Will the LIBOR banking scandal manage to finally force banking reform in the US?

[Whack-a-Mole]

I know this is not getting much attention in the US media (some but so far, as some pundits have noted, headline news seems more concerned about Tom and Katie getting divorced).

However, this distinctly qualifies as a Big Dealtm.

Here is one take on it by Matt Taibbi at Rolling Stone:

But to me what’s missing from all of this is the “Holy Fucking Shit!” factor. This story is so outrageous that it shocks even the most cynical Wall Street observers. I have a friend who works on Wall Street who for years has been trolling through the stream of financial corruption stories with bemusement, darkly enjoying the spectacle as though the whole post-crisis news arc has been like one long, beautifully-acted, intensely believable sequel to Goodfellas. But even he is just stunned to the point of near-speechlessness by the LIBOR thing. “It’s like finding out that the whole world is on quicksand,” he says.

SOURCE: http://www.rollingstone.com/politics/blogs/taibblog/why-is-nobody-freaking-out-about-the-libor-banking-scandal-20120703


For those unaware LIBOR is the London Interbank Offered Rate and, according to the Wall Street Journal (http://bit.ly/LUNmYR), $800 trillion (yes you read that right...trillions) in securities and loans are linked to the LIBOR rate.

Sixteen banks are involved with setting this rate each day and it is being claimed that Barclays bank was involved in manipulating this rate for their own profit. Their CEO, Bob Diamond, has just resigned (http://www.washingtonpost.com/business/barclays-boss-diamond-quits-with-immediate-effect-latest-scalp-of-price-fixing-scandal/2012/07/03/gJQAFeDxJW_story.html) over it as has its chairman Marcus Agius.

Now, it may seem that this is just a Barclays thing but it can't be. The way the LIBOR is set is the top four and lowest four reported rates are tossed out each day and the rate is set by the middle eight banks. In order to manipulate the rate you need the cooperation of most of the banks to make it happen.

Citibank, JP Morgan Chase and Bank of America participate in this (so basically the three biggest banks in the US).

This is yet one more example among many that the banks are making up their own rules and everyone else be damned. Will this one be big enough for us to finally force some change or will they piously claim it was just some rogue traders and they will be sure to clean up their own mess...again?

[elucidator]

Scandal? There was a scandal? It was in, like, England, or someplace, right?

[JLRogers]

What elucidator said. Reform is off the table. Americans are too busy watching trash TV and self-medicating with booze and processed foods. Panem et circenses keep us docile.

And no, that is not an allusion to Hunger Games. :p

[Whack-a-Mole]

Scandal? There was a scandal? It was in, like, England, or someplace, right?

Yeah but as noted there is a good chance American banks are involved.

Certainly some traders in New York, at the least, were involved:

In one email dated November 22, 2005, a senior trader in New York wrote to a trader in London:

"WE HAVE TO GET KICKED OUT OF THE FIXINGS TOMORROW!! We need a 4.17 fix in 1m (low fix) We need a 4.41 fix in 3m (high fix)." 1m and 3m refer to one-month and three-month Libor rates.

Nearly six months later, on February 1, 2006, another New York trader asks a London trader to keep the three-month Libor rate low until the bank gets out of its position:

"You need to take a close look at the reset ladder. We need 3M to stay low for the next 3 sets and then I think that we will be completely out of our 3M position. Then its on. [Submitter] has to go crazy with raising 3M Libor."

SOURCE: http://buzz.money.cnn.com/2012/07/04/barclays-libor-email/

[John Mace]

What is it about people with the last name "Diamond"?

[clairobscur]

Thanks for starting this thread, because there was something I wondered about regarding this scandal : So far there has only been a massive fine, but coud companies (especially other banks) or maybe even individuals sue the involved banks for losses incured as a result of the manipulation of the LIBOR and IBOR rates? If so, how massive could be the damages claimed? Could fines and damages be a threat for the very survival of the guilty banks?

Also, could individuals who provided the falsified figures to authorities be *criminally* liable? What about the traders who told them what rates they should declare?

