Tag: LIBOR

Cross posted from The Stars Hollow Gazette

The former special inspector-general of the troubled asset relief program (TARP), Neil Barofsky says that it is time for a “post mortem” analysis former Treasury Secretary Timothy Geithner’s doctrine, the preservation of large banks, the largesse of Wall St. and the perversion of of the US criminal justice system. In this article posted at naked capitalism, Mr. Barofsky looks at the effect of the “Geithner Doctrine” and the weak response to the LIBOR scandal:

The recent parade of banking scandals, such as the manipulation of Libor rates by Barclays, Royal Bank of Scotland and other major banks, can be traced back to the lax system of regulation before the financial crisis – and the weak response once disaster struck.

Take the response of the New York Federal Reserve to Barclays’ admission in 2008 that it was submitting false Libor rates and was not alone in doing so. Mr Geithner’s response was to in effect bury the tip. He sent a memo to the Bank of England suggesting some changes to the rate-setting process and then convened a meeting of regulators where he reportedly described only the risk but not the actual manipulation of the rate. He then put the government imprimatur on the rate via bailout programmes. His inaction helped permit a global crime to continue for another year.

When it was UBS’s turn to settle its Libor charges, even though a significant amount of the illegal activity took place at the parent company level, only a Japanese subsidiary was required to take a plea. Eric Holder, US attorney-general, demonstrated his embrace of the Geithner doctrine (a phrase coined by blogger Yves Smith) in explaining the UBS decision. He said that a more aggressive stance against the parent company could have a negative “impact on the stability of the financial markets around the world”.

This week we saw the latest instalment of the saga. In fining RBS £390m, the DoJ only indicted one of the bank’s Asian subsidiaries, avoiding the more damaging result that would have stemmed from charging the parent company.

Instead of seeking deterrence and justice, the US government increasingly appears to have fully absorbed the Geithner doctrine into its charging decisions by seeking a result that has a minimal impact on the target bank but will generate the best-looking press release. Some banks today are still too big to fail – and they are still too big to jail.

There are no meaningful consequences for this criminality. The fines with a promise not to do this again are just a game to allow the banks to continue the fraudulent conduct and find better ways to cover it up. Mr. Barofsky concludes that we must ditch the “Geithner Doctrine” to end “the game of incentives gone wild, and the lack of accountability in the aftermath of the crisis has only reinforced those bad incentives.”

o reclaim our system of justice, the global threat posed by the failure of any of our largest financial institutions must be neutralised once and for all. They must be reduced in size, their safety nets must be dramatically constricted and their capital requirements enhanced far beyond the current standards. Then, and only then, can the same set of rules apply to all.

In an extended interview with “The Daily Show“ host Jon Stewart, Mr. Barofsky discussed the double standards of the TARP program and the alien culture of Washington DC and explains why the banks will never face true justice..

Cross posted from The Stars Hollow Gazette

Some regulators think LIBOR, the benchmark for short term interest rates that is fixed by a group of bankers in London, can be fixed. Others feel it is irreparably damaged and was a myth from the start.

Libor Rate ‘Needs A Complete Overhaul,’ But Not To Be Scrapped, British Officials Say

Britain’s top financial watchdog delivered a 10-point plan to fix Libor but stopped short of scrapping the benchmark interest rate in a much-awaited reform of a system plagued by scandal.

“The system is broken and needs a complete overhaul,” said Martin Wheatley, head of the Financial Services Authority (FSA).

Wheatley acknowledged problems with London interbank offered rates, but said Libor is so deeply entrenched in the financial system that it cannot be easily replaced. [..]

CHARGES OF MANIPULATION

Multiple banks have been accused of trying to manipulate Libor, a series of rates set daily in London. Barclays in June agreed to pay $453 million to U.S. and British authorities to settle allegations that it tried to move Libor to help its trading positions.

Wheatley’s programme for reform includes auditing banks that contribute data used to calculate the rates, to ensure they are not submitting false rates to benefit trading positions. [..]

