Slog
News & ArtsWednesday, July 11, 2012
Money A Libor Is Not a Cross Between a Lion and a Tiger
Posted by Paul Constant on Wed, Jul 11, 2012 at 12:21 PM
Are you ready for another financial scandal? Of course you are! This one involves then-New York Federal Reserve President Timothy Geithner meeting with Barclays. Nobody knows what the meetings were about, but...
Though the subject of those discussions is unknown, they came at a time when Barclays was also talking to New York Fed officials about problems with an interest rate known as Libor, some five years before the bank agreed to pay $450 million to settle charges that it manipulated that interest rate.
The meetings raise questions about just how much Geithner, now the U.S. Treasury secretary, knew about the alleged manipulation of Libor, a critical interest rate that affects borrowing costs throughout the economy — questions he'll have to answer at a Senate hearing later this month. They could also renew criticisms of Geithner as being too chummy with the banking sector he was charged with regulating in his role at the Fed.
This stuff can be hard to handle for my fellow non-financially minded folks, so let me direct your attention to this Business Insider infographic, which explains in relatively clear language what the big deal about Libor is. If Geithner knew about this, it means he had knowledge about a plot to basically steal money from the public.
(Thanks to Slog tipper Andrew.)
3
At least he didn't meet with some alleged anarchists that may or may not have smashed a window. Then people would wanna hang the fucker.
5
"...he had knowledge about a plot to basically steal money from the public."
There is no qualification necessary. The bankers didn't "basically steal" or "all but steal" or "use questionable methods to manipulate financial markets." They stole. They are thieves. They stole billions of dollars from millions of people. The fact that they stole an outrageous amount of money from an outrageous number of people instead of, say, ten thousand dollars from a freight company does not therefore make it necessary to attempt to lessen the impact of the language when describing it.
There is no qualification necessary. The bankers didn't "basically steal" or "all but steal" or "use questionable methods to manipulate financial markets." They stole. They are thieves. They stole billions of dollars from millions of people. The fact that they stole an outrageous amount of money from an outrageous number of people instead of, say, ten thousand dollars from a freight company does not therefore make it necessary to attempt to lessen the impact of the language when describing it.
6
There's that same infographic again, that Charles already posted, which is still not explaining anything. Come on, there's got to be somebody on Slog in finance who can explain the bigger picture.
7
For those of you who are financially minded, this article is a pretty good analysis. See "smoking gun" chart 1.
9
@ Fnarf,
The following article and video summarizes the situation. The world's major banks were effectively conspiring together as an organized crime syndicate to manipulate LIBOR, which effects the interest rates on countless thousands of contracts around the world. The amounts of money involved are astronomical and likely beyond calculation.
Why is Nobody Freaking Out About the L…
The following article and video summarizes the situation. The world's major banks were effectively conspiring together as an organized crime syndicate to manipulate LIBOR, which effects the interest rates on countless thousands of contracts around the world. The amounts of money involved are astronomical and likely beyond calculation.
The banks gamed LIBOR for two semi-overlapping reasons. As noted here last week, there were instances of Barclays traders badgering the LIBOR submitters to "push down" rates in order to fatten their immediate bottom lines, depending on what they were trading or holding that day. They also apparently rigged LIBOR downward in order to produce a general appearance of better health, essentially tweaking their credit scores a few ticks upward.
Most intriguingly, or perhaps disturbingly, there were revelations last week that Bank of England deputy Governor Paul Tucker had a conversation with Diamond at the peak of the crisis in 2008. The conversation reportedly left Diamond, and subsequently his traders, with the impression that the bank had carte blanche to rig LIBOR downward in order to help allay spiraling public fears about the banks’ poor financial health.
Why is Nobody Freaking Out About the L…
10
@4, you do have a point. When a member of the Bush crime family fucked up everyone on the left pointed out that Bush was ultimately responsible. But that's politics.
12
LIBOR (London Interbank Offer Rate) attempts to measure the interest rate that well-established London banks charge each other for loans. It happens to be used as a benchmark rate in many contracts. For example, a credit card company might charge you LIBOR + 10% and a car finance company might charge you LIBOR + 2%.
