The ongoing scandal over a scheme to fix the London Interbank Offered Rate [LIBOR] is racking up an impressive body count, with many of the world’s leading banks implicated in a scheme to fix interest rates on a variety of investments amounting to some $350 trillion, ranging from variable rate mortgages and credit cards to some of the blackest of the black pool investments — including those deadly interest rate swaps.
Here’s one recent headline in the London Telegraph reporting on the London financial world’s reaction to the scandal:
Firms’ ‘disbelief and horror’ over rate swaps scandal
That reminded us something: This nifty little scene from Casablanca, to be precise:
Just how important is LIBOR? Consider this from the BBC:
Libor sets the price not only for hugely valuable derivatives deals in the City – complex trades designed to, for example, insure banks against risk or allow them to make a bet on the future value of assets.
It is also the benchmark for pricing some residential mortgages, more commonly for commercial mortgages, and increasingly for pricing commercial loans by banks to businesses.
So who would have been the losers?
They might be investors who lent money to the bank by buying its short-term bonds, with a Libor-linked interest rate.
In this case they might have been paid less interest than they should have been.
According to the Association of Corporate Treasurers, the vast majority of interest rate derivatives involve financial companies, such as banks, investment firms, insurers and hedge funds.
Neil MacKinnon, a City economist at VTB Capital, said: “Libor itself has already lost credibility as a benchmark – the banks don’t lend to each other at all at the moment.”
And how widespread is the scandal?
The Australian reports:
The Libor-rigging investigation extends to 20 of the world’s biggest banks, including Royal Bank of Scotland, UBS, Deutsche Bank and Citigroup. HSBC and Lloyds Banking Group are also involved.
Regulators and criminal investigators on three continents are examining traders’ activities. RBS has fired about 10 staff as a result. Dozens of bankers at other institutions have been sacked or suspended.
Libor and Euribor are the benchmark rates used to price more than pound stg. 300 trillion of financial products, from credit cards and mortgages to complex financial derivatives.
In the run-up to the financial crisis, traders are said to have attempted to manipulate the rates to boost their bonuses or protect their jobs. At the peak of the financial crisis, they artificially lowered rates to disguise the stress on the banks’ balance sheets. Barclays is the first bank to strike a deal in an attempt to bring an end to the affair. It blew the whistle on its own traders and agreed to settle at an early stage in exchange for a 30 per cent cut in financial punishment.
There’s no question that the game was rigged, and Barclays has already agreed to pay a £290 fine for its role in the rigging game, and CEO Robert Diamond has generously agreed to forgo his annual bonus.
One of the most striking insights to emerge from the scandal is the sheer stupidity of the crooked banksters.
You’d think that potential felons these days would be smart enough to keep their conspiring to covert sources that don’t leave paper trails.
Alas for them, the plotters plotted on email, and investigators now have a treasure trove of exchanges documenting the scam as it happened.
From the London Telegraph’s James Quinn:
“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.
For one-month Libor – “1m” – it needed it to be low. For three-month Libor – “3m” – it needed to be high.
And so it went on. Three months later, a BarCap trader in London pinged an email to a submitter, one of the bank’s staff responsible for accurately submitting information about interest rates to the British Banking Association (BBA), which then aggregated the data and produced the Libor rates. This time the trader wanted the opposite result to his colleague three months earlier: “Your annoying colleague again… Would love to get a high 1m. Also if poss a low 3m… if poss… thanks.”
More from Jamie Grierson of The Independent:
Bank of England Governor Sir Mervyn King launched a scathing attack on the banking industry and demanded a “real change in culture” as Britain’s lenders became embroiled in more controversy.
Opposition leader Ed Miliband pushed for a probe to “shine a light” on the industry after the FSA uncovered “serious failings” in the sale of complex financial products to small businesses, just days after the rate-rigging affair emerged at Barclays.
Taxpayer-backed Royal Bank of Scotland also confirmed it was being investigated for manipulating the rates at which banks lend to each other, known as Libor.
More on the British central bankster’s high dudgeon from Philip Aldrick of the London Telegraph:
Sir Mervyn King, who refused to back Barclays chief executive Bob Diamond, added that the behaviour of Barclays’ traders underlined the need to separate high street banking from casino trading operations.
“What I hope is that everyone now understands that something went very wrong with the UK banking industry and we now need to put it right,” he said. “From excessive levels of compensation, to shoddy treatment of customers, to deceitful manipulation of one of the most important interest rates.
“We can see that we need a real change in the culture of the industry. And that will require two things, one is leadership of an unusually high order and [the other is] changes to the structure of the industry.”
Here’s a London Telegraph clip of King being outraged:
But just how real is King’s outrage?
Here’s a telling excerpt from The Independent’s Oliver Wright:
The Governor of the Bank of England, Mervyn King, has joked about the unreliability of the Libor rate since the credit crunch.
He was fond of telling economic reporters: “Libor – the rate of interest at which big banks don’t lend to each other.”
So the director of the first great imperial central bank clearly knew something fishy was happening, and for at least three years.
What’s next? Answers and a bigger question
From The Independent’s Oliver Wright, Simon English, and Jim Armitage:
Bob Diamond, the chief executive of Barclays, could be called before Parliament as early as Wednesday to answer questions about when he first became aware of the practice. The bank’s chairman, Marcus Agius, will probably also be called to appear “if he is still in a job,” sources on the Treasury Select Committee said.
Ed Miliband, the Labour leader, called for a judge-led inquiry into the industry, asserting that the problem “goes far beyond individuals”. But he also singled out Mr Diamond, adding to the pressure on him to resign: “I think it’s pretty clear that change is required at Barclays. It’s very hard to see that being led by Bob Diamond.”
The head of the Institute of Directors, Simon Walker, said it was “high time” for a “clear-out” of top bankers after a wave of scandals including mis-selling and market manipulation.
It was also reported last night that Barclays failed to act on three internal warnings, between 2007 and 2008, relating to the way it set Libor rates.
London Daily Mail scribes Toby Harnden and Thomas Durante add:
Barclays’ decision to co-operate with authorities that has sent a wave of panic through financial institutions across America.
It is believed that part of Barclays chief executive Bob Diamond’s agreement with American authorities would be to give up other top banks around the world who may be involved.
‘This is the proverbial tip of the iceberg,’ said Hervey Pitt, former chairman of the Washington-based Securities and Exchange Commission.
He added: ‘It is in Barclays’ interest to prove the old adage that misery loves company and I expect they’ll be implicating a lot of their colleagues in other banks.’
So, we’re told, there’ll be a big investigation. They’ll get to the bottom of it, Scoundels will be punished. All will be made right in the world.
Remember that the very same banks implicated in the fixing scandal are players in the global bond markets, and we’re yet to read how their sweet little scame may have impacted the rates charged on those ever-growing mountains of death now smothering Europe, the U.S., and most of the rest of the industrialized world.
Just how willing with the British, U.S., and other governments be to expose the rotten edifice of global banking?
And will the deals negotiated exempt the banksters from public trials where the full extent of their corruption will be exposed.
Just recall that Barack Obama was elected by Wall Street money, and that many key figures in his administration came to Washington via Wall Street.
As for England, the basis of that country’s resistance to Merkel’s push for a Brussels-based financial regulatory regime, while cloaked in the mantle of nationalism, is really all about resistance of any real oversight of The City and its banks.
We suspect this scandal, just like the one that brought the world economy down four years ago, will be all too quickly buried, while our media divert our attention to the last celebrity scandals and scurrilous political campaign tricks.
After all, neither Obama nor Mitt Romney can afford a real independent probe of the source of all their financial support.