face pointing out the egregious behavior of the banks and you know when the “elite” are in the spotlight for anything other than their “good works”, the spotlight gets hotter than they can handle.  The fact that the mayors of cities in their corner sat in on conference calls to determine how to jointly attack these protestors, most likely this made it much easier for Mayor Bloomberg and other Mayors to unleash the “SS of NY” better known as the NYPD and other major cities, but I am just guessing there.

For help cutting through all the jargon, see this helpful explainer from American Public Media.

http://www.marketplace.org/topics/world/easy-street/libor-mortals-easy-explainer

Written by SueInCa

I am a soon to be 59 Nana to Anthony who is 11. I live in Benicia CA with my husband and Shih Tsu. I worked in Banking and the Financial Industry for 24 years in Fraud, Risk Management, Account Management, Program Management, Project Management and Customer Service. I was a Fraud Investigator for Credit Card and Merchant Business and investigated internal fraud and responded to Bank robberies. I was also management in most of these positions. Now I am content to find a part time job where I am just a worker bee, no more corporate BS for this gal. I also make jewelry. I can spend hours in a bead shop just touching all the fine baubles. Only another beader would understand that one.

12 Responses so far.

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  1. Olderandwiser55 says:

    I have to take issue with some of what you say, although the LIBOR scandal is as complex and even bigger than you state.

    You said “Will these guys ever do the time? Mostly not because they also are in a position to rewrite the laws before they commit the crime.”

    There have been so far some significant fines and as in the US, civil comes first. The SEC only has civil powers, after which they turn their finds over to the DOJ. There is now criminal investigations. Both the civil and criminal are as internationally coordinated as I’ve ever seen-UK, Asian, European and US together. The Barclays documents alone have traders blatantly coercing others and I think it likely that they will turn in their higher ups rather quickly. The holder DOJ has been following the strategy of using fines to finance investigations since republicans refuse to fund them. They also use something of the strategy of snagging mafia by catching the smaller fish in order to get the bigger ones.

    It’s also suspected a trader fired from Barclays in 2010 became a whistleblower-FINRA gives a percentage of money recovered so there is no lack of leads.

    I can’t say I know all the right people will serve time but the insider trading cases have gone well. The LIBOR is explosive and no one has ever even tried before. It’s more likely than any other administration during my lifetime.

    One more comment-you said “Barclays Blame Shifts to Fed
    New insight into the Barclays Libor scandal reveals that the Federal Reserve Bank of New York may have known that the British bank was manipulating global interest rates as early as August of 2007….”

    I believe that’s only a headline to deflect blame incorrectly to Geithner. The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States-The New York Federal Reserve is the only regional bank with a permanent vote on the Federal Open Market Committee. It’s important but it’s one vote.

    The person that really might have done something is our Secretary of Treasury in 2007-Henry Paulson Jr.-the Goldman ex-CEO…and where is he right now? I did find him serving on the board at Peregrine Financial. The failed financial firm that stole millions for years…

    Thanks for your article, I just can’t help adding a few points. Even Rupert Murdoch’s WSJ is taking some notice but Bloomberg Businessweek does nice reporting.

    • AdLib says:

      Welcome to The Planet Olderandwiser55!

      You make many good points including that the power to pursue criminal activities by the banks rests with the DoJ.

      I would bet that Paulson was indeed in the loop on what was happening with LIBOR, just as he appeared to be well informed about how his firm Goldman Sachs and other Wall Street firms had been gaming the global economic system through derivatives.

      The pessimism over criminals in the financial sector being brought to justice is understandable when one considers how all the corruption, illegal spying on American citizens, war profiteering and economic fraud that occurred under the Bush Admin resulted in no one being tried let alone convicted.

      The crash of 2008 and the fraud by the big banks and Wall Street firms that led up to it hasn’t put them in jail either. The few criminal charges that have been brought have mostly been settled for an amount of money far less than the perpetrators profited from their crimes…and the huge losses to regular Americans they contributed to.