But LIBOR wasn't measured by looking at real market transactions betwen the banks. It was measured by calling them up and asking "hey, this is the LIBOR people; what would you charge a fellow bank today?" So by lying in their answer they could move the LIBOR index independent of the real rates they charged each other.
The scandal is not that the banks used this bug to generally jack up interest rates. The distortions went in both directions, mostly depending on whether a rise or a fall in LIBOR would be good for that particular bank's position in the interest rate derivative market that day. Interest rate derivatives are bets on whether the interest rate (as measured by, you guessed it, LIBOR) will go up or down. The participants in that market are mostly big financial institutions, but also some big companies and municpal/county governments. But the thing is, since these institutions sometimes bet on a rise and sometimes on a fall, and sometimes the LIBOR distortions went one way and someties went another, there was no general transfer from one kind of institution to another. Undoubtedly you can find some goverment entity that lost money due to LIBOR distortion because of the particular bet it made on the particular day it made it; but you could find another one that gained.
There is a scandal here, but it is of the "banking has poor institutional integrity" variety, not of the "bankers stole money from the public" variety.
More...
But LIBOR wasn't measured by looking at real market transactions betwen the banks. It was measured by calling them up and asking "hey, this is the LIBOR people; what would you charge a fellow bank today?" So by lying in their answer they could move the LIBOR index independent of the real rates they charged each other.
The scandal is not that the banks used this bug to generally jack up interest rates. The distortions went in both directions, mostly depending on whether a rise or a fall in LIBOR would be good for that particular bank's position in the interest rate derivative market that day. Interest rate derivatives are bets on whether the interest rate (as measured by, you guessed it, LIBOR) will go up or down. The participants in that market are mostly big financial institutions, but also some big companies and municpal/county governments. But the thing is, since these institutions sometimes bet on a rise and sometimes on a fall, and sometimes the LIBOR distortions went one way and someties went another, there was no general transfer from one kind of institution to another. Undoubtedly you can find some goverment entity that lost money due to LIBOR distortion because of the particular bet it made on the particular day it made it; but you could find another one that gained.
There is a scandal here, but it is of the "banking has poor institutional integrity" variety, not of the "bankers stole money from the public" variety.
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@12, that's getting closer to the answer I'm after. It's clear that in addition to the up-and-down gaming of the rate by one or two basis points either way to facilitate trading profits is one part of the scandal; but in addition there was much more intense pressure in only one direction: down. And not by one or two basis points, but by 50. the purpose of this wasn't to steal money out of dirty trades; it was to prop up the banks by making them look healthier than they were.
That's the part of this scandal that Taibbi is going on about, but I don't trust Taibbi to tell the whole story. If LIBOR-based interest rates were artificially suppressed for long periods, who gets hurt? People who lend money get less back; people who borrow it have to pay less interest. Taibbi is saying that the main entities suffering here were municipalities -- all the talk about fire departments and so on. But municipalities are big-time borrowers too, through the sale of bonds. These bonds pay for all sorts of stuff -- roads, schools, stadiums (ahem), parking garages.... If they have to pay those bonds back at a lower interest rate, isn't that GOOD for municipalities? How much do municipalities invest, in securities or whatever, as opposed to borrowing?
I feel like I'm getting closer to an answer but I'm not there yet. I wish someone could do a net gain/loss statement for the City of Seattle, for instance.
That's the part of this scandal that Taibbi is going on about, but I don't trust Taibbi to tell the whole story. If LIBOR-based interest rates were artificially suppressed for long periods, who gets hurt? People who lend money get less back; people who borrow it have to pay less interest. Taibbi is saying that the main entities suffering here were municipalities -- all the talk about fire departments and so on. But municipalities are big-time borrowers too, through the sale of bonds. These bonds pay for all sorts of stuff -- roads, schools, stadiums (ahem), parking garages.... If they have to pay those bonds back at a lower interest rate, isn't that GOOD for municipalities? How much do municipalities invest, in securities or whatever, as opposed to borrowing?
I feel like I'm getting closer to an answer but I'm not there yet. I wish someone could do a net gain/loss statement for the City of Seattle, for instance.
