Thursday, July 12, 2012

Simon Johnson Asks the Big Question that Blows Apart His Argument

Simon Johnson is out with another rant about the great LIBOR "scandal". He closes his rant this way:
Who trusts a banker at this point? The collateral damage is enormous. Who in their right mind would buy a complex derivative product from Barclays or anyone else implicated in this growing scandal?
Indeed, if market players really thought Barclays was ripping them off in some major way or that LIBOR was a rip off, who would be dealing with Barclays now and who would be using LIBOR as a benchmark?

In answering Johnson's question and going beyond, we see that the markets really don't think it is a big deal, because other banks are still dealing with Barclays and still others are using LIBOR as a benchmark.

I'm not saying that some manipulation wasn't tried, when there is money to be made, people are going to try and game the system. However, if you are trading in a market, you better know how the game is being played, to protect yourself.

I have been personally front run by traders, there are ways to take care of those situations. I have had other idiots try and screw me in the markets in other ways and in the end it cost them $xxx,xxx. Thank you, guys.

Look, when money is changing hands in a fast, complicated game, there are people on the edges trying to rig the system. Any game, any system. You just have to be a step ahead. James Altucher wrote some time back on how three card monte players try to beat you. He wrote:
As far as I know, NOBODY running the con has ever lost money.
Well, there actually is a way to beat these guys (but you better be pretty big if you want to collect). When it's down to two cards, and they are setting you up, just bet on the card you don't think it is. You will win every time.

When people know you understand a rigged game, they won't mess with you. In NYC, when a three card monte team understood I knew the game, they offered me a job. They told me with my business look, I could make a lot of money. I thanked them, but told them I already had a pretty good paying day job.

The LIBOR rigging, to the degree it occurred, was about big boys trying to screw each other. It has very little to do with the general public. Overall, LIBOR rates move pretty much in tandem with rates such as T-Bill rates and the Fed funds rate. The only time there was some significant discrepancy was when the markets froze up in 2008. And that is an understandable freeze up, given that everyone was in panic.

If you had a floating rate loan, it would have cost you, not because of manipulation, but because LIBOR was no longer viewed as a riskless rate, a premium developed in the markets, a risk premium that transferred on to your floating rate. But that is a flaw in using the LIBOR system and not because of manipulation.

Again, before you get into any complex system, you better know how the game is played. It rarely makes sense, for example, to borrow at adjustable rates, but especially now given how low rates are. You are much better off locking in rates for as long as you can. Let the big boys try and game each other, and stay away from that. No rules or regulations, private or government, are going to stop players from attempting to gain an edge.

I mean even on the internet, there are people trying to game the system by increasing page views by all sorts of tricks, including using slideshows to increase page views. In the long run, the markets will sort things out, tossing out systems that can be rigged too easily.

The real riggers we need to worry about are governments. They usually force us into their games, such as when they manipulate interest rates by printing money, thus devaluing the money in our pockets, which they have made legal tender.

This focus on LIBOR is about taking an eye off the real riggers. Taibbi, Morgenson and Johnson never come close to touching the third rail and point out the evils of central banking. Instead, they go after a side show that the elitists don't mind that much.

Rather than who trusts Barclays, the real question should be who trusts the Federal Reserve and why  the Treasury won't allow an audit of the gold at Fort Knox?


  1. Good points and well said RW.

  2. As far as auditing the gold in Fort Knox, I think it was James Rickards (on I think "Russia Today") who offered an explanation as to why TPTB are avoiding an audit - credibility of gold. In other words, an audit of the gold would lend credence to its importance. It certainly seems like a plausible theory to me.

    -Kevin K

  3. I disagree with your view of LIBOR issue. I'm pure Austrian, & would welcome the closing of the Fed, & other Central Banks, but it is not relevant that the Fed, et. al. "rigged" rates more than banks did re LIBOR. And to compare banking to 3-card monte may be "fun," but presumably bankers are not criminals.

    The issues:
    1. Barclays appeared to have committed fraud in submitting low LIBOR rates, inducing investors to buy their stock/ bonds, & maintain funds at their banks, by hiding its true financial evaluation via a higher LIBOR;
    2. The trillions of loans tied to LIBOR, were not just distorted, but all supplies of funds (not the borrowers) rec'd lower rates than they "should" have received;
    3. Even many borrowers, took out loans -- or higher amount of loans -- than they would have, had the rate been higher. Especially if these were floating rate loans, this may have had results a few years later.
    4. Since LIBOR rates & confidence in Barclays -- and other banks -- were distorted, it's likely this all also contributed to further contributing to the housing bubble, and/or prevent the housing bubble from deflating.

    The fact that there was an even bigger, more dangerous player -- e.g., Central Bankers, Gov't -- is as if the 3 card monte minor criminals should be ignored, because there are far more dangerous criminals lurking in the City.

    1. To write:

      "The trillions of loans tied to LIBOR, were not just distorted, but all supplies of funds (not the borrowers) rec'd lower rates than they 'should' have received"

      Means you have no understanding of how the LIBOR rate is set. Barclays didn't have any impact on where LIBOR was set, as John Carney explained. This negates most of the rest of your commentary, since it is based on the erroneous belief that Barclay's actions somehow impacted the LIOR rate.

    2. It is not merely the LIBOR rate that was likely affected, not just by Barclays, but by other banks acting in similar fashion.

      But by indicating Barclays was strong than it was, it likely distorted interest rates & especially investor actions, world-wide, in all asset classes.

    3. Additional note:

      As an active trader then -- and now -- but esp during the height of the crisis, the LIBOR rate each day, was a major influence in stock, bond, currency, metal, -- and virtually EVERY ASSET CLASS, WORLD-wide.

      That various (likely many) bankers -- and perhaps Central Bankers -- tried to reduce the level of LIBOR, to lessen the appearance of financial strains, only contributed to additional massive mis-allocations of assets.

      And to say Barclays (or other banks) was not guilty because they did not actually influence the rate, is a non-falsifiable argument. As any trader knows, just by entering bids/offers, near the market price, will influence the price, even if minor -- and without executing a trade.

      If one goes into a bank with a guy, asking the teller for money, but for whatever reason, leaves the bank without any cash, damage has occurred.

    4. if they had to lie so as to avoid being nationalised, all the more power to them.