"Everything Is Rigged: The Biggest Price-Fixing Scandal Ever"

What do you think I said that contradicts what you said?

“most consumer loans don’t either”

I consider a mortgage a consumer loan.

edit: a common consumer loan.

The “invisible hand” is fisting us up the arse.

In government, we have the separation of powers in order to prevent such abuses: those who make the laws can’t be those who uphold them, as otherwise they could help themselves to near-total power. Can’t such a principle also be implemented in economics? Those who set the ‘base’ prices, the interest rates and whatnot, should be in some sense separated from those who stand to gain the most by manipulating these prices. Of course, this runs counter to ideal market situations, but then, in those situations, the problem also should not arise.

I’m not very familiar with the LIBOR or ISDA rate setting mechanisms except for the fact that most of the machinations provide the same transparency as an event horizon. You gauge the activity of the actors by second order phenomenon - what did they order for lunch, did they get any last night, etc.

Most markets have a fairly high degree of what we’ll loosely call “public” participation. The Chicago Board of Trade for example runs a variety of commodity markets that are partly electronic and partly “open outcry” where traders meet face to face in a pit.

That’s becoming rare as humans are increasingly being left out of the loop, but that trend is moderating in light of recent notable fubars like the flashcrash last year and the mini-flashcrash a few days ago when the AP newswire’s twatting feed got hacked.

I’ve been out of the business too long to know why the seeming anachronism continue to survive and honestly, most of my time in the financial industry was as an IT consultant anyway.

However even when everything is most electronic with human oversight, it still possible to game the system. Here’s a small example. HFT’s. Hight frequency traders. It’s universally denied, but it’s pretty clear that they use their vast ability to place and cancel orders in nanoseconds to probe the book of open orders for a given stock, option etc.

A little background. In the old days when you had walk to school and it was up hill both ways, when ‘digital’ meant fingers and toes, markets were run by specialist. This was guy who would control the market in a handful of stocks on a given exchange and insure liquidity for that security - a market maker essentially.

As such, he would see all of the orders coming in, what the volume, bid and ask prices where. From this information, he could set the price of the security such that it would be in equilibrium - since that’s what he needed to do to cover his own ass.

He could also make shitloads of cash. And it shouldn’t be too hard to understand why. If he sees a spike in sell orders, he can dump stock from his own acct before anyone else. Same for upswings. And this was perfectly legit. It was a perq of being a specialist. I’m sure there were restrictions of some sort, but as a general rule, these guys made out like banditos.

Having the exchanges go all electronic was an attempt to euthanize the specialist. However the HTF’ers and algo’s soon discovered that with some computing power and co-located servers, they could get a lot of the info a specialist might have access to and get paid for doing it.

Remember when I said the purpose of the specialist was to be a market maker and provide liquidity? Well, to help give the digital wankers some incentive to fill this role, it was agreed that they would be paid for keeping market volume high.

One of the things they do to get info about open orders and thus design their strategy for the day is to flood the system with hundreds or thousands of orders per minute. But they’re not legit. These orders are place and almost immediately canceled. They’re placed for the sole reaso of seeing if there are any buyers or sellers a that particular price. IOW, bit by bit, they are peeking at the open orders book. That is some straight up bullshit, aka cheating, but for whatever reason, they get away with it. I think the exchanges prefer to live in denial for whatever reason.

So things are potentially even worse than my man Matty boy describes since even if we did away with these antiquated systems today, it’s very likely that someone would find a way to game the new system as well.

Even in 2006, about 45% of mortgages were ARMs. I would imagine its considerably less now. So consumers are not dramatically affected by LIBOR.

PLEASE. Do some research before you tell me I’m full of shit. Source.

IOW, not just mortgages, but student loan, credit cards and all manner of other consumer debt.

This WAS in fact a big fucking deal and one over which people had NO control.

