# "Everything Is Rigged: The Biggest Price-Fixing Scandal Ever" **URL:** \ **Category:** Great Debates\ **Created:** [April 26, 2013, 6:17pm UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781 "2013-04-26T18:17:37Z")\ **Posts on this page:** 11\ **Page:** 3
**Author:** ![brickbacon](https://avatars.discourse-cdn.com/v4/letter/b/898d66/32.png) [@brickbacon](https://boards.straightdope.com/u/brickbacon)\ **Post date:** [April 29, 2013, 1:51am UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/41 "2013-04-29T01:51:44Z")
> [@deltasigma](#): > > If you can honestly say that with a straight face, you have no concept of what is involved and how inconceivably vast and pervasive the derivatives markets are. In which case, we have no common basis for communication. The derivatives market is something like 10x global GDP. That in and of itself doesn’t bother me too much. Why? Because most of those derivatives will never pay out. It’s like if I contracted with you that if I become President and Chief Justice of the Supreme court, you have to pay me $100 billion, and in the meantime, I will give you $5/year. Do you take that bet? Of course. Now should the world be worried that this “derivative market” we created is “worth” $100 billion when neither of us have that money? Either way, this back and forth is tiresome given your moving of the goalposts, and general misunderstanding and misstatements. If you want to continue this please answer some of the questions I asked. I have done more than answer yours. 1. Give me a plausible scenario in which the average investor is meaningfully impacted by the LIBOR scandal? 2. Given that LIBOR rates were often manipulated downward, do you think the consumers who (in theory) materially benefited should refund the money to defrauded investors? 3. Given that the manipulation was not skewed in one direction, and was not a net gain for most banks as a whole, why should we assume? 4. Even if all the banks colluded to swing LIBOR in one direction vs. another, how would they collude in a way that males them all money w/o getting caught immediately? Since some banks/traders want high rates and some want low ones, how does this scheme work if there isn’t a collective goal given the disparate ways bankers make money. 5. Do you think the Fed manipulates rates in the same way? ---
**Author:** ![brickbacon](https://avatars.discourse-cdn.com/v4/letter/b/898d66/32.png) [@brickbacon](https://boards.straightdope.com/u/brickbacon)\ **Post date:** [April 29, 2013, 2:04am UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/42 "2013-04-29T02:04:57Z")
> [@newcomer](#): > > Almost everything you wrote is half-truth, half-misrepresentation and serious lack of knowledge what LIBOR actually does to a derivative contract (not to mention misuse of term “loan”). Care to point out any specifics? > [@newcomer](#): > > Also, there is a difference in what LIBOR is for commercial banking vs. what it means in derivative trading. And? What does that have to do with anything I said? > [@newcomer](#): > > Yeah, peanuts. What makes you think Citibank’s “net interest revenue” was entirely based on LIBOR movements? > [@newcomer](#): > > BTW - As a result of the action on LIBOR read about switch in derivative contracts cash-flow calculations to OIS (Fed’s rate). Incorrect. The change was a result of the financial crisis, not the LIBOR scandal. This was because banks would not lend to one another, thus LIBOR went up dramatically, making the spread huge. See [here](http://www.derivactiv.com/resources/important-notices/liborois-discounting). > [@](#): > > What has Changed? > > In the past Derivative Dealers used a curve based on LIBOR (London Interbank Offered Rate) to discount derivative cash flows. Now some Derivative Dealers are using the overnight indexed swap (OIS) curve. OIS rates are based on Fed Funds rates rather than LIBOR. **Before the recent financial crisis it was standard practice to value derivatives using the LIBOR discount curve because LIBOR represented a “AA” rated credit (a “risk free” curve). The LIBOR and OIS curves were highly correlated, meaning there was very little difference, in basis points, between a curve based on LIBOR and a curve based on OIS rates.