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Thread: The LIBOR Mess

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    Banned Eric Stoner's Avatar
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    Default The LIBOR Mess

    I know what LIBOR is but I am trying to get a handle on what Barclay's and other banks supposedly did to "manipulate" the rates. Does anybody with a better understanding know what this is about ? How did they manipulate the rates ? What reporting did they do improperly ? Were the rates too low as a result ? Too high ?

    I've read Gasparino's recent columns raking Geithner over the coals for not doing anything about this as far back as 2007. What else is new ? Geithner has been a Wall St. toady ever since his first stint at Treasury under Bob Rubin and then Larry Summers. But supposedly London agreed with his inaction or non-action .

    What are the real ramifications of this, if any ?

    I'd appreciate a little help. Many thanks in advance.

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    Default Re: The LIBOR Mess

    while there are 10 different versions of what pundits think actually happened floating around the net, the most likely correct one is as follows ... from


    (snip)"By Nomi Prins and Paul Craig Roberts

    The Real Libor Scandal

    According to news reports, UK banks fixed the London interbank borrowing rate (Libor) with the complicity of the Bank of England (UK central bank) at a low rate in order to obtain a cheap borrowing cost. The way this scandal is playing out is that the banks benefitted from borrowing at these low rates. Whereas this is true, it also strikes us as simplistic and as a diversion from the deeper, darker scandal.

    Banks are not the only beneficiaries of lower Libor rates. Debtors (and investors) whose floating or variable rate loans are pegged in some way to Libor also benefit. One could argue that by fixing the rate low, the banks were cheating themselves out of interest income, because the effect of the low Libor rate is to lower the interest rate on customer loans, such as variable rate mortgages that banks possess in their portfolios. But the banks did not fix the Libor rate with their customers in mind. Instead, the fixed Libor rate enabled them to improve their balance sheets, as well as help to perpetuate the regime of low interest rates. The last thing the banks want is a rise in interest rates that would drive down the values of their holdings and reveal large losses masked by rigged interest rates.

    Indicative of greater deceit and a larger scandal than simply borrowing from one another at lower rates, banks gained far more from the rise in the prices, or higher evaluations of floating rate financial instruments (such as CDOs), that resulted from lower Libor rates. As prices of debt instruments all tend to move in the same direction, and in the opposite direction from interest rates (low interest rates mean high bond prices, and vice versa), the effect of lower Libor rates is to prop up the prices of bonds, asset-backed financial instruments, and other "securities." The end result is that the banks' balance sheets look healthier than they really are.

    On the losing side of the scandal are purchasers of interest rate swaps, savers who receive less interest on their accounts, and ultimately all bond holders when the bond bubble pops and prices collapse.


    We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%. Also, in the UK, as in the US, the government debt to GDP ratio is rising. Currently the ratio in the UK is about double its average during the 1980-2011 period.

    The question is, why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP? One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate.

    Why isn’t this happening?

    PCR’s June 5 column, “Collapse at Hand,” explained that despite the negative interest rate, investors were making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower.

    What was pushing the interest rates lower?

    The answer is even clearer now. First, as PCR noted, Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down. Thus, causing bond prices to rise.

    Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices.


    In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England’s low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it.

    How long can the government bond bubble be sustained? How negative can interest rates be driven?

    Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?

    According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates.

    The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments. We have learned that the Fed has been aware of Libor manipulation (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. 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.

    Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts."(snip)


    Of course it only gets the most cursory mention that, while LIBOR manipulation simultaneously benefits heavily indebted gov'ts, banks with non-performing assets, existing variable interest rate borrowers, and 'rich' CDO investors, it also inflicts real 'damage' on 'middle class' savers, 'middle class' bond investors, and future 'middle class' individuals and small business borrowers ( who cannot actually get approvals for loans at these artificially low manipulated interest rates ).

    The 'mechanism' by which LIBOR was manipulated is based on the fact that LIBOR is a 'self-generated' number ... and also a number based on 'if's' rather than 'facts'. Put simply, LIBOR can be set by the various banks simply quoting that they would have charged x% interest rate if another bank wanted to borrow money. Had sizeable actual borrowing transactions taken place, it is extremely doubtful that the extraordinairly low quoted 'Interbank' interest rate would actually apply to more than the very first real loan amount, since the lending bank would have eaten huge losses by making sizeable loans at such artificially low interest rates.

    Or using a somewhat related example, higher than actual real estate market values can be temporarily set by real estate agents all quoting high prices on properties in a particular area - with perhaps one colluded property sale being made at the high price. As long as no actual transaction data is required, the fact that one home was sold in a colluded transaction but zero additional homes can be sold at these elevated quoted prices is irrelevant. But once real transaction data is applied i.e. two or three dozen houses being actually sold in 'honest' transactions at prices that are significantly lower than the originally quoted high prices, the 'fiction' is exposed and local real estate market values must be realigned with 'reality'. Per the author's argument, US and UK banks face a somewhat similar balance sheet situation of desparately wanting to avoid being forced to realign the 'book' values of various interest rate sensitive 'assets' they hold. But unlike the real estate markets, LIBOR by definition exclusively involves loans between major banks - not loans from a bank to a commercial / retail customer / other entity outside of the major banks themselves ... thus no chance of LIBOR interest rate 'price levels' being driven up by 'honest' transactions or market forces beyond the control of the bankers.


