THE VISIBLE HAND OF THE MARKET: THE LIBOR SCANDAL

[jakaswanga]

The LONDON INTERBANK OFFERED RATE

Is the key benchmark in the financial markets. Given this market is dominated by the West, the rigging and falsification of its key indicator from where all other rates are derived, blows apart the foundation of the system.

Oh, Adam Smith
This Capital beast has no conscience
No invicible moral gland secreting decency!
tHE Romans asked Who would police the policeman
And to sleep we went beside the untamed monster!
---------
Not for the first time in history, a system has crashed, pretending greed can be self-regulating. The western populations do not have a choice, but to keep their money to the same banks which are now proven criminal institutions. These banks have virtual monopolies in the West. And for this rigged Libor system to have worked for so long, the whole sector had to conspire, or at least ascribe to it in coded silence. (The German central bank is already cutting deals to avoid criminal prosecutions and law-suits!)

But outside this western hemisphere, others have choices, and the BRICS have long concluded an agreement to do their trade in their own currencies. That is bolting from the dollar and her toxic Libor-based dupes. And as it becomes apparent the Western Banks have consistently been rigging the market to their advantage, saddling many countries with extra debt; forcing immigrants remitting cash home to pay cut-throat rates; basically screwing everybody they could on the planet, there is definitely more consequences in store. Crippling legal suits being one of them.

This is a story to watch, her consequences just yet to begin.

I will post a lengthy article from the economist --the voice of sane international capital --Smithsonian morality, however thinly layered!

But first a eagles view from WIKIPEDIA.
Libor scandal From Wikipedia, the free encyclopedia
en.wikipedia.org/wiki/Libor_scandal
[URL=wikipedia.org/wiki/Libor_scandal
Scale of the scandal

This dwarfs by orders of magnitude any financial scam in the history of markets.[1][2]

Andrew Lo, MIT Professor of Finance

The Libor scandal is a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) and the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. Libor underpins approximately $350 trillion in derivatives. It is controlled by the British Bankers' Association (BBA).[3]

The banks are supposed to submit the actual interest rates they are paying, or would expect to pay, for borrowing from other banks. The Libor is supposed to be an overall assessment of the health of the financial system because if the banks being polled feel confident about the state of things, they report a low number and if the member banks feel a low degree of confidence in the financial system, they report a higher interest rate number.

Because Libor is used in U.S. derivatives markets, an attempt to manipulate Libor is an attempt to manipulate U.S. derivatives markets, and thus a violation of the law. Since mortgages, student loans, financial derivatives, and other financial products often rely on Libor as a reference rate, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide.

[edit] Early reports of Libor manipulation
Libor manipulation to lower rate

Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot. [emphasis added]

Barclays Bank trader in New York to submitter,13 September, 2006[4]

On 29 May 2008, The Wall Street Journal (WSJ) released a controversial study suggesting that some banks might have understated borrowing costs they reported for Libor during the 2008 credit crunch that may have misled others about the financial position of these banks.[5] They further reported in March 2011 that regulators were focusing on Bank of America Corp., Citigroup Inc. and UBS AG.[6] In response the BBA claimed that Libor continued to be reliable even in times of financial crisis. Other authorities contradicted The Wall Street Journal article saying there was no evidence of manipulation. In its March 2008 Quarterly Review, The Bank for International Settlements stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings."[7] Further, in October 2008 the International Monetary Fund published its regular Global Financial Stability Review which also found that "Although the integrity of the U.S. dollar Libor-fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar Libor remains an accurate measure of a typical creditworthy bank’s marginal cost of unsecured U.S. dollar term funding."[8]

In November 2008, the Governor of the Bank of England, Mervyn King, described Libor to the UK Parliament saying "It is in many ways the rate at which banks do not lend to each other, ... it is not a rate at which anyone is actually borrowing."[9][10]

On 28 February 2012, it was reported that the U.S. Department of Justice was conducting a criminal investigation into Libor abuse.[11] Among the abuses being investigated were the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an unprecedented amount of insider knowledge into global instruments.[12] In court documents, a trader from the Royal Bank of Scotland claimed that it was common practice among senior employees at his bank to make requests to the bank's rate setters as to the appropriate Libor rate, and that the bank also made on occasions rate requests for some hedge funds.[13] One trader's messages from Barclays Bank indicated that for each basis point (0.01%) that Libor was moved, those involved could net “about a couple of million dollars”.[14]

What may still seem to many to be a parochial affair involving Barclays, a 300-year-old British bank, rigging an obscure number, is beginning to assume global significance. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.[15]

The Economist, 7 July, 2012

On June 13, 2012, at the request of Representative Randy Neugebauer, Chairman of the House Financial Services Subcommittee on Oversight and Investigations, the New York Federal Reserve released documents dating back to 2007 which showed that they were aware that banks were lying about their borrowing costs when setting Libor, and chose to take no action against them at that time.[16][17] Released minutes from the Bank of England indicated similarly that the bank and its deputy governor Paul Tucker were also aware in November 2007 of industry concerns that the Libor rate was being underreported.[18][19] In one 2008 document a Barclays employee told a New York Fed analyst, "We know that we’re not posting um, an honest LIBOR, and yet we are doing it, because, um, if we didn’t do it, it draws, um, unwanted attention on ourselves."[17]