SHRINKING THE NUMBER OF RATES

Rates that are infrequently referenced in trades, such as Australian and Canadian dollar rates, will be phased out, Wheatley said. Maturities that are infrequently used, such as four, five, seven, eight, 10 and 11 months, will also be ended.

The reductions will shrink the current number of Libor rates set daily to 20 from 150. Rates that are rarely traded are easier to manipulate.

More banks will be required to submit their borrowing rates. [..]

The Myth of Fixing the Libor

There were two implicit assumptions in Libor. One was that banks were virtually risk-free, or at least that their risk was small and would not vary much over time. The other was that there was a way to actually calculate what the rate was. Both assumptions turned out to be wrong.

Libor rates are calculated each day by the British Bankers’ Association, a trade group that makes good money from licensing the use of Libor rates. [..]

The scandal made clear that those reports were faked before and during the financial crisis by at least some of the banks. But what is not as widely appreciated is that there is substantial evidence that the deception goes on. Banks continue to report figures that strain credulity, both in their level and in their lack of volatility from day to day or week to week. [..]

The bank regulators believed the fiction. Banks that owned AAA-rated floating rate assets needed to keep virtually no reserves on hand to back them.

We all know what happened. It turned out that risks were far greater than had been realized. Banks failed or were bailed out. Investors in AAA securities suffered major losses.

Libor was manipulated by bankers long before the financial crisis, and it is still based on calculations that have little basis in reality. Mr. Wheatley assures us that more regulation can deal with conflicts of interest. There will, he promises, be a “clear code of conduct” and “clear rules,” enforced by a regulator with “extensive powers.”

Pollyanna lives.

Some folks just cling to their myths.

Cross posted from The Stars Hollow Gazette

If you think for that the Justice Department in this administration is going to prosecute or regulate any of the people who were involved in the LIBOR scandal, erase that thought. Regardless of any evidence the government may have now or in the future that would send the average trader to prison for life, the main goal for Attorney General Eric Holder is to protect the banksters from prosecution. There was no reason to give immunity from prosecution of the Commodities Exchange Act. Since the government already had the e-mails, they had enough to issue subpoenas and arrest warrants. Instead, Holder’s office gave them immunity from prosecution:

A crucial element in any prosecution is criminal intent, and it’s plain from the Barclays e-mails that various participants knew that what they were doing was wrong. As one Barclays trader put it in e-mails to traders at other banks, “don’t talk about it too much,” “don’t make any noise about it please” and “this can backfire against us.”

Faced with what would seem to be an open-and-shut case, how did the Justice Department proceed? Barclays entered into a nonprosecution agreement in which the United States government agreed not to prosecute Barclays as long as it met its other obligations under the agreement, including continued cooperation in what the government said was an investigation still under way. Barclays also received a conditional grant of immunity from the antitrust division. [..]

The United States government “had the smoking guns,” Professor (John C.) Coffee said, and “it could have demanded its price from Barclays,” including a guilty plea to a crime. At the same time, the agreement “isn’t surprising,” he said. “The Department of Justice has done this in almost every major case since the collapse of Arthur Andersen.” (Andersen was the accounting firm indicted after the collapse of Enron.)

Glen Ford nails precisely why there will be no prosecutions, since the ultimate aim is “protecting the banks from the consequences of their crimes:”

“The reason Eric Holder is staging criminal investigations is because that’s the only way he can protect the bankers, through immunities and by gradually narrowing the scope of the case.”

The Obama Justice Department is in theater mode, again, pretending to threaten the bankster class with criminal penalties – prison time! – for their manipulation of the global economy’s benchmark interest rates. The Justice Department claims to be building criminal and civil cases in the LIBOR scandal, which in sheer scope is the biggest fraud by international capital in history. But that’s all a front, a farce. Barack Obama has spent his entire presidency protecting Wall Street, starting with his rescue of George Bush’s bank bailout bill after it’s initial defeat in Congress, in the last days of Obama’s candidacy. He packed his administration with banksters, passed his own bailout and, in collaboration with the Federal Reserve, channeled at least $16 trillion dollars into the accounts of U.S. and even European banks – by far the greatest transfer of capital in the history of the world. Obama has reminded the banksters that it was he who saved them from the “pitchforks” of an outraged public. He pushed through Congress so-called financial reform legislation that left derivatives – the deadly instruments of mass financial destruction that were at the heart of the meltdown – untouched. [..]

