LIBOR: When Bankers Try to Shift the Blame

Stop press! Bankers found to be liars! Shock, horror. What is the world coming to?

The growing news story in relation to the collusion by bankers to fix the LIBOR (London Interbank Offer Rate) is one well worth keeping an eye on. As the rats jump from the ship they are sure to bring others down with them. We may finally get a peek inside the inner workings of the financial system.

Perhaps the general public will finally realise what a hoax it really is. Anyone who works in the markets should not be too surprised to hear that Barclays et al. have been lying about the rates that they can borrow at.

The Fox and the Hen House

The way that the LIBOR is set is that the banks are asked what their rate would be for different maturities if they were to borrow from other banks. As it states in the definition on Wikipedia:

‘The rate at which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.’

Note the word ‘perception’ that I have given emphasis. The rate doesn’t have to be an actual rate that they traded at; it just has to be their ‘perception’ of the rate that they could trade at.

If we were to not only leave the fox in charge of the henhouse but also come to the fox every day and ask him how many hens there were in the henhouse, and he said, ‘Oh yes, there’s still 50 here sir. Absolutely. Every one of them is accounted for. I’m keeping a very close eye on them’, would you be surprised to come back in a few weeks to find no fox and a lot of feathers?

Our eyes may water at the thought of paying out nearly half a billion dollars in fines, as Barclays has to do, but let’s face reality. When they did the risk/reward on the trade and worked out that they could make untold billions by lying and only have to fork out a small portion of the gains in a fine if they got caught, they would choose to do that trade every time.

It is interesting to note that some of the big names are pulling out of class actions to go it alone in litigation against the banks. This will be a war of the titans. They both have bottomless pits of funding for legal action. This could, and probably will, drag on for years.

As noted in a recent article on Reuters,

‘More than a dozen banks, including Citigroup, HSBC and UBS, have been caught up in the probe and have been sued in proposed class-actions by plaintiffs including the city of Baltimore and Frankfurt-based Metzler Investment GmbH, which manages 47 billion euros ($59 billion) in assets. The plaintiffs brought antitrust claims against the banks, saying they were bilked of potentially billions of dollars.’

The article finishes with a quote from Manal Mehta, a partner at Sunesis Capital. ‘This is the dark horse candidate to become the next big capital issue for the banks, at least for the banks involved in the Libor manipulation scandal’. Sunesis Capital is a hedge fund following litigation against the large banks. ‘It has potential to be astronomical.’

The ironic thing is that we know that the taxpayer is ultimately on the hook for any and all losses by banks these days. So if a bank were to look like going under due to litigation in relation to this debacle, we could rest assured that taxpayers will be shafted to keep them afloat.

Former Barclays CEO Bob Diamond ducked and weaved in front of a marathon Q&A session with UK lawmakers yesterday. He denied all knowledge of the rate rigging, saying that he only found out when investigations began… Ha! A quick survey on the Marketwatch website asking people whether they believed him returned an 87% ‘no’ response. I have to ask what the other 13% are smoking, because there is no way he is telling the truth.

Marketwatch Survey: Is Diamond Telling the Truth?

Marketwatch Survey: Is Diamond Telling  the Truth?

Source: Marketwatch

Today Marketwatch points out:

‘Following its chief executive’s departure on Tuesday, Barclays published a note written by Diamond in 2008 suggesting that a top Bank of England official, under pressure from the U.K. government, may have tacitly encouraged the bank to lower its submissions to a panel that sets the London interbank lending rate…

The Barclays submission has serious implications as it apparently suggests that U.K. regulators and the government – concerned about financial stability – had a role in events that led to attempts at rate-fixing by the bank. ‘

So there you have it. Not only are the banks making up rates to suit themselves but the government and the regulators were giving them the nod. This issue has the potential to keep growing like Murdoch’s phone tapping scandal. I wonder how many more heads will roll.

In true rat jumping fashion, Diamond spent his time during questioning trying to point the finger at others. In particular, he questioned how banks that had been part nationalized at the height of the crisis claimed they were borrowing at a lower rate than Barclays. The finger pointing has begun, and I think it may end up pointing all the way to the top.

Murray Dawes
Editor, Slipstream Trader

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