      One can only hope that the LIBOR scandal is aggressively investigated and prosecuted here as well as in the UK, hopefully finally bringing to justice some of these same economic criminals who are repeat offenders and continue to game our economic system to steal from the many to make themselves and their like wealthier.

      • Olderandwiser55 says:

        Good points but I reiterate that there have more than a few criminal charges although they either don’t make MSN or people think they are “small fish” because of the way articles are framed. Much financial news comes from the WSJ (once a reliable, respectable source), now owned by Newscorp/Murdoch. Many newspapers include a WSJ section as their only source of financial news.

        We do have google news and feel we need to look deeper. Search terms to google might be “insider trading”, Preet Bharara, U.S. Attorney for the Southern District of New York who has secured 56 of 63 convictions alone,Raj Rajaratnam, founder of Galleon Group-the largest hedge fund in the US and now defunct, Rajat Gupta-Goldman Sachs director until he was charged and is now convicted waiting sentencing and his trial led us to even bigger crooks. He implicated the head of Asian Sales for GS.

        I’m certainly not saying everything has been fixed but there are many convictions and better ones to come.

        Thanks Adlib, great blog and yes, I understand the pessimism but there is reason for optimism these days. We may have to look harder since the MSM doesn’t want make optimism front page news! By the way, speculation that Bharara may replace Holder.

        http://dealbook.nytimes.com/2012/06/15/victory-spurs-speculation-on-bhararas-next-move/

  2. bito says:

    Sue, b-b-b-but I thought that gas prices was all President Obama’s fault?

    Downing Street calls on regulator to investigate petrol price rigging
    Allegations of oil price manipulation should be thoroughly investigated as millions of motorists rely on accurate petrol prices, Downing Street said today.

    The Prime Minister’s spokesman said regulators should examine any evidence of oil price-fixing “very carefully”, after the Daily Telegraph revealed fears that banks and traders are likely to have fiddled the oil market.

    Concerns are growing about the reliability of petrol prices because a report for the G20 found the market is wide open to “manipulation or distortion”.

    Traders from banks, oil companies or hedge funds have an “incentive” to distort the market and are likely to try to report false prices, the official report said.

    Politicians and fuel campaigners are urging the Government to expand its inquiry into the Libor interest rate-fixing scandal to see whether oil prices have also been falsely pushed up.

    […]

    A Number 10 spokesman today said it was important the oil market is seen to be “fair and efficient”.

    “It is a matter for regulators,” the spokesman said. “With the Libor scandal, that is something that the FSA decided to look at because they had evidence.

    “The important thing is that we have efficient and fair markets. And if there is evidence that any market is being manipulated then that is a matter for the regulators, and those regulators should look at it very carefully.”

    Does anyone think that is was just coincidence that gas prices this summer fell quite quickly after the President ordered AG Holder to look in to speculation in the US?

    How is it possible for the world economy to pull out of this recession when the banksters keep these kinds of scams as “just doing business?”

    How may more scams before there will be an insistence that Gram-Steagall is not re instituted?

    Kalima has this on Morning Blog, http://planetpov.com/2012/04/23/morning-blog-4/comment-page-1/#comment-186620 I tweeted many times too, but it seems to not getting any traction. Odd how everyone complains about high energy prices when it’s Obama’s fault, but not the banksters?

  3. bito says:

    I saw a commercial on the tube today from some loan company selling ARM’s and they said it would be adjusted only once the first year.

    After reading about this Libor scandel the first thing that came to mind was ‘yeah, a rigged rate set by thieves from international banks on the 6 month dollar rate.”

    It still amazes me a bit that this story continues to be under the radar, I have only seen one program even attempt it — Up with Chris Hayes.

    Here’s a view from Canada (where is Wolf?)via twitter.

