Monday, July 9, 2012

More Taibbi Hype on LIBOR "Scandal"

Matt Taibbi writes at Rolling Stone:

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.


  1. Was the wardrobe malfunction that long ago?!


    Mises has an interesting perspective on the impact of the quantity of money and the interest rates. And the ability of a single bank or a small bloc of credit-issuing banks to influence the interest rate through the issue of fiduciary media.

    Chapter 19 of the Theory of Money and Credit Section 4 is a particularly interesting read.

    ...and if we disregard the limit that has already been mentioned as applying to the case of metallic money, then there is no longer any limit, practically speaking, to the issue of fiduciary media; the rate of interest on loans and the level of the objective exchange value of money is then limited only by the banks' running costs—a minimum, incidentally which is extraordinarily low. By making easier the conditions on which they will grant credit, the banks can extend their issue of fiduciary media almost indefinitely. Their doing so must be accompanied by a fall in the objective exchange value of money. The course taken by the depreciation that is a consequence of the issue of fiduciary media by the banks may diverge in some degree from that which it takes in the case of an increase of the stock of money in the narrower sense, or from that which it takes when the fiduciary media are issued otherwise than by banks; but the essence of the process remains the same. For it is a matter of indifference whether the diminution in the objective exchange value of money begins with the mine owners, with the government which issues fiat money credit money, or token coins, or with the undertakings that have the newly issued fiduciary media placed at their disposal by way of loans.

    So the Fed's ability to influence interest rate is indirect and a commercial bank issuing fiduciary media is direct and limited only by their costs.

  3. "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."

    As if this is an unqualified positive event. Which it is, to the banks. Just shows that this blog is a nothing but a shill for the money power.

    1. Your evidence for this being what? Wenzel's argument is that this LIBOR "scandal" has been given an immense amount of airtime. Contrast with how much time the central banks get when it comes to media coverage. Next to none? THey've been causing these crises for the better part of two centuries. And it seems the BoE has been "nudging" Barclays. Whatever that means.

      It's funny to watch regulators pretend to be in a huff over this, when they know that if the banks stop buying their cheap junk debt that their game is over.

  4. Someone please tell me why this Taibbi guy is so special.

    I've read many of his articles and have never found any of it to be eye-opening or even original. Just a bunch of OWS-ish jargon peppered with "penis," "f__k," "vagina," "p___sy," and some depraved thought-up scenarios he wishes upon some evil-banker guys (aka "douchebags").

    Is he actually revered outside socialist, progressive, and "goat-f___ing" circles?