The documents also show that in early 2008 a memo written by then New York Fed President Tim Geithner to Bank of England chief Mervyn King looked into ways to "fix" Libor.[20][21] While the released memos suggest that the New York Fed helped to identify problems related to Libor and press the relevant authorities in the UK to reform, there is no documentation that shows any evidence that Geithner's recommendations were acted upon or that the Fed tried to make sure that they were. In October 2008, several months after Geithner's memo to King, a Barclays employee told a New York Fed representative that Libor rates were still "absolute rubbish."[17]

[edit] Barclays Bank fined for manipulation


Libor manipulation to raise rate

Pls go for 5.36 libor again, very important that the setting comes as high as possible ... thanks. [emphasis added]

Barclays Bank trader in New York to submitter,29 July, 2007[4]

On 27 June 2012, Barclays Bank was fined $200m by the Commodity Futures Trading Commission,[22] $160 million by the United States Department of Justice[23] and £59.5 million by the Financial Services Authority[24] for attempted manipulation of the LIBOR and EURIBOR rates.[25] The United States Department of Justice and Barclays officially agreed that "the manipulation of the submissions affected the fixed rates on some occasions".[26][27]

Barclays manipulated rates for at least two reasons. Routinely, from at least as early as 2005, traders sought particular rate submissions to benefit their financial positions. Later, during the 2007–2012 global financial crisis, they artificially lowered rate submissions to make their bank seem healthy.[23]

On 2 July 2012, Marcus Agius chairman of Barclays, resigned from the position following the interest rate rigging scandal.[28] Bob Diamond, the chief executive officer of Barclays, resigned on July 3, 2012. Marcus Agius will fill his post until a replacement is found.[29][30] Bob Diamond was questioned by the Parliament of the United Kingdom regarding the manipulation. He said he was unaware of the manipulation until that month, but revealed discussions with Paul Tucker, deputy governor of the Bank of England.[31] Tucker then voluntarily appeared, seeking to clear his name. He said he had never encouraged manipulation of Libor, and that other self-certification mechanisms like Libor should be reformed.[32]

[edit] Breadth of scandal becomes apparent

By 4 July, 2012 the breadth of the scandal was evident and became the topic of analysis on news and financial programs that attempted to explain the importance of the scandal.[33] Two days later, it was announced that the U.K. Serious Fraud Office had also opened a criminal investigation into manipulation of interest rates. The investigation was not limited to Barclays.[34][35] It has been reported since then that regulators in at least seven countries are investigating the rigging of the Libor and other interest rates.[36]

The United States Congress began investigating on 10 July. Senate Banking Committee Chairman Tim Johnson (D., S.D.) said he would question Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke about the scandal during scheduled hearings. Rep. Randy Neugebauer (R., T.X.) chairman of the House Financial Services Committee, wrote New York Federal Reserve (New York Fed) President William Dudley. He was seeking records of communications between the New York Fed and Barclays between August 2007 and November 2009 related to Libor-like rates.[37]

The Canadian Competition Bureau was reported on 15 July to also be carrying out an investigation into price fixing by five banks of the yen denominated Libor rates. Court documents filed indicated that the Competition Bureau had been pursuing the matter since at least January 2011. The documents offered a detailed view of how and when the international banks allegedly colluded to fix the Libor rates. The information was based on a whistleblower who traded immunity from prosecution in exchange for turning on his fellow conspirators. In the court documents, a federal prosecutor for the bureau stated that the “IRD (interest-rate derivatives) traders at the participant banks communicated with each other their desire to see a higher or lower yen LIBOR to aid their trading positions". The alleged participants are the Canadian branches of the Royal Bank of Scotland, HSBC, Deutsche Bank, JP Morgan Bank, and Citibank, as well as ICAP (Intercapital), an interdealer broker.[38]

Appearing before Parliament on 16 July, Jerry del Missier, a former senior Barclays executive, said that he had received instructions from Robert Diamond to lower rates after Diamond's discussions with bank regulators. He said that he had received information of a conversation between Diamond and Paul Tucker, deputy governor of the Bank of England, in which they had discussed the bank’s financial position at the height of the 2008 financial crisis. It was his understanding that senior British government officials had instructed the bank to alter the rates. Mr. del Missier's testimony followed statements from Diamond in which he denied that he had told his deputies to report false Libor rates. Speaking before Parliment the previous week, Tucker stated that he had shared concerns regarding Barkley's Libor rates because the markets might view Barclays to be at risk if its Libor submissions continued to be higher than those of other international banks. In the midst of the Lehman Brothers collapse, there was concern the bank might need to be bailed out if the financial markets perceived it was a credit risk. Tucker told the committee, “I wanted to make sure that Barclays’ day-to-day funding issues didn’t push it over the cliff." [39]

[edit] Impact on banking regulation in Europe and the US

US experts such as Former Assistant Secretary of the Treasury Paul Craig Roberts have argued that the Libor Scandal completes the picture of public and private financial institutions manipulating interest rates in order to prop up the prices of bonds and other fixed income instruments, and that “the motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion.” [40] In that perspective they advocate stricter bank regulation, and a profound reform of the Federal Reserve System.