[clairobscur]

Now, it may seem that this is just a Barclays thing but it can't be.?

My understanding was there was already ample evidences of involvment of other banks, like in email exchanges "WTF, your guys aren't declaring the correct fake rate we had agreed upon! Rectify ASAP, pretty please" (paraphrased)


Maybe I'm too naive but I'm quite surprised that there hasn't been a single whistleblower given the number of individuals involved in the manipulation.

[John Mace]

The news story I heard yesterday indicated there could be rather large class action suits since LIBOR is used to set mortgage rates.

[RitterSport]

What is it about people with the last name "Diamond"?

Yeah, that Neil Diamond, not bringing anyone flowers anymore. Or, did you mean Jamie Dimon, from JP Morgan?

LIBOR is definitely used for credit card rates in the US, but I thought LIBOR mortgages were more of an English thing. Maybe ARMs use LIBOR?

[John Mace]

Yeah, that Neil Diamond, not bringing anyone flowers anymore. Or, did you mean Jamie Dimon, from JP Morgan?
Only heard the names on the radio-- haven't seen them written.

LIBOR is definitely used for credit card rates in the US, but I thought LIBOR mortgages were more of an English thing. Maybe ARMs use LIBOR?
Yes, ARMs. Not all, but lots.

[XT]

Will the LIBOR banking scandal manage to finally force banking reform in the US?

Why would it? Simply because some US banks are part of the system, and might (I've seen no actual evidence) have been fixing their own rates? I don't see how or why that would cause a major reform of the US banking system...I see that as possibly causing those US banks who might have fixed their rates to also have to pay a penalty.

I found this (http://www.brisbanetimes.com.au/business/libor-scandal-explained-20120704-21hie.html) quick and dirty explanation of the scandal for anyone interested:

What is Libor? Libor (London interbank offered rate) is one of the key European benchmarks for the interest rate that banks charge each other to lend money. It is calculated by averaging borrowing costs between banks. The Australian equivalent is called the bank bill swap rate.

Why is it important? Lending rates to households and businesses depend on an accurate market mechanism. Given trillions of dollars of financial products globally are priced using Libor rates - including some Australian bank debt - the benchmark is hard-wired into the world's financial system. Inaccurate figures would serve to undermine market confidence.

How was Barclays involved? At the height of the financial crisis, the British investment bank lowered its Libor submissions to give the illusion it was in better financial shape than its true borrowing costs were reflecting. In its defence, Barclays claims other banks were already underpricing their own Libor rate submissions. This left Barclays exposed as an outlier while submitting accurate rates (see chart) potentially stoking concerns over its health.
Advertisement: Story continues below

But regulators claim the rate-rigging occurred as early as 2006, suggesting trading profits were also a motivation. Barclays has been fined the equivalent of $440 million by regulators in the US and Britain. Attention has now turned to more than 10 big banks scattered around the globe, including for their role in manipulating Libor.

What about Australian rates? Under the British system, the process that banks use to come up with their individual rates is opaque and not based on actual transactions. Australia's BBSW rates are more robust, being priced on physical transactions between banks.


-XT

[XT]

Here's (http://www.theaustralian.com.au/business/wall-street-journal/libor-scandal-engulfs-rbs-ubs-deutsche-citi-boa-jpmorgan-barclays/story-fnay3ubk-1226417958257) a bit more detailed article on the scandal, if anyone is interested.

A DAY after abruptly resigning amid a mushrooming scandal over interest-rate manipulation, former Barclays chief Robert Diamond was assailed by British politicians for the bank's actions, in a preview of the scrutiny that other big lenders under investigation are likely to face.

Barclays last week agreed to pay $US453 million ($441.2m) to settle allegations by US and British authorities that the British bank tried to manipulate the London interbank offered rate, or Libor, which is the benchmark for interest rates on trillions of dollars of loans to individuals and businesses around the world.

Barclays executives initially believed they could ride out any resulting fallout from the settlement and accompanying admission that Barclays had acted improperly. But by Tuesday, the scandal had prompted the resignations of Mr Diamond, Barclays chairman Marcus Agius and chief operating officer Jerry del Missier, some of the British banking industry's most prominent figures. No individuals were charged.

