Posts Tagged ‘Libor’
LIBOR manipulation

It appears the price of money  or interest rates may have been manipulated.  This time not by the Fed and other central banks, but by private banks. Apparently they may have been colluding to manipulate the London Interbank Offered Rate (LIBOR):

LIBOR Manipulation: A Brief Overview of the Debate: LIBOR is a key, central part of the global financial market system. Over $10 trillion in corporate loans, floating rate notes, adjustable rate residential mortgages etc., are pegged to LIBOR. Additionally, LIBOR is the key rate in the $350 trillion market for interest rate swaps. Finally, many other derivatives depend upon LIBOR in some manner or other.

Therefore, if LIBOR rates are being distorted or manipulated in any way, the ramifications extend to nearly every corner of the global money markets and to participants in many sectors of the global economy other than banks and financial institutions.

So how was LIBOR supposedly being manipulated?

Libor Manipulation: Another Black Eye for UBS: According to reports of court documents filed by Canadian regulators, traders at UBS, communicating with traders at other banks using e-mail and instant messaging, colluded on whether they wanted Libor to be set high or low on any given day. They would then pass that desire off to their bank’s representative on the Libor panel.

Why can”t they just use a different measure?:

Libor is so deeply embedded in the financial system it can’t be replaced without potentially voiding existing contracts…  “You might be able to call the new benchmark Libor, but because it’s not exactly the same measure, would that invalidate all these thousands and thousands of contracts?” said Donald Mackenzie, a professor at the University of Edinburgh who specializes in the sociology of financial markets. “It’s difficult to see that you can do much more than what the BBA is already trying to do in terms of trying to improve an estimate- based measure.”

The BBA is reviewing potential changes to the benchmark and met regulators and bank executives last week. The rate is set through a daily survey of firms conducted on behalf of the BBA by Thomson Reuters Corp. in which banks are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year.

Because banks have to submit a rate when no market exists, and their estimates aren’t subject to outside verification, the benchmark is vulnerable to manipulation, investors said.

So it is interesting to read this justification:

In defence of Libor manipulation: The argument is simple. If no more than eight banks ended up submitting quotes for Libor benchmarks because most others had limited or no access to term funding, according to Libor methodology no official Libor benchmark could be produced.

Lacking an official benchmark, distressed banks would then have been able to substitute their own preferred funding rates into loan agreements instead — rates which would have been completely detached from funding realities, exploiting those who were funding them in the process.

Furthermore, if banks had been seen leaving the process altogether, this could have translated into serious reputational issues for the banks in question, heightening bank run fears and accelerating the panic.

So, was collusion by the banks in this instance justified? Did it arguably, in the circumstances, do everyone in the market a favour?

Of course it does not square with reports of their  colluding to set the rate higher or lower. There are also suggestions that pricing of floating rate debt is in need of a re-think:

Insight: Time to rethink floating rate debt: Rates for three-month Libor are the basis for most interest rate futures, swaps and options, and the notional outstanding of these contracts globally is in excess of $300,000bn, according to the International Swaps and Derivatives Association. Interest rates on many corporate loans, floating rate notes and residential mortgages are also tied to them.

Three-month Libor became the basis for the emerging interest rate derivatives and floating rate debt markets in the 1980s. It was seen as a reliable measure of the marginal cost of bank financing and a better anchor for the short-end of the yield curve than unpredictable policy and overnight rates.

But a lot has changed since then and for a couple of reasons three-month Libor may not now be the best measure of short-term interest rates.

First, it is no longer a good proxy for marginal bank financing costs. A Libor-contributing bank submits the rate at which it believes it could borrow funds, were it to do so by asking for and then accepting interbank offers in ‘reasonable market size’’. However, the interbank market for unsecured three-month deposits has been thin for a number of years.

Only unsophisticated banks place deposits with their competitors at maturities beyond one week. Liquidity management and credit limits deter banks from tying up their funds in this way. Rather the interbank deposit market is overwhelmingly overnight.

At longer maturities, banks borrow unsecured primarily by issuing securities to non-bank investors.

There more detailed analysis on the possible manipulation here.

