Hi

why are the BBC hiding this about turn, pseudo-apology, on behalf of Osbourne by an “Aide”, last night it appeared on the BBC Politics/News site. It has already had its title changed and is relegated well down the list of topics. Nick Robinson mentions it, but why are they not leading on it??

http://www.bbc.co.uk/news/uk-politics-18716828

It is major news given the furious row between Osbourne and Balls. It completely vindicates Balls. Osbourne is looking like he has used Parliamentary Privilege (and the Spectator) to spread innuendo and create the impression that Balls had interfered in Libor setting. Disgraceful. But to be expected from Osbourne, a desperate, incompetent chancellor.

Will Balls receive a proper apology and can the Tories stop trying to divert blame from their banker chums who have been caught stealing and lying.

I had a look at the events of October 2008, trying to figure out what was going on given what we know now. Key point is: Libor wasn’t just being used as one indicator among many – it failing to fall after the measures announced on October 8, 2008, was the main justification for the bailouts of October 13, 2008. It seems possible that the real rate _did_ fall, it’s just that the banks absorbed that by lying less about it. In doing this the banks had to be recapitalised, but the senior management kept their jobs.

http://abigailbrady.blogspot.co.uk/2012/07/libor-and-bailout.html

It meant that before the crash Barclays ripped us off by charging a higher rate on financial products that went through their hands.

Where did you get this idea from?

Afaik the rates Barclays charges on loan etc. are not pinned to its own Libor submission but to the published Libor rate.

So they could only change the rates charges on financial products that are linked to Libor to the extent they manage to move Libor, and if they manage to move Libor, it will be everybody that charges a different rate, not just Barlcays.

BUT Libor is an average computed from over 1000 submissions, and the highest and lowest 25% of submissions are excluded from the calculation, so if you submit high high rate, your rate won’t be included in the calculation. This suggests to me that the impact of any single bank has on Libor rates is miniscule.

Also, if it was generally true that banks make more money when Libor is higher, I’d expect all banks to be publishing exaggerated (higher) Libor rate all of the time (except during a crisis when high Libor rates are interpreted as a sign of stress). Does this happen? If it doesn’t, I don’t think it can be true that higher Libor rates mean more profit for banks. But somebody like Richard W who knows banking might know better, I am just speculating here.

“Even on the right, those who believe in free markets should be outraged at what happened. But the likes of the Adam Smith Institute have become corporate shills churning out pathetic excuses.”

Pretty sure everyone on the right, certainly everything I’ve read, is outraged. The whole point about capitalism and free markets is that private companies and their managers and shareholders have to live with the consequences of their actions. The threat of bankruptcy is what prevents people making stupid or reckless business decisions.

One of the central complaints of Brown and Darling’s handling of the Banking Crisis (and I don’t think the Tories would have done any different had they been in charge) was that the bail outs saved the bankers, rather than just saving the banking system.

The banks, and their shareholders & bondholders, should have been allowed to have gone bust. The Treasury & BoE could have saved the banking payments system (so the ATMs worked and direct debits cleared) and protected all retail depositors.

It would have been messy short term but would have led to a clear out of the disgraced top management (as Polly T is calling for today in her article in the Guardian) and the creation of a whole new host of much smaller banks. Which would mean all this discussion about ring fencing/too big to fail wouldn’t need to be debated.

mind you, what I’ve written #3 means I don’t understand how submitting inflated/deflated rates helped their trader buddies win their derivative contract bets, unless these traders had lots of buddies submitting inflated/deflated rates.

this article from the FT in 2007 should be of interest (if you can read it) – it says people knew the Libor setting process was losing legitimacy back then.

http://www.ft.com/cms/s/0/8c7dd45e-6b9c-11dc-863b-0000779fd2ac.html#axzz1zYq9JpCI

What’s a “paycheck”? Is that an American thing?

it justified huge bonuses on the premise it didn’t need a bailout. It survived by lying.

I think this might be over-egging it somewhat too. If Barclays was not bailed out, and survived, in what sense was it lying to say it did not need a bailout? Evidently it did not.

Here is an argument that submitting lower rates during those days of crisis might in fact of helped Barlcays avoid nationalization and find private investors to inject capital instead

http://blogs.reuters.com/breakingviews/2012/07/04/what-if-barclays-hadnt-lowered-libor-submissions/

So, private investors put money into Barclays on the basis of false figures, and that is a *good thing*, rather than another fraud? If I were the investors from Qatar and Dubai, I’d be seriously looking at a shareholder lawsuit.

ah – think I may have misinterpreted that 1000+ submissions bit from the Libor website I linked to above, according to The Economist, a key Libor rate is set by just 18 banks, the top and bottom 4 rates being discarded. That makes it easier to understand how banks could collude to push the rate around (even if one bank acting alone could not have much impact).

