On May 29, 2008 the Wall Street Journal published an article “Study Casts Doubt on Key Rate” substantiating its doubts published on April 16, 2008. In it they questioned why the rates of 5 of the 16 banks used for the calculation of LIBOR differed significantly from rising default insurance costs.
At that stage, the authors speculated that one of the possible causes was that the banks were lying.
Now we know that for Barclays that was the case. Interestingly, Barclays was not among the five banks originally exposed in the research, being ranked further down the list.
The two components making up an interest rate are the risk free rate and the borrowers risk premium. Not only were the banks benefitting financially from the misstatement, they were misrepresenting the market’s assessment of their risk, at a time when this was critical.
Immediately after the article on April 16 was published, the anomaly disappeared. LIBOR rose dramatically, and the shocks of 2008 started to take effect.
Did the banks cause the crash or were they just the catalyst?
Either way, they have some questions to answer.
More at: Move Over Subprime? Financial Institutions and Brokers Face Increasing Concerns Over Allegation of Improper Libor Manipulation
LIBOR Manipulation: A Brief Overview of the Debate
Study Casts Doubt on Key Rate
Banks are different from other business. Money is their stock in trade. A big part of the huge profits that they make is the difference between the interest that they charge (their income) and the interest that they pay (their cost).
The banks dishonestly adjusted the interest that they pay by manipulating LIBOR. The system of setting LIBOR, simply canvassing the banks by asking them what rates they were paying, with no checks and balances, opened it up for manipulation.
The traders who are responsible for working in the derivatives market worth $554 trillion in 2011 (37 times U.S. GDP) are not supposed to communicate with the people being canvassed for the LIBOR rate. They did. The traders asked their colleagues to manipulate the figures submitted for LIBOR, and the response was a positive “done for you big boy“.
Barclays has just been fined $93 million by the UK’s FSA and $450 million by the U.S. DoJ after owning up. Now they face law-suits from the people they ripped-off, which will certainly amount to a lot more. The time frame of the “crime” – 2005 to 2009. The FSA and DoJ may have settled for too little.
Barclays are not the only ones. Other banks are being investigated.
Watch this spot.
Q&A: Barclays and bank rates
Barclays Bank PLC Admits Misconduct Related to Submissions for the London Interbank Offered Rate and the Euro Interbank Offered Rate and Agrees to Pay $160 Million Penalty
Barclays fined for attempts to manipulate Libor rates
Barclays ‘attempted to manipulate interest rates’
More banks face interest rate rigging investigation
‘Systematic dishonesty’ at Barclays, says former boss
Q&A: Barclays and bank rates
Inter-bank interest rates Cleaning up LIBOR
The LIBOR probes An expensive smoking gun
Inter-bank interest rates Fixing LIBOR
BANKERS GONE WILD
The South African police have a tough job. The crime rate it high, and the criminals are violent. Meeting the challenge requires good leadership. A recent article in The Economist revealed how badly that’s being handled:
AT TIMES South Africa’s police force seems rotten to the core—riddled with corruption, crime, dirty tricks, political machinations and even murder. On June 12th General Bheki Cele, the police chief, was “relieved of his duties” by President Jacob Zuma amid allegations of graft and dishonesty. His predecessor, Jackie Selebi, a former head of Interpol, was also fired after being found guilty of corruption and jailed for 15 years. Now the head of the police crime intelligence unit, Richard Mdluli, has been suspended, for a second time, after charges of murder and fraud. He had apparently hoped to get Mr Cele’s job.
Some had expected Mr Mkhwanazi, a respected career officer, to succeed Mr Cele. But during his eight-month stint as acting police chief he apparently proved too independent and outspoken. In an interview last month he declared “war” on the extensive rot he claimed he had found within the police ranks. “I am cleaning out the house and will not stop until all the bad apples, regardless of who they are, are removed, once and for all,” he said. “I will prove that there are people strategically operating like the Mafia and I will deal with these people.”
Just over a month later he finds himself back in his old job as head of the police Special Task Force after the surprise appointment of Riah Phiyega, a businesswoman with no experience of policing, intelligence or security, as the country’s new police chief.
Zapiro, the cartoonist, had the last say:
After reading a recent blog it seems that the European authorities have a plan. They have produced a report that includes:
- The eurozone borrowing money collectively “could be explored”
- A European treasury office to be set up to control a central budget and keep an eye on national ones
- A single European banking regulator and a common scheme guaranteeing bank deposits
- Common policies on employment regulations and levels of taxation
The wording is diplomatic. It will move much of the financial decision making to Brussels, and in principle is a good solution. That it’s being proposed by the Eurogroup’s Herman Van Rompuy and Jose Manuel Barroso, whose powers will grow exponentially, if the plan is adopted, may bring it’s motives into question and is something that the politicians will sieze on.
You can be sure that of the politicians, whose powers will be similarly diminished, will not raise that as the issue. Their contention will be that it is “an encroachment on our sovereignty”.
Hamilton predicted much of this over two hundred years ago.
EU unveils its vision for the future of monetary union
TOWARDS A GENUINE ECONOMIC AND MONETARY UNION
Muhammad Morsi, the winner of the presidential election in Egypt, does not have a real mandate. That’s an opportunity.
Mr Morsi was not even the Muslim Brotherhood’s first choice. He was put forward to stand after the Brotherhood’s primary candidate was disqualified.
The numbers tell the story. In the first round 11.5% of the registered voters gave Mr Morsi their support, with a low turnout of 46%. In the run-off, the turnout increased to 51%, a sure sign that people were voting against, rather than for one of the candidates who stood on opposite ends of the political spectrum.
Even the final tally of 51.7% of valid votes in favor of Mr Morsi is tentative.
In 1994 there were numerous predictions that South Africa would descend in chaos after the elections there. One man made sure that it did not happen – Nelson Mandela. He did it by looking after everyone’s interests, caring about what was important to them.
He also made sure that South Africa had a solid constitution that entrenched the principles of equity, freedom and the protection of rights and human dignity.
Mr Morsi has already started on that route, saying “I have no rights, only responsibilities. If I do not deliver, do not obey me.”
Now this quiet man needs to let his actions speak.
Explainer: Egypt’s presidential poll
Egypt’s Morsi calls for unity after poll win
Egypt’s election Two reasons not to be cheerful
Egypt voters’ ‘loss of faith’
As it happened: Egypt election result
Guide to Egyptian presidential election
Voter turnout surges in final hours of Egypt presidential runoff
Language of numbers : The Egyptian Presidential elections