LIBOR Manipulation _ It Matters

Posted on July 6, 2012

What is LIBOR and why should we care? Let’s start with the first part of the question.

From Wikipedia:

The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks.^[1] It is usually abbreviated to Libor (/ˈ l aɪ b ɔr /) or LIBOR, or more officially to BBA Libor (for British Bankers’ Association Libor) or the trademark bbalibor. It is a benchmark, along with the Euribor, for interest rates all around the world.^[2]^[3]

Libor rates are calculated for different lending periods: overnight, one week, one month, two months, six months, etc., and published daily at 11:00 by the British Bankers’ Association.^[4] Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to (and typically higher than) Libor.

Libor is defined as:

The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.

This definition is amplified as follows:

The rate at which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.

Contributions must represent rates formed in London and not elsewhere.

Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets.

The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank’s cash, rather than a bank’s derivative book.

The definition of “funds” is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.

The LIBOR fix on interest rates (dollar denominated) was established in 1985. Hundreds of the biggest banks from around the world agreed with the British Banking Association (BBA) to use the LIBOR rates as the benchmark for their operations. The sixteen biggest banks communicate with the BBA in Londom each business day relating what interest they would expect to pay if they were to borrow from member banks for different periods of time. The BBA then throws ouut the highest and lowest four suggested rates for each time period and then averages the remaining rates and then announces the LIBOR rate for each time period at 11:00 am each day.

Why should we care about the LIBOR? The LIBOR is the benchmark fromwich actual rates are negotiated in the market place and affects all futures contracts, variable rate mortgages, credit card rates, foreign exchange rate (dollar, and much more. Still, the LIBOR is not something the average American worries about the first thing every morning. There is no need to do so. The manner in which LIBOR is determined is reasonable and logical. But, what if some or all of the sixteen (TBTF) banks were manipulating the LIBOR to their benefit and at the expense of everyone else? Well, that is what is happening. It means that there is no such thing as a free market.

This is a huge scandal that has received little attention in the US media. So far Barclay’s Bank has been the center of attention. Barclay’s has been fined and the Chairman of the Board as well as the CEO have resigned. But, there is now evidence that the Bank of England and the Royal Scottish Bank are also involved. There is a good article at BBC News that gives a timeline showing that manipulation of the LIBOR goes back at least to 2005. Here is an excerpt from a story in the Telegraph:

“We have to get kicked out of the fixings tomorrow,” read the email. “We need a 4.17 fix in 1m. We need a 4.41 fix in 3m.”

The email, from a senior Barclays Capital trader in the bank’s offices in the MetLife building looking down over New York’s Park Avenue, to a trader in the bank’s London offices in Canary Wharf, could have seemed innocuous to the unknowing eye.

But what the American banker was doing was telling his British counterpart exactly where the bank needed the Libor – the London Interbank Offered Rate used to set interest rates for everything from mortgages to complex derivatives – to be fixed.

The Telegraph has another article titled: Libor scandal: Was Barclays the worst offender? . The point is, considering how sixteen banks supply information and the four highest and the four lowest are discarded, it would take more than two or three banks to manipulate the LIBOR. It might take all of the banks to do it. I had hoped to share with you a video that The republican Mother had on her blog yesterday that would have given you a good feel for just how serious this scandal is. Unfortunately the video has been pulled.

The bottom line is this: if anyone had any doubt the world’s biggest bank are in fact running the world, this scandal should put those doubts to rest. The LIBOR affects everyone on this planet that takes part in commerce. As i said earlier, there is no such thing as a free market anymore.

That’s what I’m thinking. What are your thoughts?