Having just looked at a chart of LIBOR vs BoE base rate, people are going to hard pressed to prove that the “manipulation” unduly affect people – the correlation is 0.97. The only time people might be able to prove something is if there is a real paper trail to prove some kind of misdeed.

This idea that somehow the banks have ripped people off for the tune of billions, form the likes of Sunny, comes from a fundamental misunderstanding of how LIBOR works.

Firstly, LIBOR is set by a pool of banks (20 in this case), with the lowest and highest submissions removed and the rest averaged. So it makes it pretty difficult to move LIBOR a significant amount on your own. Derivatives based on LIBOR use the composite rate, not an individual bank’s submission.

Indeed, until the Lehmans crisis the LIBOR-OIS spread, a very good indicator of the true cost of borrowing for a bank (and thus the true cost of borrowing for their customers) moved almost exactly in lockstep. That spread only blew out AFTER Lehmans, as banks started to price in liquidity and credit risk between themselves….yet that also tells us banks WEREN’T passing the true cost of funding on to their customers.

Secondly, LIBOR itself is not a traded instrument. It is an *estimate* of where a bank thinks it can borrow, and is based but not 100% derived from real money market lending rates (because of credit risk primarily, but other things also come into play).

Lastly, a bank’s LIBOR rate will almost always be driven by their cash needs. A bank which has plenty of cash will tend to set a lower LIBOR, a bank which is desperate for cash will be forced to pay up for it and thus set a higher LIBOR. Banks don’t have huge pots of cash lying around to lend out to people – they have to go and borrow in the money markets to cover the shortfall, so if a bank has loaned out a lot of cash it wil have to borrow more, and push it’s LIBOR submission up.

Given we have a good estimate of where banks were actually getting cash (LIBOR – OIS spread) we can see that until Lehmans there doesn’t seem to have been any material attempt to push LIBOR away from true funding costs….and we also know that post Lehman’s the effort made to push LIBOR DOWN. I’m not sure how easy it is going to be to prosecute banks for doing something which was ultimately in both their and their customers best interests.

Lastly, people use LIBOR as a fix for derivatives because it is trusted and incredibly hard to significantly manipulate. People can use any fixing they want, but most use LIBOR for these reasons…htere are plenty of examples of people avoiding the use of other fixings because they aren’t trusted and use LIBOR instead because it is. So it’s all well and good saying that there is a problem with LIBOR, but i’d challenge anyone to come up with something more reliable and less open to manipulation.

[note there is a large difference between manipulating Libor so that the bank can charge higher rates on loans, mortgages etc. (which I don’t think is what was going on) and manipulating Libor so that traders writing derivative contracts – essentially bets on what Libor is going to do – can win their bets. This, as I understand it, is what they were up to and is sufficient cause for anger, even if it doesn’t really affect people who are not trading derivative contracts. But I am happy to be corrected.]

@ 3 Luis

Banks *can* make more money when LIBOR is higher, but can also make less, because the cost of their borrowing goes up too, and because they are funding short to lend long an increase in borrowing costs tends to show up at the banks first.

In terms of derivatives, remember that there are two parties to the trade…so whilst one guy might want LIBOR higher and push it thus, the other guy wants it lower and does the opposite…so in the submitted average there is now change.

In real life the bank’s real funding needs tend to massively dominate where LIBOR is set, and whilst the notional amount of derivatives contracts might be huge, most of them are offsetting so actual risk you run against LIBOR is very small usually.

I’ve traded derivatives (interest rate swaps) for 10 years now, and not once have I ever worried LIBOR being manipulated by the tiny amounts banks could manage. The real risk you run is that the central banks changes their base rate by a material amout which will obviously affect LIBOR.

“So, private investors put money into Barclays on the basis of false figures, and that is a *good thing*, rather than another fraud? If I were the investors from Qatar and Dubai, I’d be seriously looking at a shareholder lawsuit.”

Good grief, does anyone actually follow the story?

Up to the point at which the Qataris stumped up their cash Barclays’ submissions were higher than average.
Hence the Tucker call, etc.

Tyler

sure there are two sides, weren’t they helping their buddies be on the winning side?

I’ve traded derivatives (interest rate swaps) for 10 years now, and not once have I ever worried LIBOR being manipulated by the tiny amounts banks could manage.

maybe you should have been (maybe you should have been making friends with libor submitters)

What of the relationship between shadow banking, LIBOR and repo rates? The shadow banking system means that slight changes in LIBOR will have huge ramifications. So when The Economist estimates that LIBOR sets the rate for about $800 trillion worth of financial products – about ten times the size of the world economy, they are referring to shadow banking, within which the smallest change in the Libor rate is worth many millions.