    The biggest financial fraud in history receives scant media attention

    We are now finding out that the entire system has been rigged, enriching the “elect” and financially looting the rest. If you are reading this, you have been robbed, although the corporate media remains silent about who robbed you, how it was done, and which government and non-government officials were complicit and benefited. Why? Perhaps the most compelling reason is that when the “average” person learns the depths at which corruption exists between the various banks, governments and government officials, there will be a revolution like the world has never seen. Additionally, they too, along with many elected and appointed officials, have aided and abetted the fraud. Yes, it’s that bad, and it’s about to break wide open.

    http://www.canadafreepress.com/index.php/article/47926

    • SueInCa says:

      When you are sitting in New York City a stone’s throw away from Wall Street you don’t lob a hand grenade. They will keep quiet for their masters. You heard what that lady said going into Romnmey gig -- she thinks we are all just hicks who don’t understand anything anyway so why tell us? If they did not say it it did not happen. Until the fines start to hit them which probably will not happen in a Romney admin

  4. Sue excellent article. I’m not going to pretend I understand it all but it sounds like another bunch of multi-millionaires and billionaires trying to fix the system even more for their own benefit. I really don’t get it any ‘free market’ system is already fixed for people with wealth. How much money do these greedy bastards need?

    It’s also why Romney hiding his money in offshore banks should be a big deal to the vast majority of Americans. Like you said the world of international banking is opaque and anyone squirreling money away in foreign accounts is hiding or avoiding something.

    • SueInCa says:

      KQ

      I don’t understand all the details but like you I know these greedy bastards will continue until they are stopped. I just wonder who has the guts to finally do so?

  5. bito says:

    Excellent Sue! What an amazing scam, manipulating Libor has touched nearly everyone and the repercussions could be immense when the fines start coming down. In a tweet from @DesertBeacon on this he said it’s doubtful that any of the banks have any reserves set aside in amounts that they may be fined. We’re talking perhaps billions of dollars. Then what? Will the banksters come running for another bail out due to their illegalities, their absolute greed? Is there any trust left in the average person towards the banks?

    Another way this scandal hits everyone is from the interest rates set on municipal bonds, and who pays off those bonds? Taxpayers. Energy bonds, same thing…the ratepayers pay it off in their monthly bills.

    Watching parts of the hearings in the UK, the question was raised to Mr. Diamond if this wasn’t now time to go back to having the firewall between investment and commercial banking. Glass-Steagall in the US. He was adamant that it wasn’t needed. Why, because it’s easier to steal?

    After this and the housing bubble there is now excuse that we don’t go back to having a strong firewall, what will it take before congress realizes it?

    Again, great post and thanks for taking it on, your links are invaluable.

    • SueInCa says:

      Barclays Blame Shifts to Fed
      New insight into the Barclays Libor scandal reveals that the Federal Reserve Bank of New York may have known that the British bank was manipulating global interest rates as early as August of 2007. In 2008 the Fed even offered up some suggestions to British authorities on how to fix the system. In an online statement, a spokesperson for the New York Fed said, “In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and emails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor.” They said they shared these observations and suggestions for improvement with British authorities. Meanwhile, former-CEO Robert Diamond is giving up $31 million in deferred bonuses.

      My last paragraph is somewhat vindicated now. Not a very popular post is it?

    • SueInCa says:

      Bito

      Not to mention the civil suits that could be coming. And that firewall is what I referred to as the Chinese Wall at JPMorgan. While they were telling everyone they were acting separately they were working together to prop up the business accounts one side was holding and propping up or destroying with a single email those same businesses on the trading side.

      This is where Spitzer screwed up. He let them get away with fines and now it is common practice. Had he stood up to them and insisted on criminal charges things might be different now. Same with Rubin and the Brooke Bornsley fiasco. There is no will among the elected to deal with this once and for all.

      • Olderandwiser55 says:

        Yes, the civil suits are likely to be huge Sue! Some of the mega-banks are rumored to be in financial trouble already. Bail-outs? Maybe but if we take a financial stake/equity position(as the Obama admin. did), that is also called nationalizing. The equity stake makes perfect business sense as collateral for a loan. And that is the fear of the right wing.


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