The Libor affair isn't solely a Barclays problem and the scandal has also tainted Royal Bank of Scotland. A class action in the US over the setting of Libor rates has named Bank of America, Citigroup, JPMorgan Chase & Co, UBS, Deutsche Bank and Barclays.

In the UK, the scandal has quickly touched other top figures in the British political and finance establishment. That is partly because Mr Diamond sought to deflect some of the blame by saying that Mr del Missier, the COO and one of his deputies, believed that by lowering Barclays's Libor submissions he was acting at the behest of a top Bank of England official, Paul Tucker. That allegation is explosive, since Mr Tucker has been regarded as a front-runner to become the central bank's next governor.

Libor, a measure of how much banks have to pay to borrow from each other, is drawn up daily following submissions from a group of 16 giant banks, which report their borrowing costs for loans of different maturities and in different currencies.

Investigations of more than a dozen banks, by authorities on three continents, are starting to unearth evidence that some banks improperly sought to manipulate Libor. Regulators say that some banks, including Barclays, submitted artificially low readings during the early days of the financial crisis as part of an effort to mask the financial problems they were encountering.

Analysts say the industry may have to shell out billions of dollars to settle the cases and other bank chiefs could find themselves in the crosshairs.

Yesterday's three-hour parliamentary hearing in London didn't yield much new information about what some industry executives say was a widespread practice of submitting faulty Libor data. It also didn't fully clarify the roles played by Mr Tucker or British government officials.

-XT

[Whack-a-Mole]

Why would it? Simply because some US banks are part of the system, and might (I've seen no actual evidence) have been fixing their own rates? I don't see how or why that would cause a major reform of the US banking system...I see that as possibly causing those US banks who might have fixed their rates to also have to pay a penalty.


Because I think this is bigger than most people are aware of. Partly because this is obscure and complex finance shit that doesn't lend itself to our short attention span and partly because the MSM is not really jumping on it*.

I doubt I need to remind people here (but I will anyway) that the financial systems of the world are deeply intertwined. It is a gigantic house of cards and poking at one corner may seem remote to some but have the potential to have far flung knock-on effects.

Further, it is hard to imagine this as a UK-only scandal. As mentioned the way the LIBOR is set up it is almost impossible to imagine how RBS and Barclays alone could manipulate rates (remember the top four and bottom four reported rates are tossed and the rate is pegged from the middle eight reporting). So, Barclays could fudge numbers but alone would have little to no effect on this. It almost certainly requires the collusion of many more banks.

More broadly is faith in the financial system. It is becoming increasingly apparent that the game is rigged against retail investors. Institutional investors are running the game and stacking the deck against everyone else. This is no small thing and if retail investors lose faith and decide it is not in their interest to play the game because it is rigged that would also have profound impacts on global finance.

How many body blows can the system take before people stop wanting to participate?


*As for the MSM not reporting it seems some did try and were bullied into backing off the story:

Last week, Gillian Tett of the Financial Times wrote how five years previously, she and her fellow journalists were intimidated into backing off of a huge story about banks manipulating LIBOR.

<snip>

At the heart of the allegations is what appears to be a blasé criminal conspiracy within Barclays. Moreover, Tett is correct. Barclays is far from alone.

Unfortunately, the intimidation was a success. The BBA and Barclays chose their word carefully, because accusing journalists of "scaremongering" suggests they are irresponsible sensationalist hacks. In essence, through lies and intimidation, they threatened to ruin careers.

SOURCE: http://www.huffingtonpost.com/janet-tavakoli/financial-journalism-some_b_1647093.html


ETA: I will also note the fines they are forced to pay are laughable in the scheme of things. It'd be like you robbing a bank and if caught your penalty is having to return some of the money.

[Whack-a-Mole]

Why would it? Simply because some US banks are part of the system, and might (I've seen no actual evidence) have been fixing their own rates? I don't see how or why that would cause a major reform of the US banking system...I see that as possibly causing those US banks who might have fixed their rates to also have to pay a penalty.