** For example, the spread between LIBOR and OIS was around 5-10 basis points and it did not vary by much from period to period. **However after the collapse of Lehman Brothers in September 2008, LIBOR spiked and diverged significantly from OIS and the spread widened to as much as 365 basis points. The previously negligible spread between LIBOR and OIS became significantly wider and more volatile** , which impacted the profit & loss statements of the Derivative Dealers. Another [cite](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2211800). And [another](http://marketsmedia.com/libor-to-ois-shift-challenges-buy-side/): > [@](#): > > The index is typically an interest rate considered less risky than the corresponding interbank rate (Libor). > > “OIS rates are a more accurate estimate of funding costs for fully collateralised trades,” Khan said. “Before the credit crisis, the basis between Libor and OIS was negligible, and the Libor swap market was more liquid than OIS, making Libor a widely used as a proxy for funding costs. Now, because the OIS-Libor basis is significant, the market is migrating to OIS discounting in order to more accurately value OTC derivatives.” ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 29, 2013, 2:06am UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/43 "2013-04-29T02:06:51Z")
I thought I made it clear that I wouldn’t be responding. Feel free to take your victory lap. ---
**Author:** ![brickbacon](https://avatars.discourse-cdn.com/v4/letter/b/898d66/32.png) [@brickbacon](https://boards.straightdope.com/u/brickbacon)\ **Post date:** [April 29, 2013, 2:18am UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/44 "2013-04-29T02:18:29Z")
> [@deltasigma](#): > > I thought I made it clear that I wouldn’t be responding. Feel free to take your victory lap. Right, then you responded several more times. :dubious: But thanks, I will enjoy my victory lap. Sad you seem afraid to answer some basic questions. I guess you wanted to whine instead of debate. And to **newcomer** , since you mentioned the OIS. If you think the LIBOR was being dramatically skewed by bankers for greed, why did the spread between the two benchmarks remain remarkable consistent until the financial crisis? ---
**Author:** ![newcomer](https://avatars.discourse-cdn.com/v4/letter/n/e5b9ba/32.png) [@newcomer](https://boards.straightdope.com/u/newcomer)\ **Post date:** [May 1, 2013, 1:30am UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/45 "2013-05-01T01:30:22Z")
Almost forgot about this thread. > [@brickbacon](#): > > What makes you think Citibank’s “net interest revenue” was entirely based on LIBOR movements? Do you know what is LIBOR used for in Derivative world? Other than go-to rate for float leg of the swap, of course. ---
**Author:** ![brickbacon](https://avatars.discourse-cdn.com/v4/letter/b/898d66/32.png) [@brickbacon](https://boards.straightdope.com/u/brickbacon)\ **Post date:** [May 1, 2013, 2:42am UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/46 "2013-05-01T02:42:09Z")
> [@newcomer](#): > > Almost forgot about this thread. > > Do you know what is LIBOR used for in Derivative world? Other than go-to rate for float leg of the swap, of course. I am sure you are about to tell me… much like you told me about the rationale for the switch to OIS :dubious:. You also ignored my question (to say nothing of you being wrong about the above). ---
**Author:** ![newcomer](https://avatars.discourse-cdn.com/v4/letter/n/e5b9ba/32.png) [@newcomer](https://boards.straightdope.com/u/newcomer)\ **Post date:** [May 1, 2013, 2:29pm UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/47 "2013-05-01T14:29:30Z")
> [@brickbacon](#): > > And to **newcomer** , since you mentioned the OIS. If you think the LIBOR was being dramatically skewed by bankers for greed, why did the spread between the two benchmarks remain remarkable consistent until the financial crisis? I think you are confusing \*\*OIS vs. LIBOR spread **(they are not correlated as they represent different things; the spread itself shows certain characteristics of the market but that’s all) and** LIBOR manipulation \*\*(which is when a bank that is responsible for setting it up stands to benefit from it pushing it artificially lower or higher depending on where they stand on a derivative deal). The 10 basis points spread prior to crisis was the sign that things are okay, relatively speaking. When it shot up to 364 points it meant things are not okay in global money markets. The only reason banks are switching to OIS is because of the way LIBOR is constructed. If you are a market participant that has no role in how the LIBOR is determined while your counterparty does then you have obvious disadvantage. And now that the trust is broken that LIBOR process is fair and honest (sic!) market MUST move to something else. However, it will be a temporary measure because traders always find a way. ---