Mainland European scholars have also discussed the necessity of far-reaching banking reforms in light of the current crisis of confidence, recommending the adoption of binding regulations that would go further than the Dodd-Frank Act: notably in France where SFAF and World Pensions Council (WPC) banking experts have argued that, beyond national legislations, such rules should be adopted and implemented within the broader context of separation of powers in European Union law, to put an end to anti-competitive practices akin to exclusive dealing and limit conflicts of interest.[41][42] This perspective has gained ground after the unraveling of the Libor scandal, with mainstream opinion leaders such as the Financial Times editorialists calling for the adoption of an EU-wide "Glass Steagall II" [43]

[edit] Reactions

In a July 14 editorial in the Guardian, Naomi Wolf suggests that only a short time ago the "notion that the entire global financial system is riddled with systemic fraud – and that key players in the gatekeeper roles, both in finance and in government, including regulatory bodies, know it and choose to quietly sustain this reality – is one that would have only recently seemed like the frenzied hypothesis of tinhat-wearers". Looking at the fact that Tim Geithner went on to be promoted to Treasury Secretary. Wolf commented, "It is very hard, looking at the elaborate edifices of fraud that are emerging across the financial system, to ignore the possibility that this kind of silence – "the willingness to not rock the boat" – is simply rewarded by promotion to ever higher positions, ever greater authority. If you learn that rate-rigging and regulatory failures are systemic, but stay quiet, well, perhaps you have shown that you are genuinely reliable and deserve membership of the club."[44]

[jakaswanga]

--@THE ECONOMIST Jul 7th 2012 | from the print edition
THE LONDON INTERBANK OFFERED RATE

The LIBOR scandal: The rotten heart of finance.

A scandal over key interest rates is about to go global

THE most memorable incidents in earth-changing events are sometimes the most banal. In the rapidly spreading scandal of LIBOR (the London inter-bank offered rate) it is the very everydayness with which bank traders set about manipulating the most important figure in finance. They joked, or offered small favours. “Coffees will be coming your way,” promised one trader in exchange for a fiddled number. “Dude. I owe you big time!… I'm opening a bottle of Bollinger,” wrote another. One trader posted diary notes to himself so that he wouldn't forget to fiddle the numbers the next week. “Ask for High 6M Fix,” he entered in his calendar, as he might have put “Buy milk”.

What may still seem to many to be a parochial affair involving Barclays, a 300-year-old British bank, rigging an obscure number, is beginning to assume global significance. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.

In this section•»The rotten heart of finance
•First-mover disadvantage

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Related topics
•Economics
•Economic crisis
•Royal Bank of Scotland
•Barclays
•Banking

Over the past week damning evidence has emerged, in documents detailing a settlement between Barclays and regulators in America and Britain, that employees at the bank and at several other unnamed banks tried to rig the number time and again over a period of at least five years. And worse is likely to emerge. Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. “This is the banking industry's tobacco moment,” says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America's tobacco industry more than $200 billion in 1998. “It's that big,” he says.

As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged. The scandal also corrodes further what little remains of public trust in banks and those who run them.

Like many of the City's ways, LIBOR is something of an anachronism, a throwback to a time when many bankers within the Square Mile knew one another and when trust was more important than contract. For LIBOR, a borrowing rate is set daily by a panel of banks for ten currencies and for 15 maturities. The most important of these, three-month dollar LIBOR, is supposed to indicate what a bank would pay to borrow dollars for three months from other banks at 11am on the day it is set. The dollar rate is fixed each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow if they needed money. The top four and bottom four estimates are then discarded, and LIBOR is the average of those left. The submissions of all the participants are published, along with each day's LIBOR fix.

In theory, LIBOR is supposed to be a pretty honest number because it is assumed, for a start, that banks play by the rules and give truthful estimates. The market is also sufficiently small that most banks are presumed to know what the others are doing. In reality, the system is rotten. First, it is based on banks' estimates, rather than the actual prices at which banks have lent to or borrowed from one another. “There is no reporting of transactions, no one really knows what's going on in the market,” says a former senior trader closely involved in setting LIBOR at a large bank. “You have this vast overhang of financial instruments that hang their own fixes off a rate that doesn't actually exist.”

A second problem is that those involved in setting the rates have often had every incentive to lie, since their banks stood to profit or lose money depending on the level at which LIBOR was set each day. Worse still, transparency in the mechanism of setting rates may well have exacerbated the tendency to lie, rather than suppressed it. Banks that were weak would not have wanted to signal that fact widely in markets by submitting honest estimates of the high price they would have to pay to borrow, if they could borrow at all.

