Tuesday, July 10, 2012

How the LIBOR 'Scandal' Benefited Borrowers

Reuters is out with a story this morning on a Federal Reserve report that indicates during the financial crisis LIBOR banks underreported their costs of funds:
According to the calendar of then New York Fed President, Timothy Geithner, who is now U.S. Treasury Secretary, it even held a "Fixing LIBOR" meeting between 2:30-3:00 pm on April 28, 2008. At least eight senior Fed staffers were invited.

It is unclear precisely what was discussed at this meeting or who attended. Among those invited, along with Geithner, was William Dudley, who was then head of the Markets Group at the New York Fed and who succeeded Geithner as its president in January 2009. Also invited was James McAndrews, a Fed economist who published a report three months later that questioned whether Libor was manipulated.

"A problem of focusing on the Libor is that the banks in the Libor panel are suspected to under-report the borrowing costs during the period of recent credit crunch," said that report in July 2008 that examined whether a government liquidity facility was helping ease pressure in the interbank lending market.
In other words this great "scandal" that Taibbi and crew are blowing up, would have benefited every single one of the borrowers in the $500 trillion market that Taibbi and crew tend to babble about. Banks were downplaying their costs of funds, which means they set rates lower than they otherwise would have. They were likely doing so to appear stronger relative to market activity, during the financial crisis. Note: This action would have resulted in nothing more than giving the appearance that LIBOR was more in line with the Fed Funds rate and the T-Bill rate, which, again, means the move benefited borrowers at the expense of the bankers themselves. Some collusion. This appears to have been done at the height of the crisis when no loans were being made anyway and can be seen as little more than posturing. It would be hard to understand how this posturing could have occurred when markets were actually functional, since it would mean rates would be set lower than at market levels, which would mean supply not equaling demand, with less supply of funds but greater demand for funds, thus distorting the global loan markets. In active markets, something like this would have resulted in banks around the world adjusting their premiums relative to the LIBOR benchmark or not using the LIBOR as a benchmark at all.

In addition to the crisis period there is this report on an email:
In documents released with the Barclays settlement, the CFTC said Barclays traders on a New York derivatives desk asked another Barclays desk in London to manipulate Libor to benefit trading positions.

"For Monday we are very long 3m (three-month) cash here in NY and would like the setting to be set as low as possible," a New York trader emailed in 2006 to a person responsible for setting Barclays rates.
In this situation, you have a New York trader asking the Barclays desk in London to keep its rate low. Think about this for a minute. The trader is asking for an immediate distortion in rates. Is the Barclays desk supposed to call up the other 15 banks to manipulate this for Barclays that day? What if some of the banks were on the opposite side of Barclays on this trade and wanted to see rates higher?

Its very possible the New York trader didn't understand how the LIBOR was set, or was simply hoping that London could bail him out. If he understood how the rate was set, he would understand how difficult it would be to manipulate the rate, especially on such short notice.

What's going on here? I think Rupert Murdoch had it right when he tweeted:

Libor " scandal" very suspicious. 2008/9 huge crisis and Brown should defend pressure to keep rates down and prevent meltdown.
Don't know, but suspect Diamond scapegoat used by old establishment who did not like energetic competitor.
Now, the interventionists, led by Taibbi, are taking the scandal to a new level so that they can play their favorite game: calling for more regulation of the economy, specifically in this case the banking sector---while ignoring the true elephants in the room that can, and do, manipulate rates on a daily basis, the Fed and the Bank of England.


  1. interesting deconstruction

  2. Huh? My LIBOR-pegged monthly payment ballooned up in 2008-2009. If I had been pegged to U.S. treasuries, I would have paid less.

  3. It screwed the savers. They get routinely screwed by FED but its their mandate/law.

    As they say, dont waste a crisis. In this case, there is clearly criminal/financial corruption fraud by banks.

    It may be minuscule, but they broke the law. we already too much into banks ignoring or cleverly bypassing laws. Hopefully this helds atleast someone accountable.

    1. Lets first get the central banks and government to be accountable and then worry about the banks.

  4. >Timothy Geithner, who is now U.S. Treasury Secretary, it even held a "Fixing LIBOR" meeting

    Yes, Timmy is into 'Fixing' many things, no doubt of about that.

    >It screwed the savers.

    Are any interest bearing savings instruments pegged to LIBOR, as if so then assuming the rates were lower than they should have been, a loss would have been incurred.

    >Now, the interventionists are taking the scandal to a new level so that they can play their favorite game:calling for more regulation of the economy

    Good point that imposing new regulation or whatever will likely make matters worse, however, it IS a big deal if LIBOR was purposefully manipulated, just as it is with other manipulation that has and is going on at a macro financial level.

    I am in the middle of Financing Failure: A Century of Bailouts by Vern McKinley(Independent Institute), and he methodically lays out how there was plenty of regulation and supervisory authority in place to have monitored failed insurer AIG by The Office of Thrift Supervision(OTS), yet when it failed(and was bailed out) the claim by the Fed and Treasury was there was not enough supervisory authority in place and more was needed. The point is in instance after instance over time, more than enough regulation and supervisory authority has been in place to prevent fraud, malfeasance, but it has failed. Adding more will do no good, and just grows the government hydra(including the many parasites that feed off the host), which I believe dovetails with Mr. Wenzel's point.

    The present Central Banking System is doomed, it will be interesting to see what TPTB come up with next(and they always do).