The New York Times and its outstanding financial reporter, Gretchen Morgenson, have published an important article about the LIBOR banking crisis, challenging American regulators to take this mess as seriously as the British appear to be.The article isn't outstanding for the breaking of new news. Morgenson just regurgitates what has been known for days:
By now the world knows that Barclays manipulated the most widely used benchmark rate, the London interbank offered rate. But Barclays is just one member of the cozy club that sets the Libor, which is supposed to be based on the average rate at which large banks can borrow money overnight. It’s not based on actual transactions, however — and that leaves room for mischief.
And mischief there was, according to e-mails and other documents that Barclays has turned over to regulators in the United States and Britain. The upshot: traders colluded by posting rates that either helped their bets in the markets or their bank’s perceived financial strength during the harrowing days of 2008.Morgenson's description of what went on is a bit of a stretch. Barclay's by itself couldn't manipulate LIBOR anywhere. If they put in high bids, their bids would have been dropped from the calculation of LIBOR. It's possible that collusion could have occurred by a number of bankst, but nothing has been said about such. Indeed, as I have shown in charts, the LIBOR tracked the T-Bill rate and Fed funds rate quite closely (except for a brief period in 2008 when LIBOR spiked up--which makes sense given the panic going on at that time. LIBOR backing would not have been viewed as safe as T-Bills at that time). Such tracking indicates that if there was collusion it was done at such a minuscule level that it would have been barely noticeable. I repeat from earlier posts, traders attempt to manipulate every market out there. The markets always win. Thus, it would not be surprising to learn of attempted collusion, though give the manner in which LIBOR is determined it would have to involve almost all 16 banks that participate in setting the rate ---and the banks would have had to all be on the same side of the trade to profit. If suddenly, the top 16 banks in the world were all top heavy on one side of the interest rate market, it would have made huge waves through out the interest rate markets. No such waves occurred--LIBOR stayed in line with T-Bill rates and the Fed funds rate.
As for Barclay's setting a rate to give the impression that Barclay's had greater "perceived financial strength during the harrowing days of 2008." That's possible. Indeed, judging from the emails, even likely. But that is the government putting pressure on Barclay's not Barclay's trying to manipulate the market on its own. Further, even this action would have zero to negligible impact on LIBOR, as it would have simply pushed Barclay's more in line with the other 15 banks and would have resulted, if it had any impact at all, in lower rates.
Thus, it is curious when Morgernson makes this claim:
Manipulating the Libor is a big deal because it affects the cost of money for almost everyone. The Libor is used to set rates on mortgages, credit cards and all manner of loans, personal and commercial. The amount of money affected by the phony rates is at least $500 trillion, British regulators have estimated.It is curious that she fails to point out that, what would have happened as a result of the Bank of England nudging Barclay's to put in a lower rate, would have resulted in lower rates for all $500 trillion of the loans and other instruments affected.
This regurgitation of facts without full explanations, and, of course, the obligatory call for U.S. regulators to investigate, is what Taibbi calls an "important article". To me it looks like NYT and Morgenson catching up on a story that has developed legs thanks to hysteria from Taibbi, Spitzer and the like.
I, personally, would rank this "scandal" one notch under the Janet Jackson Super Bowl wardrobe malfunction of 2004.