Friday, July 20, 2012

Matt Taibbi versus Larry Kudlow on LIBOR

Matt Taibbi continues to be the fountain from which all declarations, that the LIBOR "scandal" is the greatest scandal ever, pour forth and woe be any high profile commentator who fails to hop in sync with Taibbi's view.

For example,consider the case of CNBC talking head Larry Kudlow.

Huffpo reports, taht Kudlow dismissed the Libor scandal on his CNBC show on Tuesday, claiming that when banks manipulated LIBOR lower, those reduced rates benefited ordinary people, which is true.

"All those mortgages, I happen to have one, that float against Libor, benefited. Homeowners benefited. I daresay probably state and local governments benefited," Kudlow said."The Justice Department says this could be a criminal prosecution. I don't get that. Who are the victims? Who are the victims?," he continued.

Here was Taibbi's reaction to all this. HuffPo again (my emphasis): Taibbi acknowledged that Americans "probably benefited" on their mortgages and credit cards when banks manipulated the Libor rate downward.

But his comments about Kudlow were truly off the wall:
"I can’t imagine how he [Kudlow] could possibly -- a sane person could possibly -- describe this as a victimless crime," Taibbi told "Democracy Now!" on Thursday. "Even the tiniest manipulation downward, when you’re talking about a thing of this scale, would result in tens of trillions of dollars of losses."

"It's an enormous scandal," said Taibbi.
In truth, it is a minor league scandal being pumped up by interventionists so that they can heap even more regulations on the financial sector.

Indeed, even interventionist Robert Shapiro provides information that downsizes the scandal:
From 2000 to 2006, LIBOR rates averaged one-quarter of one percentage point above Treasury rates, and the two rates moved up and down together in lock step.
This suggests that if any manipulation was occurring before 2007 in LIBOR, it was minuscule. The LIBOR rate started to climb in 2007, however, there was a market reason for the climb---banks were starting to look more risky and vulnerable because of the start of the subprime mortgage crisis.

Here's a Marketwatch report from February 2007:
HSBC Holdings, the world's third-largest bank and one of the most aggressive players in the U.S. market for low-quality mortgages, has sent a chill through the financial world with news that its bad-debt charges will be 20% higher than forecast.

HSBC (US:HBC) is the largest, but not the first, lender to warn that higher interest rates in the United States are starting to take a toll on borrowers -- especially those with poor credit -- who bought homes using mortgages with low introductory rates during the real-estate boom.
Bloomberg in October 2008, provided the specifics, back then of what led up to the spike in the LIBOR spike:
March 5, 2007: HSBC Holdings Plc, Europe's biggest bank by market value, says the U.S. subprime market is ``unstable'' and now in a ``downturn,'' making it the main drag on company earnings.

March 29, 2007: HSBC Chairman Stephen Green says the U.S. subprime mortgage services division will be ``run down significantly'' as the bank tries to recover from loan losses.

April 2, 2007: New Century Financial Corp., which specialized in loans to people with poor credit, files for bankruptcy protection after being overwhelmed by customer defaults.

July 17, 2007: Investors in two Bear Stearns Cos. hedge funds that invested in collateralized debt obligations backed by subprime mortgage loans are told there is no value left in the funds, wiping out $1.6 billion originally invested.

July 19, 2007: Federal Reserve Chairman Ben S. Bernanke tells the U.S. Senate's Banking Committee that there may be as much as $100 billion in losses associated with subprime mortgage products.

Aug. 9, 2007: BNP Paribas SA, France's biggest bank, halts withdrawals from three investment funds because it can't ``fairly'' value their holdings, as concern over U.S. subprime mortgage losses roils credit markets.

Aug. 17, 2007: The Fed lowers the interest rate it charges banks and acknowledges for the first time that an extraordinary policy shift is needed to contain the subprime-mortgage collapse.

Aug. 22, 2007: Countrywide Financial Corp., the biggest U.S. mortgage lender, sells $2 billion of preferred stock to Bank of America Corp., the biggest U.S. bank by market value, to bolster its finances.

Sept. 7, 2007: The three-month London interbank offered rate, or Libor, the rate banks charge each other for dollars, rises to a seven-year high, signaling efforts by central banks to free up lending are sputtering.
This timeline explains exactly why the climb in LIBOR started in 2007. Given the problems that were developing in the financial sector, markets simply feared that the crisis would expand inn the baking sector. Indeed, the next point on the Bloomberg time line is this:
Sept. 14, 2007: Northern Rock Plc says the Bank of England agreed to provide emergency funds to ease a ``severe liquidity squeeze'' sparked by U.S. subprime mortgage defaults following the first run on a British bank in more than a century.
Then, of course, 2008 came along and even higher LIBOR rates. Here's what went down in 2008:
March 14, 2008: Bear Stearns Cos. gets emergency funding from the U.S. Federal Reserve and JPMorgan Chase & Co. as a run on the bank depletes its cash reserves in three days.