In the case of Barclays, two very different sorts of rate fiddling have emerged. The first sort, and the one that has raised the most ire, involved groups of derivatives traders at Barclays and several other unnamed banks trying to influence the final LIBOR fixing to increase profits (or reduce losses) on their derivative exposures. The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars. In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America's Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions. Risibly, Bob Diamond, its chief executive, who resigned on July 3rd as a result of the scandal (see article), retorted in a memo to staff that “on the majority of days, no requests were made at all” to manipulate the rate. This was rather like an adulterer saying that he was faithful on most days.

Barclays has tried its best to present these incidents as the actions of a few rogue traders. Yet the brazenness with which employees on various Barclays trading floors colluded, both with one another and with traders from other banks, suggests that this sort of behaviour was, if not widespread, at least widely tolerated. Traders happily put in writing requests that were either illegal or, at the very least, morally questionable. In one instance a trader would regularly shout out to colleagues that he was trying to manipulate the rate to a particular level, to check whether they had any conflicting requests.

The FSA has identified price-rigging dating back to 2005, yet some current and former traders say that problems go back much further than that. “Fifteen years ago the word was that LIBOR was being rigged,” says one industry veteran closely involved in the LIBOR process. “It was one of those well kept secrets, but the regulator was asleep, the Bank of England didn't care and…[the banks participating were] happy with the reference prices.” Says another: “Going back to the late 1980s, when I was a trader, you saw some pretty odd fixings…With traders, if you don't actually nail it down, they'll steal it.”

Galling as the revelations are of traders trying to manipulate rates for personal gain, the actual harm done would probably have paled in comparison with the subsequent misconduct of the banks. Traders acting at one bank, or even with the clubby co-operation of counterparts at rival banks, would have been able to move the final LIBOR rate by only one or two hundredths of a percentage point (or one to two basis points). For the decade or so before the financial crisis in 2007, LIBOR traded in a relatively tight band with alternative market measures of funding costs. Moreover, this was a period in which banks and the global economy were awash with money, and borrowing costs for banks and companies were low.

“Clean in principle”

Yet a second sort of LIBOR-rigging has also emerged in the Barclays settlement. Barclays and, apparently, many other banks submitted dishonestly low estimates of bank borrowing costs over at least two years, including during the depths of the financial crisis. In terms of the scale of manipulation, this appears to have been far more egregious—at least in terms of the numbers. Almost all the banks in the LIBOR panels were submitting rates that may have been 30-40 basis points too low on average. That could create the biggest liabilities for the banks involved (although there is also a twist in this part of the story involving the regulators).

As the financial crisis began in the middle of 2007, credit markets for banks started to freeze up. Banks began to suffer losses on their holdings of toxic securities relating to American subprime mortgages. With unexploded bombs littering the banking system, banks were reluctant to lend to one another, leading to shortages of funding system-wide. This only intensified in late 2007 when Northern Rock, a British mortgage lender, experienced a bank run that started in the money markets. It soon had to be taken over by the state. In these febrile market conditions, with almost no interbank lending taking place, there were little real data to use as a basis when submitting LIBOR. Barclays maintains that it tried to post honest assessments in its LIBOR submissions, but found that it was constantly above the submissions of rival banks, including some that were unmistakably weaker.

At the time, questions were asked about the financial health of Barclays because its LIBOR submissions were higher. Back then, Barclays insiders said they were posting numbers that were honest while others were fiddling theirs, citing examples of banks that were trying to get funding in money markets at rates that were 30 basis points higher than those they were submitting for LIBOR.

This version of events has turned out to be only partly true. In its settlement with regulators, Barclays owned up to massaging down its own LIBOR submissions so that they were more or less in line with those of their rivals. It instructed its money-markets team to submit numbers that were high enough to be in the top four, and thus discarded from the calculation, but not so high as to draw attention to the bank (see chart 1). “I would sort of express us maybe as not clean, but clean in principle,” one Barclays manager apparently said in a call to the FSA at the time.

Confounding the issue is the question of whether Barclays had, or thought it had, the tacit support of both its regulator and the Bank of England (BoE). In notes taken by Mr Diamond, then the head of the investment-banking division of Barclays, of a call with Paul Tucker, then a senior official at the BoE, Mr Diamond recorded what was interpreted by some in the bank as a nudge and a wink from the central bank to fudge the numbers (see article). The next day the Barclays submissions to LIBOR were lower. This could be a crucial part of the bank's defence.

The allegation by Barclays that some banks seemed to be fiddling their data would appear to be supported by the data themselves. Over the period of the financial crisis, the estimates of its borrowing costs submitted by Barclays were generally among the top four in the LIBOR panel (see chart 2). Those consistently among the lowest four were some of the soundest banks in the world, with rock solid balance-sheets, such as JPMorgan Chase and HSBC. However, among banks regularly submitting much lower borrowing costs than Barclays were banks that subsequently lost the confidence of markets and had to be bailed out. In Britain these included Royal Bank of Scotland (RBS) and HBOS.

The tobacco moment

Regulators around the world have woken up, however belatedly, to the possibility that these vital markets may have been rigged by a large number of banks. The list of institutions that have said they are either co-operating with investigations or being questioned includes many of the world's biggest banks. Among those that have disclosed their involvement are Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, RBS and UBS.