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@9, Yes, I've read Taibbi's pieces more than once. I don't trust Taibbi to explain financial stuff. I'm not saying he's wrong, I'm saying he's not making his case for me. It's not the mechanism of how LIBOR works that confuses me; LIBOR's been around for 25 years.
It's the specifics of "affects countless thousands of contracts" that I want clarification on: HOW does it affect them? Lower rates -- whom does that hurt, whom does that help? The infographics all say "Fire department! Hospitals! Libraries!" but it's not clear to me that that is always the case. Maybe it is. I'm looking for someone to explain it to me with something better than "which are involved with".
It's the specifics of "affects countless thousands of contracts" that I want clarification on: HOW does it affect them? Lower rates -- whom does that hurt, whom does that help? The infographics all say "Fire department! Hospitals! Libraries!" but it's not clear to me that that is always the case. Maybe it is. I'm looking for someone to explain it to me with something better than "which are involved with".
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@13 depends. With or without the bonding done by City Light?
They tend to get better muni rates on bonds than the City does as a whole.
They tend to get better muni rates on bonds than the City does as a whole.
16
@9, also, what Taibbi is of course leaving out is that the biggest risk of this crisis isn't to Joe Q. Public, it's to....the banks, in large part because they are going to get sued six ways to Sunday by other banks and companies that got screwed by the false LIBOR but have no way of recouping the false profits from other companies that unfairly gained from them. So this could be another round of massive bank failures, which means another financial collapse.
One is tempted to just come out and say that the English are wholly and fundamentally dishonest people, based on this and a number of other recent scandals (like the phone-hacking thing) except that many of the crooked traders operating in The City are in fact Americans working for the British branch of an American company. Remember the financial collapse of 2008 was triggered by AIG, an American company, through their derivatives investment group -- in London.
One is tempted to just come out and say that the English are wholly and fundamentally dishonest people, based on this and a number of other recent scandals (like the phone-hacking thing) except that many of the crooked traders operating in The City are in fact Americans working for the British branch of an American company. Remember the financial collapse of 2008 was triggered by AIG, an American company, through their derivatives investment group -- in London.
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@16 no, it's Joe Q Public.
Because we're the ones that will be forced to bail out the banks so the rich can get richer and everyone else becomes poor.
Because we're the ones that will be forced to bail out the banks so the rich can get richer and everyone else becomes poor.
18
@ Fnarf,
We'll probably be hearing about this for some time, during which we'll get an idea of the global scope of the problem. The most obvious issues are that traders conspired to falsify information depending on how it made them and their banks the most money, and that this rate manipulation impacted countless third parties on both sides of lending and borrowing deals.
While the technical details of financial frauds are difficult to understand, the bottom line is that they lied, cheated, stole, and--until now--have gotten away with it.
One commentator astutely called it "the LIE-MORE scandal."
We'll probably be hearing about this for some time, during which we'll get an idea of the global scope of the problem. The most obvious issues are that traders conspired to falsify information depending on how it made them and their banks the most money, and that this rate manipulation impacted countless third parties on both sides of lending and borrowing deals.
While the technical details of financial frauds are difficult to understand, the bottom line is that they lied, cheated, stole, and--until now--have gotten away with it.
One commentator astutely called it "the LIE-MORE scandal."
19
When the foxes own the henhouses, you have to pick the least evil fox to guard them. A president can only do so much in a plutocracy.
Look at the hysterical opposition to Eliz. Warren's appointment to the CFPB. You'd think she was Trotsky.
America is FUCKED.
Look at the hysterical opposition to Eliz. Warren's appointment to the CFPB. You'd think she was Trotsky.
America is FUCKED.
20
Fnarf, pull out your credit card agreement, mortgage, or practically any consumer agreement with an interest rate. Odds are better than even the interest rate you pay is pegged to LIBOR. They used to peg it to the prime rate, but that got kind of stodgy.
21
@20, yes, as I said, I understand LIBOR and how other rates are dependent on it. It's been around for 25 years, as I mentioned. But, as a credit card borrower, doesn't an artificially lower rate mean that I BENEFITED from their actions?
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