March 16, 2008: JPMorgan Chase agrees to buy Bear Stearns for 7 percent of its market value in a sale brokered by the Fed and the U.S. Treasury.

April 1, 2008: Lehman Brothers Holdings Inc., the fourth- largest U.S. securities firm, raises $4 billion from a stock sale to quell speculation it's short of capital.

April 9, 2008: Washington Mutual Inc. rejected an offer from JPMorgan Chase to buy it for as much as $8 a share, or $7 billion, before announcing it received a $7 billion capital infusion from a group led by TPG Inc., the Wall Street Journal reports, citing people familiar with the situation.

May 31, 2008: Bear Stearns ceases to exist as the acquisition by JPMorgan is completed.

June 20, 2008: The Dow closes below 12,000.

July 11, 2008: IndyMac Bancorp Inc., the second-biggest independent U.S. mortgage lender, is seized by federal regulators after a run by depositors depleted its cash.

July 31, 2008: Nationwide Building Society, Britain's fourth-biggest mortgage lender, says U.K. house prices declined the most in almost two decades in July and consumer confidence fell to a record low as the economy edged closer to a recession.

Aug. 12, 2008: UBS AG, Switzerland's biggest bank, announces plans to separate its investment banking and wealth management units after mounting subprime writedowns prompt rich clients to withdraw funds for the first time in almost eight years.

Aug. 31, 2008: Commerzbank AG agrees to buy Allianz SE's Dresdner Bank for 9.8 billion euros ($13.3 billion) in Germany's biggest banking takeover in three years.

Sept. 7, 2008: The U.S. government seizes control of Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies.

Sept. 15, 2008: Lehman Brothers Holdings Inc. files the largest bankruptcy in history, and Bank of America agrees to acquire Merrill Lynch for about $50 billion.

Sept. 16, 2008: American International Group Inc. accepts an $85 billion loan from the Fed to avert the worst financial collapse in history, and the government takes over the company.

Sept. 18, 2008: Lloyds TSB Group Plc, the U.K.'s biggest provider of checking accounts, agrees to buy HBOS Plc, Britain's largest mortgage lender, for 10.4 billion pounds ($18.1 billion).

Sept. 21, 2008: Goldman Sachs Group Inc. and Morgan Stanley receive approval to become commercial banks regulated by the Fed as tight credit markets forced Wall Street's two remaining independent investment banks to widen their sources of funding.

Sept. 23, 2008: Goldman Sachs says it will raise at least $7.5 billion from Warren Buffett's Berkshire Hathaway Inc. and public investors in a bid to quell concerns that pushed up the Wall Street firm's borrowing costs and hurt its stock.

Sept. 26, 2008: The U.S. Securities and Exchange Commission ends a program that monitored securities firms' capital after Morgan Stanley and Goldman Sachs, the only companies remaining under its jurisdiction, became banks overseen by the Fed.

Sept. 26, 2008: The SEC's inspector general releases a report asserting that the agency failed in overseeing Bear Stearns because it knew the firm had ``high leverage'' and was too concentrated in mortgage securities before its forced sale to JPMorgan Chase & Co.

Sept. 26, 2008: Washington Mutual Inc. is seized by government regulators and its branches and assets sold to JPMorgan Chase in the biggest U.S. bank failure in history.

Sept. 27, 2008: Washington Mutual files for bankruptcy protection.

Sept. 28, 2008: Fortis, the largest Belgian financial- services firm, receives an 11.2 billion-euro rescue from Belgium, the Netherlands and Luxembourg after investor confidence in the bank evaporates.

Sept. 29, 2008: The House of Representatives rejects a $700 billion plan to rescue the U.S. financial system, sending the Dow Jones Industrial Average down 778 points, its biggest point drop ever. Citigroup agrees to acquire the banking operations of Wachovia Corp. for about $2.16 billion after shares of the North Carolina lender collapsed under the weight of overdue mortgages. Bradford & Bingley Plc, the U.K.'s biggest lender to landlords, is seized by the government. The Dow closes below 11,000.

Sept. 30, 2008: Dexia SA, the world's biggest lender to local governments, gets a 6.4 billion-euro state-backed rescue as a worsening financial crisis forces policy makers across Europe to aid ailing banks. Ireland says it will guarantee its banks' deposits and debts for two years.