Now Obama and Holder are playing the same diversionary game, making tough noises about criminal investigations of the LIBOR conspirators. But the Justice Department has already given immunity to Barclay’s Bank, of Britain, and to the Swiss banking giant UBS. More immunities will follow. The reason Eric Holder is staging criminal investigations is because that’s the only way he can protect the bankers, through immunities and by gradually narrowing the scope of the case. In the end, there will be settlements all around, and the banksters will move on to even more fantastic heights of criminality – thanks to the loyal, protective hands of President Obama.

Prosecutions? Don’t hold you breath.

Cross posted from Friday the 13th news dump at The Stars Hollow Gazette

If it weren’t Friday the Thirteenth, you’d think it was April’s Fool. It’s all the usual excuses by the CEO’s and the TBTF banks, “we are just finding it was this bad”

JPMorgan Fears Traders Obscured Losses in First Quarter

JPMorgan Chase, which reported its second-quarter results on Friday, disclosed that the losses on a soured credit bet could mount to more than $7 billion, as the nation’s largest bank indicated that traders may have intentionally tried to conceal the extent of the red ink on the disastrous position. [..]

If the trades, made out of the powerful chief investment office unit in London, had been properly valued, the bank said it would have lost $1.4 billion on the position in the first quarter.

Jamie Dimon, the bank’s chief executive who has consistently reassured investors that the losses would be contained, announced that the bank lost $4.4 billion on the botched trade in the second quarter. So far this year, the bank says it has lost $5.8 billion on the trades in credit derivatives.  [..]

Since announcing the multibillion-dollar mistake, JPMorgan has lost $25 billion in market value.

Jamie Dimon finally admitting what we already knew but still not admitting that the real losses for the bank is closer to $30 billion. He is either the most incompetent CEO or he thinks that we’re all stupid to realize he knew about tis all along.

or  “but Timmy wrote a memo”

Barclays Informed New York Fed of Problems With Libor in 2007

A Barclays employee notified the Federal Reserve Bank of New York in April of 2008 that the firm was underestimating its borrowing costs, following potential warning signs as early as 2007 that other banks were undermining the integrity of a key interest rate.

In 2008, the employee said that the move was prompted by a desire to “fit in with the rest of the crowd” and added, “we know that we’re not posting um, an honest Libor,” according to documents that the agency released on Friday. The Barclays employee said that he believed such practices were widespread among major banks.

In response, the New York Fed began examining the matter and passed their findings to other financial authorities, according to the documents.

But the agency’s actions came too late and failed to thwart the illegal activities. By the time of the April 2008 conversation, the British firm had been trying to manipulate the interest rate for three years. And the practice persisted at Barclays for about a year after the briefing with the New York Fed.

Friday’s revelations shed new light on regulators’ role in the rate manipulation scandal. The documents also raise concerns about why authorities did not act sooner to thwart the rate-rigging.

The perp’s figured they were too big to indict and the Justice Department agreed.

In Barclays Inquiry, the Calculation in Making a Deal

The question needs to be faced in the wake of the bank’s admitted efforts to manipulate the London interbank offered rate, known as Libor, the benchmark for countless interest rate determinations and approximately $450 trillion in derivative contracts.

If the Justice Department was looking for a textbook case of white-collar financial crime – including a conspiracy that was flourishing at the height of the financial crisis – this would seem tailor-made. As the facts released by the government make clear, there were two separate but overlapping schemes to manipulate Libor within Barclays. Yet the bank secured a nonprosecution agreement and agreed to pay a penalty of more than $450 million, a comparatively paltry sum for a bank that had more than £32 billion ($50 billion) in revenue in 2011. “The perception so far has been that the regulators have been toothless,” John C. Coffee Jr., professor of law and specialist in white-collar crime at Columbia Law School, told me this week. [..]