Court documents filed by Canada's Competition Bureau have also aired allegations by traders at one unnamed bank, which has applied for immunity, that it had tried to influence some LIBOR rates in co-operation with some employees of Citigroup, Deutsche Bank, HSBC, ICAP, JPMorgan Chase and RBS. It is not clear whether employees of these banks actually co-operated or, if they did, whether they succeeded in manipulating rates.

Continental Europe is focusing on cartel effects rather than digging into the internal culture of banks. Separate investigations, by the European Commission and the Swiss authorities, focus on the possible effects of inter-bank rate manipulation on end users. Last October European Commission officials raided the offices of banks and other companies involved in trading derivatives based on EURIBOR (the euro inter-bank offered rate). The Swiss competition commission launched an investigation in February, prompted by an “application for leniency” by UBS, into possible adverse effects on Swiss clients and companies of alleged manipulation of LIBOR and TIBOR (the Tokyo inter-bank offered rate) by the two Swiss and ten other international banks and “other financial intermediaries”.

The regulatory machinery will grind slowly. Investigators are unlikely to produce new evidence against other banks for a few months yet. Slower still will be the progress of civil claims. Actions representing a huge variety of plaintiffs have been launched. Among the claimants are investors in savings rates or bonds linked to LIBOR, those buying derivatives priced off it, and those who dealt directly with banks involved in setting LIBOR.

Deciding a figure for the potential liability facing banks is tough, partly because the cases will be testing new areas of the law such as whether, for instance, an Australian firm that took out an interest-rate swap with a local bank should be able to sue a British or American bank involved in setting LIBOR, even if the firm had no direct dealings with the bank. The extent of the banks' liability may well depend on whether regulators press them to pay compensation or, conversely, offer banks some protection because of worries that the sums involved may be so large as to need yet more bail-outs, according to one senior London lawyer.

A particular worry for banks is that they face an asymmetric risk because they stand in the middle of many transactions. For each of their clients who may have lost out if LIBOR was manipulated, another will probably have gained. Yet banks will be sued only by those who have lost, and will be unable to claim back the unjust gains made by some of their other customers. Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.

The revelations also raise difficult questions for regulators. Mr Tucker's involvement in the Barclays affair may harm his prospects of being appointed governor of the Bank of England, although he may well have a benign explanation for his comments (he is due to appear before parliament soon).

Another issue is the conflict central banks face, in times of systemic banking crises, between maintaining financial stability and allowing markets to operate transparently. Whether the BoE instructed Barclays to lower its submissions or not, regulators had a pretty clear motive for wanting lower LIBOR: British banks, in effect, were being shut out of the markets. The two hardest-hit banks, RBS and HBOS, were both far too big to fail, and higher LIBOR rates would have made the regulators' job of supporting them more difficult.

This highlights a deeper question: what is the right level of involvement in influencing or regulating market interest rates, in a crisis, by those responsible for financial stability? Central banks get a slew of sensitive information from banks which they rightly do not want to make public. Data on deposit outflows at banks could trigger unnecessary runs, for example. Yet LIBOR is a measure of market rates, not those picked by policymakers.

Reform club

Two big changes are needed. The first is to base the rate on actual lending data where possible. Some markets are thinly traded, though, and so some hypothetical or expected rates may need to be used to create a complete set of benchmarks. So a second big change is needed. Because banks have an incentive to influence LIBOR, a new system needs to explicitly promote truth-telling and reduce the possibilities for co-ordination of quotes.

Ideas for how to do this are starting to appear. Rosa Abrantes-Metz of NYU's Stern School of Business was one of a group of academics who, in 2009, raised the alarm that something fishy was going on with LIBOR. One simple change, she proposes, would be significantly to raise the number of banks in the panel. The theoretical changes needed to repair LIBOR are not difficult, but there are practical challenges to reform. The thousands of contracts that use it as a point of reference may need to be changed. Moreover, the real obstacle to change is not a lack of good ideas, but a lack of will by the banks involved to overturn a system that has served most of them rather well. With lawsuits and prosecutions gathering pace, those involved in setting the key rate in finance need to get moving. Adding a calendar note to “Fix LIBOR” just won't do.

from the print edition-THE ECONOMIST- | Briefing

[jakaswanga]

07/10/2012 10.07.2012 [fROM GERMANY'S DER SPIEGEL]

Waves of Lawsuits Pending Barclays Affair Rocks European Banking Industry --By Martin Hesse

The LIBOR rate-fixing scandal has sent a shock wave through the whole European financial industry. A number of other banks are suspected of having manipulated interest rates, and Deutsche Bank has already suspended two employees. Experts warn of a wave of lawsuits that could ruin some institutions.

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Bob Diamond seemed nervous when he sat in front of the members of the Treasury Committee of the British House of Commons last week. He had been forced to resign as CEO of Barclays, a major bank, the day before. Suddenly Diamond, once such an important figure, seemed very small indeed.