**Author:** ![Kearsen](https://avatars.discourse-cdn.com/v4/letter/k/82dd89/32.png) [@Kearsen](https://boards.straightdope.com/u/Kearsen)\ **Post date:** [May 1, 2013, 2:37pm UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/48 "2013-05-01T14:37:49Z")
> [@dataguy](#): > > Yeah, that makes sense. When the wholesale price goes up the retail price goes up. So, I guess that means that prices at the pump only change when the storage tanks are filled with gas purchased at a new price. That’s fine. > > But I still move the question up one level: What makes the wholesale price of existing gasoline volatile? When the price of oil goes up, the existing gasoline has already been manufactured from oil that was purchased at some previous price. My best guess is that some kind of cash accounting is at work where all current inventory is valued at the market price, or something. If that’s the case, what’s the point of a futures market? Gasoline prices change daily. From manufacturer to supplier to retailer. When gas price goes up, it doesn’t matter if they are taking delivery of ‘new gas’ or not, the price at the pump could potentially jump. There are times that I will get gas at a discounted rate because the actual cost of the gas hasn’t gone up on the fuel they have in stock but it will on future stock. When they change the price of the gas they have stockpiled based upon the prices that change on future stock, they are ripping you off. ---
**Author:** ![brickbacon](https://avatars.discourse-cdn.com/v4/letter/b/898d66/32.png) [@brickbacon](https://boards.straightdope.com/u/brickbacon)\ **Post date:** [May 1, 2013, 6:24pm UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/49 "2013-05-01T18:24:15Z")
> [@newcomer](#): > > I think you are confusing \*\*OIS vs. LIBOR spread \*\*(they are not correlated as they represent different things; the spread itself shows certain characteristics of the market but that’s all) I am not confusing anything. They are correlated (the spread that is) to the overall health of the financial markets. If systemic, widespread manipulation of LIBOR was happening on a regular basis, it would be reflected in a spread that would seemingly fluctuate for no reason, and would do so solely because of the movement of LIBOR. However, we did not see that until the crisis. > [@newcomer](#): > > and\*\* LIBOR manipulation \*\*(which is when a bank that is responsible for setting it up stands to benefit from it pushing it artificially lower or higher depending on where they stand on a derivative deal). If that were true, than you would see evidence of that in the spread. Most graphs I see don’t show that. My question to you is why that is the case? > [@newcomer](#): > > The 10 basis points spread prior to crisis was the sign that things are okay, relatively speaking. When it shot up to 364 points it meant things are not okay in global money markets. Yes, which is exactly what I alluded to earlier. The significance of this is that people recognized that LIBOR was being manipulated in large part based on the spread, and LIBOR itself, not reflecting reality. That’s how the investigation began in earnest. People recognized the LIBOR numbers were cooked to overstate the health of the banks. There was evidence of clear, demonstrable skewing of the numbers, even recognizable from the outside. While I am glad it one sense they did that, it is clear that such significant manipulation likely could not at an earlier point because the banks did not all have collective strategic and tactical goals as they did at the beginning of the crisis. At that point, all of them wanted to survive, so lowering LIBOR as to present a better health picture made collective sense. All these guys want to have jobs the next day, so doing what you need to do to survive makes sense. Even with that goal, collusion is necessary to make the numbers appear plausible, which is what they likely did. Most other times, such an incentive wouldn’t exist. That is, every bank would not want the same thing (high/low LIBOR) at the same time. Effective collusion is based on that. It’s hard to effectively conspire to commit fraud if we both want diametrically opposite things. It’s even harder if two groups at the same bank want different things (as they often did in these cases). Which is why the attempted manipulation doesn’t correlate with the individual bank’s overall NET positions. It would just theoretically help a group or a handful or traders friendly with the guy submitting the numbers. Which is why this mostly boils down to a friend “helping” a friend rather than WIDESPREAD CORRUPTION IN AN EFFORT TO STEAL TRILLIONS. It’s just not likely such a scheme would be effective and unnoticed for as long as it was alleged to have occurred. Now I am not saying they didn’t try. I just think it was not likely successful. Certainly not successful enough to affect the average Joe on the street. I said this not only because of the way LIBOR is calculated [outliers are