I didn’t say you were full of shit, I said consumers were not dramatically affected. I don’t think they were. Yes, some loans do float with LIBOR, but they are often risky variable interest rate loans like private student loans and ARMs; both of which do not make up the majority of consumer loans. US credit cards are generally not tied to LIBOR, but even if they were, a basis point difference would not really matter given APRs like 18%.

As far as mortgages, how many people do you think pay off all of their theoretical mortgage interest? Most people sell or refinance, so looking at the notional value of this debt doesn’t really reflect actual losses from interest rate manipulation. Plus, much of the fixing made loans cheaper, not more expensive. Do you think any of the consumers who saved money are gonna cut the bank a check? Are any of the subsidized borrowers gonna give money back to all the pension funds and SWFs they “defrauded”.

You are also forgetting that competition limits greed in most cases. Why? Say I do get an 5 year ARM for my house that is artificially floated to 10%. If the real cost of borrowing is 4%, another bank will help me refinance to convert my ARM to a fixed at say 6%. Or, I just walk away from my house.

As I said, the average guy was likely not screwed by all of this. Don’t believe me, look at this article on the website you cited:

Why does he say that? Not only for the reasons I outlined, but also because of the way LIBOR is calculated. Even collusion of a few banks probably wouldn’t move the number too much. The fraud we are talking about here is roughly 1 basis point. That 1/100 of a percent. Would you even notice that? Would you have walked away from a house if your bank offered you 4.26% interest instead of 4.25%? Of course not. These small movements only matter in aggregate and to people dealing with billions of dollars; not the guy buying a house or taking out school loans. At least not in terms of real money coming out of your pocket.

There are many ways to be affected as the quote you conveniently provided notes. Also note the following quote supporting what I said earlier:

And at that time, a large portion of loans were ARMs. If I have to get stats, I will.

Hit submit too early so will continue.

I admit that Matt tends to sensationalize. But that’s his job. However it was still a big fucking deal although the dollar impact DIRECTLY to any individual consumer was probably not particularly onerous.

HOWEVER, once you start to include the impact on various institutions and investment vehicles upon which an individual might depend, THEN it starts to get murkier.

The real damage however comes in intangible form, where it is most corrosive and pernicious. It erodes trust in the financial system - which was never that warm and fuzzy to begin with. As a result, people are disinclined to invest and that has a tremendous affect on the economy.

ARMs do not make up the majority of home loans, which is what I originally said. in 2006, at the height of the hysteria, they made up 45% of home loans. By 2010, they were less that 10% of home loan originations. Besides, you are missing three important points:

  1. The inherent risk of an ARM is not in market manipulation, but rather real interest rate changes. Getting worked up about fraud on the order of one basis point per year is really a waste of time.

  2. Just because you get an ARM doesn’t mean you are subject to a variable interest rate determined by LIBOR. For example, take a 5/1 arm. The first 5 years are fixed at a lower rate that a typical mortgage product. An ARM is typically marketed to people who don’t plan to keep a house much longer than that first term. Even if they do decide to keep it, if you see interest rates are too high because they in fact are, or because you think LIBOR is rigged, you can refinance.

  3. The LIBOR fixing was often in favor of borrowers. There was no systemic skewing of the rate in one direction or another. It was mostly one banker calling another to fix his rate in order to help HIS positions. This fraud wasn’t even correlated to the net position the banks themselves had. Such a thing is basically a non-factor. It’s has about the same affect as one of the rate-setter just being “wrong”. This is also helped because the low and high submission are thrown out, and because the spread must be in line with other rates so that it does not arouse suspicion.

How? And don’t bother dreaming up some doomsday scenario. Please sell me on a plausible case of a normal person being screwed by this. Barclay’s, the bank for whom we have the most information about, was accused of (between 2005 and 2007) “helping suppress LIBOR to in order come out ahead on certain derivatives trades” and (during the financial crisis- 2007/2008) helping “suppress LIBOR so that the outside world would think it was healthier than it was”. How did that hurt Joe Six-Pack? Sure, his pension fund may have used derivatives to hedge against high-interest rates, but they also may done other things with the opposite effect. Additionally, funds that big should have people working for them that are protecting those assets; not naively trusting anything a banker says and does. Those guys are playing hardball. They are not amateur investors who don’t understand risk and greed.