He poured himself a glass of water, cleared his throat and wiped his mouth with a handkerchief. The banker seemed like a stubborn child as he described his view of the scandal over the manipulation of interest rates that had just cost him his job.

Yes, Barclays employees had behaved reprehensively when they manipulated interest rates for years, Diamond said. But he also insisted that he had known nothing about it, and pointed out that other banks had also fudged their financial records. "I love Barclays. History will judge Barclays as an incredible institution because of its people."

Historians are probably more likely to remember Diamond's appearance and the scandal as a milestone in the demise of investment banks.

Greed and Egos

Barclays was ordered to pay a fine of $500 million (€407 million), because bank employees allegedly manipulated the London Interbank Offered Rate (LIBOR) for years. The rate is determined by a group of international banks, which provide the British Bankers' Association (BBA) with the rates at which they can borrow money from other lenders in the short term on a daily basis.

The rate appears on the screens of securities traders, fund managers and directors of savings banks around the globe. LIBOR is the basis for more than $350 trillion in securities transactions and loans. The scandal meant that one of the most important levers of the global economy had fallen into the hands of irresponsible bankers. Once again, it was a story of greed and inflated egos.

In addition to Barclays, about 20 other banks are suspected of having entered incorrect figures into the LIBOR system between 2005 and 2011. In doing so, they may have inflicted losses worth billions on investors, borrowers and other customers, further destroying confidence in their industry.

Financial companies will now have to get used to stricter regulation. The British government wants to largely separate risky investment banking from the rest of the banking sector, and there are similar plans afoot in the United States. Scandals and shrinking profits have made things difficult for financial industry executives. "You can't invest in the shares of investment banks at the moment, because there's constantly so much junk coming to light," says one of the leading analysts for bank stocks.

Shoddy Treatment

Even before regulators announced the first penalty in the LIBOR scandal, investment banks were constantly in the headlines for all the wrong reasons. Just recently, it was revealed that the major US bank JPMorgan Chase had lost at least $2 billion as a result of risky speculative deals.

In Germany, the public was astonished by the chutzpah of Morgan Stanley banker Dirk Notheis. A member of the center-right Christian Democratic Union (CDU), Notheis and his friend Stefan Mappus, the former governor of the southwestern state of Baden-Württemberg, had quietly, and without informing lawmakers, orchestrated the purchase of a stake in the energy group EnBW for €4.7 billion.

And in London, Frankfurt and New York, even major British and American shareholders rebelled against the large bonuses being paid to some bank CEOs. For these reasons, the LIBOR scandal in London, the mecca of high finance, has now triggered a storm of outrage. Mervyn King, head of the Bank of England, abandoned his usual restraint to attack the corrupt "culture in the banking industry and (…) the structure of the banking industry, from excessive levels of compensation, shoddy treatment of customers, to deceitful manipulation of one of the most important interest rates."

Financial industry regulators in various countries, including Britain's Financial Services Authority (FSA), the American Commodity Futures Trading Commission (CFTC) and the European Commission, are investigating a total of 20 financial companies. In four cases, investigators believe it likely that collaborative, quasi-institutional manipulation took place.

'The Big Day'

According to financial industry sources, not only Barclays, but also the Royal Bank of Scotland (RBS), the Swiss bank UBS and Citigroup are suspected of having systematically contributed incorrect interest rates for the LIBOR calculations, in part with the knowledge of senior executives. The institutions have yet not commented on these accusations. UBS had triggered the investigations with voluntary declarations.

In the case of the other banks, the investigators apparently assume that the interest-rate manipulations were the work of individuals. Emails that securities traders exchanged with bank employees who reported the interest rates for the LIBOR calculation to the BBA illustrate how they did it.

"The big day (has) arrived," one derivatives trader wrote in an email to the Barclay LIBOR submitter in March 2006. He needed a fixed three-month rate, and pointed out that "as always, any help (would) be greatly appreciated." The LIBOR submitter responded that he would report a rate that was lower by one basis point. "When I retire and write a book about this business, your name will be written in golden letters," the grateful trader wrote back.

Deutsche Bank under Examination

WestLB and Deutsche Bank are among the banks investigators are targeting. In its most recent quarterly report, Germany's largest financial group states that it is being investigated by several regulatory agencies. The report notes that Deutsche Bank is cooperating with regulators, but that it has no further comment.

"If offences similar to those that apparently occurred at Barclays are uncovered at Deutsche Bank during the course of the investigations, everything will have to be investigated," says Hans-Christoph Hirt of the British shareholder advisory service Hermes. "It would be an opportunity for the new Supervisory Board Chairman Paul Achleitner to prove that he takes seriously the concerns that shareholders have clearly articulated."

The matter could also prove to be uncomfortable for the bank's new co-CEOs Anshu Jain and Jürgen Fitschen. For months now, outside auditors have, at the bank's request, been examining whether its traders were involved in manipulations. Two employees have already been suspended. If the suspicions against Deutsche Bank are confirmed, it could become the most expensive legal legacy from the days of the financial crisis, says one insider. This isn't just because of the investigators, but also because of people like the Frankfurt banker Friedrich von Metzler. Metzler's holding company includes an investment company that has filed an action for damages against Deutsche Bank and other banks in a New York court. Many investment companies are likely to join the suit, because they, as the trustees of their investors, must file claims if there is a justifiable suspicion that they were harmed.