tossed, submissions (I believe) are public], but also because there smart people who would have a vested interest in making sure such a scheme didn’t happen. This isn’t a case of dumb money vs. smart money, or even the rich and powerful vs. poor and weak. The counter parties that would lose money are every bit as greedy, manipulative, and (most importantly) prepared as the guys alleged to have run this scam. Just look at how this all come to a [head](http://www.bbc.co.uk/news/business-18671255). At the height of the crisis, the compliance guy at Barclay’s, a bank which was alleged to also be cooking the numbers, ratted out the other banks, yet said his bank’s numbers were reasonable. > [@](#): > > In December, a Barclays compliance officer contacted the UK banking lobby group British Bankers’ Association (BBA) and the FSA and described “problematic actions” by other banks, saying they appeared to be understating their Libor submissions, according to US regulator the Commodity Futures Trading Commission (CFTC). > > On 6 December, a Barclays compliance officer contacted the FSA, according to the FSA report, to express concern about the Libor rates being submitted by other banks, **but did not inform the FSA that its own submissions were incorrect, instead saying that they were “within a reasonable range”.** > > The FSA said that the same compliance officer then told Barclays senior management that he told the FSA “**we have consistently been the highest (or one of the two highest) rate provider in recent weeks, but we’re justifiably reluctant to go higher given our recent media experience**”, and that the FSA “agreed that the approach we’ve been adopting seems sensible in the circumstances”. > > In early December, the CFTC said that the Barclays employee responsible for submitting the bank’s dollar Libor rates contacted it to complain that Barclays was not setting “honest” rates. People like this do not generally run effective cartels or conspiracies. As soon as his bank was threatened (in a way his bank is alleged to have threatened others for years), he decided to rat everyone out while claiming he has clear hands. > [@newcomer](#): > > The only reason banks are switching to OIS is because of the way LIBOR is constructed. If you are a market participant that has no role in how the LIBOR is determined while your counterparty does then you have obvious disadvantage. And now that the trust is broken that LIBOR process is fair and honest (sic!) market MUST move to something else. However, it will be a temporary measure because traders always find a way. No, they switched because of volatility. I provided several cites detailing this rationale. It had very little to do with allegations of LIBOR manipulation. It was the financial crisis that led to this change. ---
**Author:** ![spifflog](https://avatars.discourse-cdn.com/v4/letter/s/c5a1d2/32.png) [@spifflog](https://boards.straightdope.com/u/spifflog)\ **Post date:** [May 3, 2013, 4:26pm UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/50 "2013-05-03T16:26:09Z")
> [@Eonwe](#): > > The average citizen can’t do much. My point is that the ship has sailed. Somewhere along the line normal people became dependent on financial institutions in order to maintain an “average” lifestyle. I don’t know how we back away from that, but as long as we are swimming in those waters, we are nothing but kept bait fish. We get fed small amounts to keep us happy, while the sharks gobble us whole. I assume you’re just bitching, but in the off chance you aren’t . . . the system worked just fine for me. This lower middle class bricklayer’s son borrowed money to go to a community college, and then to a state school. Then I received a bank loan to buy a car, then a mortgage for a house, and then one for my current home. All those loans are paid off now. I would have none of this without the banking system, but some crazy rich kid who had money on his own would have. What do you want? Piles of cash left at the corner for you? So I guess I don’t see it the way you do. ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [May 5, 2013, 3:07pm UTC](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781/51 "2013-05-05T15:07:28Z")
> [@deltasigma](#): > > **brickbacon** : Do you understand how fixed income markets work? Investors LOSE money when interest rates go up and MAKE money when they go down - Since nobody else laughed at this, I thought I’d jump in and make a fool of myself… You do realize that for every Investor there is a borrower? And I think you meant speculator, not investor, anyway. That’s obvious right? [Previous page](https://boards.straightdope.com/t/everything-is-rigged-the-biggest-price-fixing-scandal-ever/656781.md?page=2)