Oct. 1, 2008: The U.S. Senate approves a revised version of the rescue plan that was refashioned to entice enough votes for passage.

Oct. 3, 2008: The House passes the revised version of the rescue plan. Wells Fargo & Co., the biggest U.S. bank on the West Coast, agrees to buy all of Wachovia for about $15.1 billion, trumping Citigroup's government-assisted offer. U.S. President George W. Bush signs the rescue plan into law.

Oct. 5, 2008: BNP Paribas SA, France's biggest bank, will take control of Fortis's units in Belgium and Luxembourg after an earlier government rescue failed to ensure the company's stability as the global credit crisis worsened.

Oct. 6, 2008: The Fed says it will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens. The German government and the country's banks and insurers agreed on a 50 billion euro rescue package for commercial property lender Hypo Real Estate Holding AG after an earlier bailout faltered. The Dow Jones Industrial Average falls below 10,000 for the first time in four years.

Oct. 9, 2008: Citigroup walks away from its attempt to buy Wachovia, handing victory to Wells Fargo. The Dow Jones falls below 9,000 for the first time in five years and briefly dips below 8,000.

Oct. 11, 2008: U.S. Treasury Secretary Henry Paulson indicates that pumping government funds into banks is a priority, saying financial markets will remain volatile.

Oct. 12, 2008: European leaders agree to guarantee bank borrowing and use government money to prevent big lenders from going under, trying to stop the financial hemorrhage and stave off a recession.

Oct. 13, 2008: The Fed leads an unprecedented push by central banks to flood the financial system with as many dollars as banks want, backing up government efforts to revive confidence and helping to reduce money-market rates.

Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group Plc get an unprecedented 37 billion-pound bailout from the U.K. government as Germany, France and Spain prepare similar rescues. Germany says it will provide as much as 500 billion euros in loan guarantees and capital to bolster the banking system, the country's biggest government intervention since the Berlin Wall came down in 1989.
It was in this panic period that the very reasonable occurred, LIBOR climbed, as it was unclear how safe the paper was relative to, for example, Treasury bills.

It was during this period that Barclay's and perhaps others LIBOR banks attempted to push rates lower (which would have benefited borrowers) to give the impression that the markets viewed them as stronger than was actually the case.

Thus, to the degree manipulation was going on, it would have benefited borrowers, who had rates set based on LIBOR. This is what Taibbi is calling an "enormous scandal" at a time when central banks through their trillions in money printing have destroyed housing values of millions.

Taibbi is a joke, who would call for more regulation of the banking sector on any basis, but never say a word about the real massive interest rate and money supply manipulations of central banks, such as the Bank of England and the Federal Reserve.

There was probably an attempt of some manipulation of LIBOR, but it is not clear if any of it was successful. Further, any serious manipulation would have distorted markets through out the world and would have been spotted immediately because of the distortions in supply and demand. There are people trying to game most markets all the time, but massive manipulation against supply and demand can't be pulled off, unless of course you are the Federal Reserve and can print money at will.


  1. Fail. Shill for the banksters, or idiot - take your pick.

  2. Taibbi is revered by the Left, possibly because they are impressed that he is not afraid of numbers and has average ability to handle them.

  3. I've tried to ignore the LIBOR story because I think it's bank on bank crime. But I have to agree that the righteous indignation from those on the Left is comical to the point of sinister. I don't think this is an excuse to bring more banking regulation (not that they need to push another law through with Frank-Dodd being just the poorly worded, loose language law a parasitic bureaucracy dreams for). I think it's excuse for governments around the world to pull a tobacco "settlement" on the banking sector. They'll investigate and the banks with settle with money that the central banks have printed up for them and the governments will get paid. But there's nothing really illegal that went on here. So they misreported rates to their banking association. So what?

    There's one chart that would clear this up and show that the only victims here are the banks themselves: LIBOR v Eurodollar rates. Pick any tenor. Track the eurodollar futures vs LIBOR rate. Eurodollars are traded marks. LIBOR are reported clearing prices (that probably averages for the day anyway). Money Market Funds actually use the eurodollar marks they make the money on the interest upfront. It'll tell you everything you need to know about the impact of the "manipulation".

  4. Taibbi is a journalistic clown, an aggressively violent curmudgeon, an unapologetic on-the-job drug-abuser, and a vile-beyond-belief bigot. Perhaps that helps explain the extreme overvaluation, by the MSM and other state-worshiping idiots and gargoyles, of his fantastical economic and political "expertise."