The plaintiffs claim that the LIBOR banks had an incentive to push down the interest rate, especially during the 2007 and 2008 financial crisis. Investors were questioning the stability of banks at the time. It was in the financial institutions' interests to claim that their borrowing costs were as low as possible. Deutsche Bank, however, has always insisted that it never had any refinancing problems.

'The Wrong Impression'

Last week, it became apparent how explosive the cited reason for the manipulation is. After resigning, Diamond hinted that the Bank of England might have encouraged Barclays to feed lower rates into the LIBOR system. Paul Tucker, the current deputy governor of the Bank of England, allegedly told Diamond in the fall of 2008 that "it did not always need to be the case that we appeared as high (with LIBOR submissions) as we have recently," according to Diamond's notes of the telephone call.

In the hearing before the House of Commons, however, Diamond stressed that he had not understood Tucker's statement as a call to manipulate LIBOR. On Monday, Tucker gave his side of the story, telling the Treasury Committee that he did not tell Barclays to lower its LIBOR submissions in 2008 and that no cabinet minister had asked him to put pressure on Barclays to do so. He said that Diamond's account of the telephone conversation gave "the wrong impression," saying that he regretted not having made a note of the call himself.

But it is noticeable that, up until the now notorious telephone conversation with Tucker in October 2008, Barclays routinely submitted the highest interest rates of the LIBOR banks, whereas its rates were on par with the others afterwards. In the committee, Diamond had expressed surprise that banks like WestLB, which already had problems at the time, were showing lower interest rates than Barclays.

Officials at WestLB declined to comment on Diamond's insinuations. A spokeswoman merely said that the bank is cooperating with regulators.

It could also become costly for WestLB, Deutsche Bank and other lenders if they are proven to have engaged in manipulation. If LIBOR rates were indeed shifted by up to 25 basis points and this actually affected transactions worth $350 trillion, the resulting claims will be staggering. "This could even ruin major banks," says Christoph Kaserer, a capital markets expert at the Technical University of Munich. However, it will be difficult to demonstrate the actual losses for individual plaintiffs.

Deutsche Bank is also coming under pressure from Germany's Federal Financial Supervisory Authority (BaFin). It is examining whether German banks have adequate control mechanisms to prevent or quickly discover interest-rate manipulations. To this end, BaFin has requested a special audit at Deutsche Bank.

Regulators and Shareholders Respond

Regulators may soon take steps to reduce banks influence on the LIBOR rate. "The existing procedure makes it far too easy for the participating banks to manipulate the reference interest rate, because it is based entirely on self-monitoring," says Andreas Dombret, the member of the Bundesbank's executive board responsible for financial stability. "In this sense, it is susceptible to fraud." According to Dombret, a new method is needed to determine reference rates like LIBOR. But the debate will extend beyond the lending rate.

"In light of the LIBOR case, a fundamental discussion about regulating banks needs to be conducted once again," says Hans-Christopher Hirt of shareholder advisory service Hermes. In fact, investors are already asking themselves whether it is right to have an investment banker at the head of a universal bank, as is the case with Jain at Deutsche Bank.

New rules are already making life difficult for the investment banks. They are now required to provide significantly more collateral for riskier deals, which reduces the rate of return.

While former Deutsche Bank CEO Josef Ackermann boasted of returns on equity of 25 percent and more, his successors recently had to make do with about 10 percent.

A majority of analysts expect that when the investment banks publish their quarterly results starting this week, the profits of most will shrink considerably.

End of an Era

Within the companies, there is an ongoing debate about what a strategy that goes beyond the usual cost reductions could look like. Shareholders are also no longer willing to accept dubious financial wizardry.

"The deals made by investment banks are justifiable, as long as they benefit the real economy," says shareholder representative Hirt. Jain and Fitschen plan to explain their interpretation of this guideline in September.

Investment banks pride themselves for being particularly flexible organizations. Recently, however, this flexibility seems to have consisted of manipulating interest rates when things became difficult.

But such trickery will not allow the financial industry to overcome its current crisis of confidence. The era of the Bob Diamonds of this world is finally coming to an end.

Translated from the German by Christopher Sultan

[jakaswanga]

This scandal could soon spread to a bank near you! Watch your investments if they are tied in value to the value of biblic Libor, and the currencies that rotate around it!~

Is your bank cheating on you? or you have saints at yours?

PS: emergency financial laws are being studied to prevent no cure no pay lawyers from filing suits on behalf of individual clients! There is not enough money in the west to handle that. Most banks would collapse --and they are already on the taxpayers infuse anyway! And they are too big to let fail! so after bailing them out, now the laws to protect them from criminal liability!

A civilisation got to do what it got to do to save her money-sector! What a pity the men who have brought this fiasco about are reputed to be some of the most brilliant men of that civilisation! Greed! you can not insulate yourself by education against this most human of sins. You have to punish regression to the level of deterrence. You have to police humans against themselves.