Massive Market Manipulation

We have posted on the possibility of USD 15 trillion money laundering, a rogue US agency or an attempt to extort at least 50 billion. It seems so farfetched, surely it can’t be true. But is it any more unbelievable than the manipulation of the gold and silver market or that of AAA rated securities?

Gold and silver markets are manipulated in what was termed the biggest fraud in the history of the world. Gold is the biggest commodity market in the world. USD 5.4 trillion a year is traded through the LBMA and no end of derivatives hang off it. The leverage level is 100 to 1. In other words there are 100 ounces of paper gold for every ounce of physical gold. Every ounce of gold that leaves the LBMA causes leverage rates to rise. At some point the market is going to blow.

Listen to King World News Interview with Andrew Maguire & Adrian Douglas. Andrew told the CFC exactly what was going to happen to the gold price when it followed the pattern caused by the manipulation. It then moved exactly as he said it would. He even gave the CFC live commentary explaining what was happening.

The email exchange between Andrew Maguire and the CFTC is linked to at the King World News site. It includes the following:

A final e-mail to confirm that the silver manipulation was a great success and played out EXACTLY to plan as predicted yesterday. How would this be possible if the silver market was not in the full control of the parties we discussed in our phone interview? I have honored my commitment not to publicize our discussions.

I hope you took note of how and who added the short sales (I certainly have a copy) and I am certain you will find it is the same concentrated shorts who have been in full control since JPM took over the Bear Stearns position.

It is common knowledge here in London among the metals traders that it is JPM’s intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.

The Wikipedia entry on Maguire states:

He went public in April 2010 with assertions of market manipulation by JPMorgan Chase and HSBC of the gold and silver markets. Maguire said “JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses (on their short positions) by the Fed and/or the U.S. taxpayer.” “No one at JPMorgan is familiar with Andrew Maguire,” said Brian Marchiony, a JPMorgan spokesman. HSBC declined to comment….

Maguire and his wife were injured in London in a hit-and-run accident on March 26, 2010, the day after Maguire’s name came to light during a CFTC hearing on limiting gold and silver positions held by large market participants in order to prevent manipulation. Maguire believes the accident was an attempt on his life. The driver of the other vehicle was apprehended after a police chase, both on the ground and from the air in helicopters, but his name has not been released.

Think about the implications of the biggest commodity market in the world being manipulated. Of banks being even more leveraged in this than other securities. At the moment much of the manipulation may be designed to stop gold from appearing as a viable alternative to fiat currencies. But it also flags the potential manipulation in the event of a move back to the gold standard. A debate that has raged before. The Secret of Oz is a great documentary. Well worth watching for its outline of the debate between a gold standard and one which uses silver coinage as well.

We have commentated repeatedly on fraud in assorted securities market. I expect this book will detail more. If central bank manipulation of interest rates, the very price of money was not bad enough, we have the banks at it as well. Money is so central to everything that if it is too badly distorted the economy can’t fail but to destroy value, rather than create it.

It’s time to face facts, there is something rotten in the State of Denmark. Not to mention the other States of the formerly developed world. Formerly developed world is an awkward term. The “regressing world” seems a better term for describing our reality.

What is happening has nothing to do with classical models of capitalism. We now have a new form in the US, UK and perhaps other “Anglo” style economies. It can be thought of as connected capitalism. Not because the net connects us all, but because wealth accrues on the basis of connections. Not merit, not luck, but that now rather quaint concept …. corruption. Corruption on this scale will undermine the legitimacy of our system. This would be an unmitigated disaster.

Innovation represents the only hope for a beneficial black swan that will enable western governments to meet their promises. That will enable developed country citizens to have anything like the life style they are expecting. It must not be sabotage in a march to neo-luddite or pseudo-socialist alternatives. Neither they nor gangsta capitalism or its related connected capitalism will enable sufficient innovation. It really is a case of go forward fast or experience a collapse of Western civilization and much of the existing world order.

There is an interesting video here on the failure of our societies to continue to get big things done. It makes an unstated but nevertheless devastating attack on the precautionary principle. It also touches on the loss of the BS detector that Westerners used to have. We need to turn our culture around, fast.

Graphic courtesy of The Market Oracle