Some more info that this may be broader than a UK thing:

Banks across the world were fixing interest rates in the run-up to the financial crisis but regulators failed to take action to stop it, the former head of Barclays claimed yesterday.

Giving evidence to Parliament Bob Diamond said Barclays had raised the issue of banks ‘under-reporting’ the true amount they were having to pay to borrow money but were ignored.

SOURCE: http://www.belfasttelegraph.co.uk/news/local-national/uk/bob-diamond-banks-across-the-world-were-fixing-interest-rates-in-runup-to-the-financial-crisis-16181211.html

[clairobscur]

I found this (http://www.brisbanetimes.com.au/business/libor-scandal-explained-20120704-21hie.html) quick and dirty explanation of the scandal for anyone interested:

-XT

But this (Barclays fixing its figures to look better) is only the tip of the iceberg (and the reason why Barclays was fined).

What is now alleged is that a number of banks colluded to fix the LIBOR and IBOR rates so that they could make money on related instruments, knowing in advance what the rates would be. Some of the emails published read something like "we put Y money into this, so it would be nice if you made the rate to be X". It is alleged that traders would routinely call whoever was in charge of the official declaration to tell them what fake rate should be declared, and that representatives of the involved banks would negotiate about the future fixed rates.

This is an entirely different level of manipulation, and vastly more infuriating.

[elbows]

But where Brits like to drag their shit into the open and deal with it, American's somewhat prefer the 'head in the sand' approach.

In Britain some CEO recipients of mega bonuses, were actually shamed into returning them. That could not happen in the US. There is no shame. And besides, whatever it is, they'd rather remain ignorant than deal with it. Not a single wall street reform has been put into place since Obama took office. Not one change.

[Ulfreida]

The time when I hoped that the vast banking frauds and scandals that have caused ruin and havoc in the US economy would be corrected and those responsible brought to justice and new regulation and oversight be instituted has long since passed.

The US political system is constructed such that all politicians must grovel to the corrupt banks in order to stay in power. Can you say Timothy Geitner? I have despaired.

[Whack-a-Mole]

The time when I hoped that the vast banking frauds and scandals that have caused ruin and havoc in the US economy would be corrected and those responsible brought to justice and new regulation and oversight be instituted has long since passed.

The US political system is constructed such that all politicians must grovel to the corrupt banks in order to stay in power. Can you say Timothy Geitner? I have despaired.

Generally I agree but I am hoping (a tiny hope) this may be different.

Nothing happens as long as those with the money are riding on the gravy train. However, shit moves fast when you start taking money from those people. Witness Madoff. Not like he was the only crook on Wall Street but instead of ripping off grandma he ripped off other rich people. He went to jail so fast it was head spinning as these things go.

In this case the banks are making money but they are ripping off other huge investors who are having the game rigged against them. This is why people on Wall Street are actually pretty appalled by this one.

I dunno, maybe it will be another smoke-and-mirror show with nothing happening but it certainly is yet another sign of profound problems with the financial markets and sooner or later something will give and the house of cards will come tumbling down and it will not be pretty.

It is important to restore some faith in the markets and I hope someone who can do something about this recognizes that.

[grude]

I believe the public in the US is becoming burned out at wall street rage, justified or not.

I doubt the story will stir much public interest.

[Simplicio]

I think public outrage over Tom and Katie's divorce will finally force banking reform.

[Typo Negative]

Any chance Diamond and\or other conspirators may actually go to prison?

[The Niply Elder]

But wait: if they were underreporting their borrowing costs, doesnt that mean that they would take a loss on borrowing that money? I mean, they are still defrauding their investors, but still. If i run a business and i underreport my expenditures, and continue to do business, eventually i will have to report all those expenses in the yearly reports. I would be more worried if banks overreported their expenses, as that would mean the individuals involved could be skimming off or padding the expenses for their own profit.