I do not think the West can punish her best and brightest lads. So it remains for the outside world to teach them the lesson. They can screw themselves all over again and again, but no longer the whole world.

[jakaswanga]

Jul 21, 2012 14:25:28 GMT 3 jakaswanga said:

This scandal could soon spread to a bank near you! Watch your investments if they are tied in value to the value of biblic Libor, and the currencies that rotate around it!~

Is your bank cheating on you? or you have saints at yours?

PS: emergency financial laws are being studied to prevent no cure no pay lawyers from filing suits on behalf of individual clients! There is not enough money in the west to handle that. Most banks would collapse --and they are already on the taxpayers infuse anyway! And they are too big to let fail! so after bailing them out, now the laws to protect them from criminal liability!

A civilisation got to do what it got to do to save her money-sector! What a pity the men who have brought this fiasco about are reputed to be some of the most brilliant men of that civilisation! Greed! you can not insulate yourself by education against this most human of sins. You have to punish regression to the level of deterrence. You have to police humans against themselves.

I do not think the West can punish her best and brightest lads. So it remains for the outside world to teach them the lesson. They can screw themselves all over again and again, but no longer the whole world.

www.reuters.com/article/2015/05/20/us-banks-forex-settlement-usa-idUSKBN0O51PY20150520

| Wed May 20, 2015 11:08am
Five global banks to pay $5.7 billion in fines over rate rigging

Five of the world's largest banks, including JPMorgan Chase & Co and Citigroup Inc, were fined roughly $5.7 billion, and four of them pleaded guilty to U.S. criminal charges over manipulation of foreign exchange rates, authorities said on Wednesday.

A fifth bank, UBS AG, will plead guilty to rigging benchmark interest rates, the U.S. Justice Department said.

U.S. banks JPMorgan Chase and Citigroup will pay $550 million and $925 million in criminal fines, respectively, as part of their guilty pleas.

British banks Barclays Plc will pay $650 million in criminal penalties and Royal Bank of Scotland Plc $395 million. Each will plead guilty to one felony count of conspiring to fix prices and rig bids for U.S. dollars and euros in the foreign exchange spot market.

Euro dollar traders at four of the banks described themselves as members of “The Cartel” and used an electronic chat room and coded language to manipulate exchange rates to increase profits, the Justice Department said.
Related Coverage

› RBS says forex fines to influence future pay decisions

The $5.7 billion total includes $1.6 billion in fines separately imposed by the U.S. Federal Reserve on the five banks.

Separately, the Fed fined Bank of America Corp $205 million for unsound practices in foreign exchange.

Barclays also will pay an additional $1.3 billion to settle with the New York State Department of Financial Services, the U.S. Commodity Futures Trading Commission and the UK's Financial Conduct Authority, authorities said.....

www.ft.com/intl/cms/s/0/23fa681c-fe73-11e4-be9f-00144feabdc0.html#axzz3ah6XqNsz

May 20, 2015 3:00 pm
Six banks fined $5.6bn over rigging of foreign exchange markets

Three banks were also fined an additional total of $400m for manipulating the Libor and Isdafix benchmarks, bringing the tally for the day to $6bn.

Global banks have now paid more than $10bn over the forex scandal, exceeding the $9bn paid by a larger group of institutions to settle the Libor rigging claims. The banks settling forex allegations on Wednesday — Barclays, Citigroup, JPMorgan Chase, Royal Bank of Scotland, Bank of America and UBS — are hoping the deal will let them finally draw a line under both affairs.

In a statement, the DoJ said that between December 2007 and January 2013, euro-dollar traders at Citi, JPMorgan, Barclays and RBS — who described themselves as members of “The Cartel” or “The Mafia” — “used an exclusive electronic chatroom and coded language to manipulate benchmark exchange rates”.

...

Six global banks settled with US prosecutors on Wednesday as part of a $5.6bn deal over the alleged rigging of the foreign exchange benchmarks. Here is an explanation of what a fix is and why it is needed in a currency market.

.....

It also said that UBS had engaged in deceptive trading and sales practices, including “undisclosed mark-ups” on certain FX transactions. The DoJ said on some occasions, “UBS traders and sale staff used hand signals to conceal those mark-ups from customers”.

Separately, a statement by the New York Department of Financial Services (DFS) quoted one Barclays trader as writing in a November 5 2010 chat: “if you ain’t cheating, you ain’t trying”.

NB: We all saw how candidates Obama and Romney were in tempers, unanimously condemnning China for manipulating its currency. China never bothered to respond. Anybody interested could ask for a mandarin translation of their journals. That is where I heard, that the Chinese since ages had been aware the Great temples of finance in the West were rigging the game, whereupon China thought it wise to FACTOR in the factor ''rigging'' in its own calculations.

I am curious to know how much extra our Harvard Kennedy school wonderboy Dr Rotich at Finance in Kenya has had to pay in this rigged game. Those international loans we have been repaying: Did our best and brightest, like the Chinese, see through the game and factor in a ''correction''?

Just curious.