True. Which is why I said in my first post that these people should be fined/arrested. I am glad to see many have. I am not saying this is not a big deal, I am just saying the impact to the average person is very minimal.

But Taibbi says it in the biggest price-fixing scandal ever!

I agree with you, of course. The “victims” in this scandal are other banks that are counterparties of the broker - not retail clients.

Really, Taibbi is a yellow journalist. How he became a hero to some of my fellow liberals is a mystery.

brickbacon: Do you understand how fixed income markets work? Investors LOSE money when interest rates go up and MAKE money when they go down - so NOW does it make sense why the rates always tended to be low rather than high? If you don’t even understand that much, I’m not going to spend a lot of time trying to explain things to you.

Beyond that, you spent most of your post responding to straw issues I didn’t raise. However as to the magnitude of the problem and it’s impact, I guess you didn’t even get past the first page of the article huh?

Show me that you actually understand what’s going on and I’ll give you a more respectful reply.

Yes, I do. My brother and many others I know work in fixed income or finance. I am certainly no expert, but I know enough.

First, no, your understanding of fixed income as it is practiced in banking is not correct. Not all fixed income instruments lose money when rates go down. For example, a reverse floater, which can certainly be engineered to provide fixed income.

Second, LIBOR is NOT AN INTEREST RATE in and of itself; it is what many variable interest rate instruments are based on. Please understand this. If LIBOR goes up or down, it does not affect the interest rate paid on a fixed income instrument like say, US government bonds or German government bonds. These rates are not related. The fixed income you would get from a bond like that is probably not based on LIBOR at all. Some are, but the percentage is not even close to 100 as you seem to imply with your, “fixed income + low interest rate = always bad” speech.

Third, it is clear the second case of LIBOR suppression wrt Barclay’s was to overstate the health of the bank, not to fleece investors. They were basically in survival mode.

Fourth, banks do not just do fixed income. The fraud in the proven cases DID NOT CORRELATE WITH THE BANK’S NET POSITIONS. Even if you want to argue that one group or set of investors profited as a result of this, it’s likely another group or set of investors at the same bank lost money.

Fifth, you are changing the subject. We were first taking about normal folks (eg. consumers and everyday borrowers), now you are talking about institutional investors and the like. Did I say that nobody lost money at all? Additionally, you are conflating the type of instrument with the interest rate that is applied. AFAICT, LIBOR manipulation primarily affected non-fixed income instruments.

Don’t bother. It’s clear you just want to be enraged by evil bankers. The facts are what they are. All I can do is explain it to you; I can’t comprehend it for you.

Nice attempt at a save dude but you completely blew it by not pointing out the fact that the example I gave had NOTHING to do with LIBOR.

Maybe we’ll have better luck another time.

Then why the hell did you bother posting it at all? Serious question. Is this thread not about LIBOR rate fixing? I was giving you the benefit of the doubt that you were attempting to stay on topic, and not just provide inaccurate and irrelevant lectures. I guess I was wrong.

Actually it is. Later in the article which you stubbornly refuse to read, Taibbi is talking about the related ISDAfix scandal and how it suggests some intrinsic bias favoring this type of behavior:

So you are now saying your example is related to LIBOR? Honestly, I don’t understand what you are trying to say.

I read the article a long time ago. I said I planned to read in it my first post. But once again, you are not understanding the issue. The ISDAfix scandal hardly affects average citizens. Mostly because everyday people aren’t particularly involved in interest rate swaps or derivatives. Which is, incidentally, the original point I was making.

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.

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”).

Also, there is a difference in what LIBOR is for commercial banking vs. what it means in derivative trading.

Wiki entry for LIBOR scandal is pretty good.

Yeah, peanuts.

BTW - As a result of the action on LIBOR read about switch in derivative contracts cash-flow calculations to OIS (Fed’s rate).