[puddleglum]

But wait: if they were underreporting their borrowing costs, doesnt that mean that they would take a loss on borrowing that money? I mean, they are still defrauding their investors, but still. If i run a business and i underreport my expenditures, and continue to do business, eventually i will have to report all those expenses in the yearly reports. I would be more worried if banks overreported their expenses, as that would mean the individuals involved could be skimming off or padding the expenses for their own profit.

As I understand it they were defrauding investors. They wanted some investors to help shore them up during the financial crisis but were worried that if they showed borrowing costs higher than normal that would lead the investors to doubt their solvency and not invest.
Defrauding investors is already illegal, there does not need to be new laws to stop what is already illegal. It is like saying "Will the Sandusky case finally get states to outlaw child molesting?"

[Whack-a-Mole]

As I understand it they were defrauding investors. They wanted some investors to help shore them up during the financial crisis but were worried that if they showed borrowing costs higher than normal that would lead the investors to doubt their solvency and not invest.
Defrauding investors is already illegal, there does not need to be new laws to stop what is already illegal. It is like saying "Will the Sandusky case finally get states to outlaw child molesting?"

Right.

We just need to enforce the laws but the foxes are in charge of the hen house.

[Simplicio]

As I understand it they were defrauding investors. They wanted some investors to help shore them up during the financial crisis but were worried that if they showed borrowing costs higher than normal that would lead the investors to doubt their solvency and not invest.

That was part of it, but the larger scandal seemed to be that the banking part of Barclays manipulated the LIBOR numbers in such a way as to advantage the trading part of Barclays.

Defrauding investors is already illegal, there does not need to be new laws to stop what is already illegal. It is like saying "Will the Sandusky case finally get states to outlaw child molesting?"

But we'd like laws that make it more difficult to commit crimes, not just punish people once the crime has already been committed. One hopes that Penn State will change its policies regarding child-abuse reporting in the wake of the Sandusky thing to make it less likely to happen again, rather then just settle with the fact that Sandusky will go to jail. The obvious change here is the one mentioned in the WSJ article, require banks to actually submit a record of their transaction costs instead of self-reporting.

[LonghornDave]

LIBOR is used as the benchmark rate for nearly all floating rate corporate loans in the world, including the U.S.

Also, when talking about total dollar amount of financial products ($800 trillion), realize that these all net to a much smaller number. Let's say I have a floating rate loan for $100 million. I could then get an interest rate swap of $100 million to move from floating to fixed (now we are at $200 million). Then I decide I want to go back to floating but capped at no higher than rate x and a floor of no lower than rate y. I get another swap to go back from fixed to floating and I buy one option to set a floor and sell one option to set a ceiling. I've just added another $300 million. We now have $500 million worth of financial products but really there is only one loan of $100 million that has a rate cap and a rate floor.

[Whack-a-Mole]

LIBOR Banking Scandal Deepens; Barclays Releases Damning Email, Implicates British Government

Former Barclays CEO Bob Diamond is testifying before parliament in London today, and that's sure to bring some shocking moments. But there's already been one huge stunner. In advance of that testimony, Barclays released an email from October 29, 2008, written by Diamond to then-Chairman John Varley and COO Jerry del Messier (who also stepped down yesterday). The email from the CEO to the other two senior Barclays execs purports to detail the content of the conversation Diamond had with Bank of England deputy governor Paul Tucker that same day.

In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from "a number of senior figures within Whitehall" – that is, the British government – expressing concern about Barclays' high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were.

SOURCE: http://www.rollingstone.com/politics/blogs/taibblog/libor-banking-scandal-deepens-barclays-releases-damning-email-implicates-british-government-20120704?utm_source=dailynewsletter&utm_medium=email&utm_campaign=newsletter


This is becoming a real shit storm in the UK. One thing the powers that be have learned in the US is to never throw your people under the bus no matter how bad they screw up. You pat them on the back and give them raises or awards and look in the camera with a straight face and tell the world how awesome they are (looking at you Bush with the Presidential Medal of Freedom Award to George Tenet).

If you don't do that it becomes cover-your-ass time and the facade crumbles as everyone takes pot shots.

We need something like that over here.

[Whack-a-Mole]

For those who still think this is just a UK problem and/or much ado about nothing (bolding below mine):

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.