(The criminal division said its agreement with Barclays was reached in conjunction with the antitrust division.)

And this is why Richard Diamond and Jamie Dimon have nothing to worry about and the world is still being screwed.

Cross posted from The Stars Hollow Gazette

LIBOR just keeps getting bigger by the day, like a wildfire.

Effect of Libor on US loans examined

by Shahien Nasiripour at The Financial Times

US lawmakers have raised concerns that the alleged manipulation of the London Interbank Offered Rate, or Libor, may have harmed households, raising the stakes on a scandal that thus far has been confined to Wall Street and the City of London.

There are at least 900,000 outstanding US home loans indexed to Libor that were originated from 2005 to 2009, the period the key lending gauge may have been rigged, investigators have said. Those mortgages carry an unpaid principal balance of $275bn, according to the Office of the Comptroller of the Currency, a bank regulator.

During periods when banks were allegedly attempting to push Libor higher, households with loans tied to the gauge may have paid higher rates than necessary. However, if the rate was manipulated lower, households may have benefited from paying below-market interest rates.

“I think the US government should be just as aggressive in getting to the bottom of this scandal as the United Kingdom has been,” said Senator Sherrod Brown, chair of the bank regulatory subcommittee on the Senate banking committee.

“This was not isolated to London, but affected tens of millions of investors, borrowers and taxpayers in our country as well,” Mr Brown added.

Libor Investigation Extended to US Mortgages, but What About TALF Loans?

by Yves Smith at naked capitalism

One area we hope will be investigated is the impact on TALF borrowing. Some of the loans were priced off Libor, raising the specter that the banks might have gamed the rates not just for advertising purposes, but to game these programs. From the Federal Reserve Bank of New York’s website:

   The interest rate on TALF loans secured by ABS backed by federally guaranteed student loans will be 50 basis points over 1-month LIBOR. The interest rate on TALF loans secured by SBA Pool Certificates will be the federal funds target rate plus 75 basis points. The interest rate on TALF loans secured by SBA Development Company Participation Certificates will be 50 basis points over the 3-year LIBOR swap rate for three-year TALF loans and 50 basis points over the 5-year LIBOR swap rate for five-year TALF loans. For three-year TALF loans secured by other eligible fixed-rate ABS, the interest rate will be 100 basis points over the 1-year LIBOR swap rate for securities with a weighted average life less than one year, 100 basis points over the 2-year LIBOR swap rate for securities with a weighted average life greater than or equal to one year and less than two years, or 100 basis points over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. For TALF loans secured by private student loan ABS bearing a prime-based coupon, the interest rate will be the higher of 1 percent and the rate equal to “Prime Rate” (as defined in the MLSA) minus 175 basis points. For other TALF loans secured by other eligible floating-rate ABS, the interest rate will be 100 basis points over 1-month LIBOR.

Note again that some of the loans were priced off one-month Libor, which per the Barclays disclosures, were among the maturities manipulated; these are clearly a place to start [..]

The Market Has Spoken, and It Is Rigged

by Simon Johnson at The New York Times

In the aftermath of the Barclays rate-fixing scandal, the most surprising reaction has been from people in the financial sector who fully understand the awfulness of what has happened. Rather than seeing this as an issue of law and order, some well-informed people have been drawn toward arguments that excuse or justify the behavior of the Barclays employees.

This is a big mistake, in terms of the economics at stake and the likely political impact.

The behavior at Barclays has all the hallmarks of fraud – intentional deception for personal gain, causing significant damage to others.

The Commodity Futures Trading Commission nailed the detailed mechanics of this deception in plain English in its Order Instituting Proceedings (which is also a settlement and series of admissions by Barclays). Most of the compelling quotes from traders involved in this scandal come from the commission’s order, but too few commentators seem to have read the full document. Please look at it now, if you have not done so already.

The commission’s order portrays a wide-ranging conspiracy (or perhaps a set of conspiracies) to rig markets, including, but not limited to, any securities for which the price is linked to a particular set of short-term interest rates.

This past weekend on Up with Chris Hayes, Chris and his panel guests discuss the rate rigging scandal.