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A brief discussion of [LIBOR] and related scandalry/goosery
sportzboytjw
squeeeeeezzeeeesome more tax breaks outRegistered User regular
squeeeeeezzeeeesome more tax breaks outRegistered User regular
wikipedia wrote:In 1984, it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest rate swaps, foreign currency options and forward rate agreements. While recognizing that such instruments brought more business and greater depth to the London Interbank market, bankers worried that future growth could be inhibited unless a measure of uniformity was introduced. In October 1984, the British Bankers' Association (BBA)—working with other parties, such as the Bank of England—established various working parties, which eventually culminated in the production of the BBA standard for interest rate swaps, or "BBAIRS" terms. Part of this standard included the fixing of BBA interest-settlement rates, the predecessor of BBA Libor. From 2 September 1985, the BBAIRS terms became standard market practice.
BBA Libor fixings did not commence officially before 1 January 1986. Before that date, however, some rates were fixed for a trial period commencing in December 1984.
Member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated professional firms (as of 2008).
So I've been trying to figure out what happened here. Apparently LIBOR is basically similar to what the fed does in stablizing a standard rate at which banks can borrow from. The problem (as I understand it, PLEASE CORRECT ME IF I'M WRONG!) is that these rates are built not as basically a plan at manipulating the economy and banks in a positive way, but in response to what banks are reporting. This wouldn't be a bad thing by itself if banks report honestly. As wikipedia explains, people and companies are not always honest.
On Thursday, 29 May 2008, The Wall Street Journal (WSJ) released a controversial study suggesting that banks might have understated borrowing costs they reported for Libor during the 2008 credit crunch.[16] Such underreporting could have created an impression that banks could borrow from other banks more cheaply than they could in reality. It could also have made the banking system or specific contributing bank appear healthier than it was during the 2008 credit crunch.
So banks and individuals may have (probably) lied about rates and costs to look healthier. Okay, people do this; why is it so bad? Well, unlike normal cost-hiding, this impacts the world financial market to a tune of around $350,000,000,000. Yes. That many zeros. Seriously, wtf.
On 28 February 2012, it was revealed that the U.S. Department of Justice was conducting a criminal investigation into LIBOR abuse.[22] Among the abuses being investigated were the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an advantage in predicting that day's fixing. LIBOR underpins approximately $350 trillion in derivatives. One trader's messages indicated that for each basis point (0.01%) that LIBOR was moved, those involved could net “about a couple of million dollars”.[23]
On 27 June 2012, Barclays Bank was fined $200m by the Commodity Futures Trading Commission[6], $160m by the United States Department of Justice[7] and £59.5m by the Financial Services Authority[8] for attempted manipulation of the LIBOR and EURIBOR rates.[24] The United States Department of Justice and Barclays officially agreed that "the manipulation of the submissions affected the fixed rates on some occasions".[25][26] On 2 July 2012, Marcus Agius, chairman of Barclays, resigned from the position following the interest rate rigging scandal. [27] Bob Diamond, the chief executive officer of Barclays, resigned on July 3, 2012. Marcus Agius will fill his post until a replacement is found.[28][29]
By July 4, 2012 the breadth of the scandal was evident and became the topic of analysis on news and financial programs that attempted to explain the importance of the scandal.[30] On July 6, it was announced that the U.K. Serious Fraud Office had also opened a criminal investigation into the attempted manipulation of interest rates. [31]
Bankers/banks/others involved may have made millions of dollars by cheating at knowing what was coming (it's much like insider trading) and made their borrowing rates lower by appearing to be stronger than they were (the same way a bank will give you a better loan if you have, saying, 1 million in collateral compared to $100,000 or $10,000).
TL:DR dishonest people at large banks may have manipulated their books to borrow at higher rates or to profit off of knowing the next day's rates. Corrects and clarification welcome!
khain wrote:I don't know if someone wants to put this in he first post, but there are essentially two scandals here. The first happened pre-crisis where banks, Barclays and others, manipulated the Libor rate to make money. The second part as outlined in the OP is that Barclays, and Barclays claims most other banks, reported a lower rate because reporting a high rate was taken as a weakness. Part of the problem here is that there's a memo from the Bank of England to Barclays that hints that they should report a lower rate. Also at least in Barclays case the data I saw showed them in the top four for this time period which means they dont affect the average.
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My understanding is that the LIBOR rate was designed to get more of a standardized interbank lending interest rate for use to derive other interest rates and and put in contracts, so you could say "this is the one standard rate" rather than each deal having to use some random proprietary interest rate for their deals. This is opposed to what the Federal Reserve does with the federal funds rate, where they actively manipulate the rate through buying and selling assets on the markets in order to enact monetary policy.
The LIBOR was collected by basically surveying some of the big banks and saying "what is the interest rate that you could get for this sort of a loan?", cutting off a few of the data points from the high and low end, and then taking an average of what is left over.
The obvious problem with that is that the banks being asked could lie and report a number that was a bit off in their favor. So if a guy in the other part of the bank, like at their trading desk, or one of the bank's buddies said "man, my derivatives portfolio would love it if the LIBOR rate was a teensy bit higher/lower", and then the guy reporting the rate to be used in LIBOR said "OK!" and reported a rate they knew was off. Even worse, when you have a bunch of guys at different of these banks calling each other up and colluding to shift the rate one way or another to suit their ends.
This is extremely corrupt, but I'm guessing that figuring out who was affected exactly by how much will be next to impossible, since these guys were shaving rates both ways regularly over a long period of time. If you tended to be on the opposite side of the trades as the big banks involved, then you got screwed because they rigged the system to be in their favor.
This rather tempers the GOLDMAAAAAN SAAAACHS *shakes fist* instinct.
I would pinpoint the scandal as more being a degree of insider knowledge created by the (claimed) miscommunication.
Well, the part that got the problem noticed was that the LIBOR rates were suspiciously small during the financial meltdown, correct? So in that instance, you could see it working in more than one way, where some of the lenders would take a hit in terms of getting less interest for what should be a highly risky environment, in exchange for trying to lessen the problem of the whole system locking up and potentially collapsing in a crisis of confidence due to multiple large financial institutions going under one after the other.
But like I said, figuring exactly who won and lost and by how much might be impossible. If you benefited from interest rates moving the same way as the colluding banks did then you were a winner even if you had nothing to do with them, likewise if you were on the opposite side you were a loser even if you were operating independently of the bank's immediate concerns.
This is what I read as well (in The Economist). Their suggestions to keep from happening again are to either A) dramatically increase the number of banks used to compile the LIBOR rate, or
That being said, I hope jail time for banksters will be involved. This type of fraud will not diminish until there's a credible threat of jail. The potential rewards are just too great.
Added to OP.
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Well, it's got massive inertia since so much uses it already. I'm not sure there's really another standard interbank rate set up yet that could replace it despite this scandal, especially since the federal funds rate is explicitly manipulated by the Federal Reserve for monetary policy. So they'll likely have to change how it is compiled to reduce the avenues of abuse, or come up with some other rate that can be used. But those things don't happen overnight, especially since the British government is probably going to play some sort of role in these proceedings.