SOURCE: http://www.economist.com/node/21558281?fsrc=scn/rd_ec/the_rotten_heart_of_finance

[elucidator]

Well, heck, it their money, isn't it? They let us handle some of it, every once in a while, before we hand it back to them. Damned white of them.

[Nancarrow]

ETA: I will also note the fines they are forced to pay are laughable in the scheme of things. It'd be like you robbing a bank and if caught your penalty is having to return some of the money.

Actually the fines are even less punitive than they seem. Because the fines are applied to banks. Institutions that provide services to customers... for a fee. A fee that can be changed at will... by the bank. So a fine to a bank quickly becomes a tax on customers.

So, a couple of Mondays ago, I read on the BBC news website - Barclays to be fined £298 million for fixing interbank rates.

A couple of days later - Bob Diamond - 'I will NOT resign'. (well there was a small silver lining there at least)

A couple of days later... an email in my inbox. Ooh, I love emails! *click*


Dear Mr [Nancarrow]

We are writing to let you know about a change to the interest rates on your Barclaycard account.

We may change our interest rates if there is a change in our costs, including those relating to funding, the risk of lending and of operating your account.

Your standard rate (including purchases) will increase from 16.9% p.a. to 21.9% p.a.


Fuck the fucking fuckers. :mad:

[Evil Captor]

Generally I agree but I am hoping (a tiny hope) this may be different.

Nothing happens as long as those with the money are riding on the gravy train. However, shit moves fast when you start taking money from those people. Witness Madoff. Not like he was the only crook on Wall Street but instead of ripping off grandma he ripped off other rich people. He went to jail so fast it was head spinning as these things go.

In this case the banks are making money but they are ripping off other huge investors who are having the game rigged against them. This is why people on Wall Street are actually pretty appalled by this one.

I dunno, maybe it will be another smoke-and-mirror show with nothing happening but it certainly is yet another sign of profound problems with the financial markets and sooner or later something will give and the house of cards will come tumbling down and it will not be pretty.

It is important to restore some faith in the markets and I hope someone who can do something about this recognizes that.

One of the reasons Madoff went to jail so fast was he was ripping off the mob, specifically some Russian mobsters, and he was more afraid of being killed by them than by being in jail, so he didnt fight it.

[Evil Captor]

Things will not change in the US unless Wall Street wants them to. They OWN the US government. This is not a democracy, it's a plutocracy, and will remain one until we get campaign finance reform instituted.

[Simplicio]

One of the reasons Madoff went to jail so fast was he was ripping off the mob, specifically some Russian mobsters, and he was more afraid of being killed by them than by being in jail, so he didnt fight it.

Sounds like BS. Madoff has already been the target of prison violence, I imagine if the Russian mob wanted to kill him, they'd have a far easier time of it when he was in jail instead of outside where he could spend part of his fortune on security measures.

And there was no way he was escaping spending the rest of his life in jail, whether he fought it or not.

Do you have a cite?

[Evil Captor]

Sounds like BS. Madoff has already been the target of prison violence, I imagine if the Russian mob wanted to kill him, they'd have a far easier time of it when he was in jail instead of outside where he could spend part of his fortune on security measures.

And there was no way he was escaping spending the rest of his life in jail, whether he fought it or not.

Do you have a cite?

I've got cites, but no hard evidence:

CNBC video. (http://video.cnbc.com/gallery/?video=987308800)

Well actually, this article from the New York Times says Russian oligarchs invested in Madoff:

Russian "oligarchs" (http://www.nytimes.com/2009/01/07/business/07medici.html?_r=3&ref=business)

Interesting that the woman who led them to invest in Madoff went into hiding.

[Whack-a-Mole]

Actually the fines are even less punitive than they seem. Because the fines are applied to banks. Institutions that provide services to customers... for a fee. A fee that can be changed at will... by the bank. So a fine to a bank quickly becomes a tax on customers.

So, a couple of Mondays ago, I read on the BBC news website - Barclays to be fined £298 million for fixing interbank rates.