    I'll also mention that I have been deliberately avoiding the topic of 'LIE'-BOR because it is so far removed from virtually all financial vehicles and transaction types that a typical 'middle class' person would experience. However, that does not mean that the actions behind 'LIE'-BOR won't have a very real ( negative ) effect on those 'middle class' persons. In simplest terms, 'LIE'-BOR is yet another 'stealth' example of 'crony capitalism' at its finest.
    Last edited by Melonie; 07-16-2012 at 03:04 PM.

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    Default Re: The LIBOR Mess

    First of all, a BIG "thank you". 0ne problem I had were the various versions floating around about who did what. The one you posted is probably closest to the "truth".

    I think it does matter and not just because what they did affected rates for other people. It also seems to have implications for those of us who invest in bank and financial stocks. And those who buy bonds. Not so esoteric after all, was it ?
    Last edited by Eric Stoner; 07-17-2012 at 12:20 PM.

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    Default Re: The LIBOR Mess

    ^^^ well, the sad truth is that as long as the 'manipulations' continue, there won't be ANY effect on price levels for gov't bonds, for real estate bonds, or in stock valuations for the Wall St / London financial firms involved. It will only be at the point where the 'manipulations' CEASE that interest rates will rise thus causing bonds and financial stocks to fall.

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    Default Re: The LIBOR Mess

    This whole thing proves that you can do just about any financial shenanigns, and get away with it..... Not only that..... If it blows up..... You'll get a bailout.
    The country has been looted.

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    Default Re: The LIBOR Mess

    ^^^ only true if you are a 'crony'. Not true if you aren't ...


    (snip)"WASHINGTON—Four former top executives of a failed Virginia bank were charged with fraud, a rare federal criminal case against bank chiefs arising from the recent financial crisis.

    The U.S. attorney for Virginia's eastern district alleged in an indictment that those executives and a few favored borrowers orchestrated and masked fraudulent loans, in some cases to purchase properties owned by bank insiders.

    Bank of the Commonwealth failed in 2011, costing the Federal Deposit Insurance Corp. an estimated $268 million, after unsuccessfully applying for aid from the Troubled Asset Relief Program."(snip) from

    ^^^ the only significant difference about the failed Virginia bank was that no 'Friends of Angelo' politicians were involved in the alleged sweetheart loans. Well that's not strictly true, because another difference is that the Virginia bank was also loaning out depositor's money instead of taxpayers' TARP money ( which the Virginia applied for but were turned down ... proving their lack of 'crony' status ). And yet another difference is that the Virginia bankers weren't making political contributions to the 'correct' recipients to purchase 'crony' status prior to their indibtments ! Undoubtedly, other regional banks will 'read between the lines' and start taking 'correct' actions before indibtments start flying in their direction as well !!!


    And 'speak of the devil' ... I swear I couldn't make up stuff this ironic if I tried !!!

    (snip)"Yes, Chuck Schumer just said "Get to work, Mr. Chairman" right after saying that "The Fed is the only game in town... You have to take whatever actions are necessary to ensure a strong recovery." What he really meant is that my biggest donors demand a solid bonus for 2012. Who are these donors you may ask? Here they are."(snip)



    from


    As a parting comment, all I can say is that with every additional financial news announcement of this type that winds up 'leaking' out, my relocating to a 'third world country' seems less and less different than if I had stayed in New York !!! Well, except for the tax rates of course !!!
    Last edited by Melonie; 07-17-2012 at 11:31 AM.

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    Default Re: The LIBOR Mess

    More to come on the LIBOR scandal including criminal prosecutions.

    Another good piece by Matt Taibbi in the latest Rolling Stone. Reporting on U.S. v. Carollo and other criminal prosecutions , Taibbi reports how municipal financial services markets were rigged for years. Banks like JP Morgan and BOA paid hundreds of millions in fines. The brokers who were supposed to assure cities, states and public authorities the highest rate of return possible were prosecuted and convicted.

    When a public bond is sold the funds from the sale are put into escrow accounts from which the contractors for the underlying project are paid. A broker is hired to shop around and get the highest rate of return at the lowest cost for that money. Instead they were effectively bid-rigging and pocketing the difference. Just like The Mob. And they were paying off politicians like former New Mexico Governor Bill Richardson. Whom Obama's Justice Dept. declined to prosecute despite the fact that he was caught on tape soliciting campaign contributions and was handed $25,000 by one of the defendants. One of the most under-reported Wall St. scandals ever.

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    Default Re: The LIBOR Mess

    Taibbi and RS are just about the only media outlet pounding home the message that...... the country is being looted.

    Will someone from maybe...... The NY Times..... do a piece on underfunded pensions.... and private retirement accounts with no interest being paid..... Because of the ZIRP policy that is starving savers?
    The country has been looted.

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    Default Re: The LIBOR Mess

    Bernanke told Congress last week that LIBOR manipulation was "very troubling" but that banks weren't manipulating the rates for profit but just to avoid appearing "weak" during 2008 and 2009. Geithner admitted that he did nothing more than send an e-mail to the Bank of England. Both Ben and Tim could have taken U.S. banks off LIBOR and insisted that they use something else to set rates ; like the Fed's discount rate.

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