A couple of days later - Bob Diamond - 'I will NOT resign'. (well there was a small silver lining there at least)

A couple of days later... an email in my inbox. Ooh, I love emails! *click*

Fuck the fucking fuckers. :mad:

Yep.

The Royal Bank of Scotland is about to be fined $233 million (£150 million pounds) for its role in the Libor-rigging scandal.

<snip>

The bank, which is 82 per cent owned by the taxpayer, is preparing for a political firestorm over the affair because it believes that it has no power to claw back bonuses from the traders responsible. Instead, the expected fines would be borne by the shareholders — largely the Government.

SOURCE: http://www.rollingstone.com/politics/blogs/taibblog/another-domino-falls-in-the-libor-banking-scam-royal-bank-of-scotland-20120629?utm_source=twitterfeed&utm_medium=twitter


So the bankers made personal fortunes and everyone else is left holding the bag. They must be laughing their asses off.

[elucidator]

No, they have people for that sort of thing.

[Robot Arm]

Further, it is hard to imagine this as a UK-only scandal. As mentioned the way the LIBOR is set up it is almost impossible to imagine how RBS and Barclays alone could manipulate rates (remember the top four and bottom four reported rates are tossed and the rate is pegged from the middle eight reporting). So, Barclays could fudge numbers but alone would have little to no effect on this. It almost certainly requires the collusion of many more banks.I've been wondering about that "toss out the top four and the bottom four" method. Clearly no single bank, acting alone, could set the rates to whatever value they chose; but it seems that one bank could influence them up or down, however slightly, as they wanted.

Imagine a situation with all banks fairly reporting their rates. Some days, Barclays' number will be in the top four, and be disregarded in setting the rate. Some days they'll be in the bottom four, and some days in the middle. Contrast that with the case of them trying to manipulate rates. Suppose they want the rate to be higher than it fairly would, and they report a slightly higher number. Now they'll always be in the top four. Some days, that will make no difference. Some days, they'll displace another bank's number out of the top four and into the middle eight, where it can only make the final LIBOR number higher than it otherwise would have been.

It would be a minor effect, to be sure, but with the sums involved even a hundreth of a percent would be significant.

[Whack-a-Mole]

I've been wondering about that "toss out the top four and the bottom four" method. Clearly no single bank, acting alone, could set the rates to whatever value they chose; but it seems that one bank could influence them up or down, however slightly, as they wanted.

Imagine a situation with all banks fairly reporting their rates. Some days, Barclays' number will be in the top four, and be disregarded in setting the rate. Some days they'll be in the bottom four, and some days in the middle. Contrast that with the case of them trying to manipulate rates. Suppose they want the rate to be higher than it fairly would, and they report a slightly higher number. Now they'll always be in the top four. Some days, that will make no difference. Some days, they'll displace another bank's number out of the top four and into the middle eight, where it can only make the final LIBOR number higher than it otherwise would have been.

It would be a minor effect, to be sure, but with the sums involved even a hundreth of a percent would be significant.

Originally the fudging seemed to move the price only a few basis points. Then it got worse:

Almost all the banks in the LIBOR panels were submitting rates that may have been 30-40 basis points too low on average.

SOURCE: http://www.economist.com/node/21558281


Hence the point that this is a global banking issue and not just one or two banks in the UK.

[septimus]

Also, when talking about total dollar amount of financial products ($800 trillion), realize that these all net to a much smaller number.

Yes, but the derivatives have values tied to interest rate(s) so the effect of a rate change does get multiplied (albeit not multiplied by any simple linear factor).

[adaher]

Um, wasn't Dodd-Frank reform? What kind of reforms are you looking for that weren't already part of Dodd-Frank?

[Whack-a-Mole]

Um, wasn't Dodd-Frank reform? What kind of reforms are you looking for that weren't already part of Dodd-Frank?

Making the SEC actually do its fucking job for starters. The foxes are currently in charge of the hen house. That needs to change.

How many people got in trouble for the 2008 economic crisis?

[adaher]

Since financial regulation, like most business regulation, is complex, governments have no choice but to have industry people do the watching. This actually wasn't too controversial when it first started and we still support the concept for things like medical boards. You don't hear too many people say that if only doctors weren't on medical boards, things would be so much better. Likewise, you can't use poets and beekeepers to regulate the financial industry. So it's never going to work very well. It just has to work well enough to prevent disaster.

As for people getting in trouble, that involves proving individual criminal actions, something that was mostly done by people lower on the totem pole. The government wouldn't find it very satisfying to make a few thousand Joe Briefcases do a perp walk.

[Carmady]

Those responsible should have their fortunes mostly stripped away and be forced to live the rest of their lives on only a few hundred million dollars each.

[elucidator]

Pour encourager les autres, to be sure. Stern, but fair.

[adaher]

But are not the people also responsible? It was said before the 1929 stock crash that when the janitor starts giving you stock tips, it's time to get out of the market. Likewise, the real estate bubble created a situation where millions of people got greedy and thought they could make easy money, facilitated by loans which they ideally hoped to never even make a single payment on before flipping the house. Bubbles require the active participation of the masses. And once the masses are involved, things take on a momentum all their own. No one wants to be a party pooper and anyone who tries is vilified. And if a recession had come because the banks prudently decided to cut back on lending, who would have been blamed for the recession? The banks. Because no one would know, or even want to know, that they'd prevented something far worse.

[Esox Lucius]

But consumers, including janitors, get their investment advice from bankers and stock brokers who are trusted to know better, especially since the experience of 1929. That saying should be amended to: "When the janitor starts giving you stock tips, don't trust stock brokers/bankers anymore and get out of the market".

[adaher]

Actually, middle class folks who start trying to make money in the markets tend to get their info from "get rich quick" books. They actually tend to avoid the professionals since professionals charge fees.

Now don't get me wrong, I think middle class and even poor people should save and invest in the markets, but there's a tried and true way to do this and during a bubble a lot of people forget the rules. They think it's different this time, they can make big returns and never risk a loss. I remember trying to tell people online and in person tha investing in real estate was getting to be stupid because the only way people could afford it was with special loans. I was assured that since people had to live in houses, values could never drop. So it's hard for me to hold people blameless. They simply weren't tricked by the bankers. If anything, the bankers just got infected with the same irrational exuberance everyone else did. And the same thing happened during the 90s stock bubble. IT's not as if the industry tricked people into investing in overpriced tech stocks. The big institutions were doing it too! Everyone goes nuts during bubbles.

[septimus]

I was assured that since people had to live in houses, values could never drop. So it's hard for me to hold people blameless. They simply weren't tricked by the bankers. If anything, the bankers just got infected with the same irrational exuberance everyone else did. And the same thing happened during the 90s stock bubble. IT's not as if the industry tricked people into investing in overpriced tech stocks. The big institutions were doing it too! Everyone goes nuts during bubbles.

Your premise is partly incorrect, but even if correct, your implied conclusion is largely wrong.

Home buying in the 2000's and stock buying in the 1990's were touted very widely, with magazines, newspapers, bankers, brokers, etc. all united in preaching the message that prices would never fall. People reluctant to buy expensive houses were coaxed into it by brokers. Many of these commentators and brokers were themselves gulled by the bubble's illusions, but not all. One of the highest rated supply-side analysts on Wall St. became famous for strongly recommending stocks publicly that he was calling "dogs" in e-mails to preferred customers. (I still don't understand why he wasn't sent to prison.) Perhaps a large majority of brokers and commentators were as "nuts" as most of the rest of us, but it would be naive to disbelieve that at the very top of the financial food chain, bankers were well aware bubbles burst and were laughing privately at the fortunes snookered from the gullible.

So the premise that the common man fell victim to his own greed is incomplete. He had a lot of help; naive homebuyers were strongly urged to buy homes more expensive than they'd intended.

But even if your premise were correct, the conclusion is wrong. 49% of the people are below average in intelligence. To blame such average people for being victimized by con men is inhumane. It is precisely because people are imperfect, and because average people are not expected to take a college class in Bubbles and Burstings that regulation is needed.