Unlike the conventional banking system, the shadow banking system is largely unregulated. That is what happened in September 2008 following the bankruptcy of Lehman Brothers, a major investment bank; it was a run on the shadow banking system that caused the credit collapse that followed. Investors rushed to pull their money out overnight. LIBOR—the London interbank lending rate for short-term loans—shot up to around 5%. Since the cost of borrowing the money to cover loans was too high for banks to turn a profit, lending abruptly came to a halt.

Banks seem to prefer to use the repo rate, as opposed to LIBOR, as their preferred measure of ‘true’ costs as this links up to the shadow banking system closely (think Collateralised Debt Obligations, Credit Default Swaps and all those other securitised loan deals, linked up with pension funds, insurance funds, etc, all that stuff that nobody, not even the banking sector, really understands) as this is usually a lower, longer term measure. The BoEs official interest rate is the repo rate. The worth of European repo contracts at the close of business on June 8, 2011, was $8.57 trillion. That was up from survey totals of $8.19 trillion in December 2010 and $6.42 trillion in December 2008, the post-crisis low.

There appears to be an axiom that the bigger the gap between repo rates and LIBOR, the larger the market stress. It might follow then that at a time when stresses in the shadow banking system were appearing around the Lehman’s collapse, repo rates might start to be less attractive. So, when banks started to realise how much exposure they had to ‘toxic’ debts via the shadow banking system, LIBOR started rising and repo started lowering as an indication that banks did not want to continue buying and selling on each others debts, as they were so toxic. While soaring LIBOR rates were a key indicator of market stress during the credit crunch, the best indicator of collateral crunch intensity is instead the repo rate. The lower the rate, the greater the crunch. The wider the spread between LIBOR and the secured (repo) rate, the greater the general distress in the market. Because markets view a big gap between repo and LIBOR as an ominous portent, banks, in order to hide that fact from governments and the markets, would then have sought to manipulate LIBOR down to reduce the gap between repo rates and LIBOR to downplay market stresses, hiding their own exposure to toxic debt and the wider market, in the hope that LIBOR linked rates would seem more attractive compared to repo rates, distracting attention from their exposure to shadow banking debts.

As the repo market, and the wider shadow banking system, is so interconnected and interwoven with funds and investments that we all rely on, the true effects of the manipulations on the finances of the majority of the public may be very difficult to quantify, with so many investments, funds and loans involved; small changes in base LIBOR rate that might not seem significant to the new mortgage or loans market could have bigger ramifications elsewhere.

We shouldn’t forget that the banking sector has been bailed out to the tune of trillions by government and the public purse despite, or because of, this, with all the terrible consequences of market urged austerity being visited upon us. To say these practices have had no real effect on ‘ordinary’ people, as some people seem to be suggesting, ignores a lot of factors. It would be hoped that an independent inquiry would cast light on these.

@cjcj

If you look at the Reuters opinion article I was responding to, then you’ll see that they had been internally low-balling the number to look more stable, before they got the direction from the BoE to make it even smaller.

Luis “[note there is a large difference between manipulating Libor so that the bank can charge higher rates on loans, mortgages etc. (which I don’t think is what was going on) and manipulating Libor so that traders writing derivative contracts – essentially bets on what Libor is going to do – can win their bets. This, as I understand it, is what they were up to and is sufficient cause for anger, even if it doesn’t really affect people who are not trading derivative contracts. But I am happy to be corrected.]”

Yes, that’s my (lay, in my case) understanding of it. The US Commodities Future Trading Commission report (http://t.co/46Dwa1WT fof those who’ve not seen it) make no mention of higher ‘real world’ rates at all, and I’m not sure where talk of this possible impact has come from; though I’m open to the idea that rela world effects might have been an uintended consequence, I’d want to see some actual proof/sums.

The key point in respect of this post is that Sunny is wrong to say that pre-2008 the traders’ and submitters colluded to keep LIBO/EURIBOR high; the emails in the report show quite clearly that the traders wanted the rates high or low, depending on their trading position, as Tyler sets out.

The emails also seem to make clear that the submitters knew exactly what kind of submitted rates might squeeze into the 50% submission and on which LIBOR’s published rate was based – there’s one in particular which talks about not going too high, but high enough to count. What actually intrigues me is whether the traders actually understood the judgments the submitters actually had to make such that the LIBOR rate did end up shifting enough up or down – with enough submissions just in the 70-75% range, say, to allow them to make big money on presumably massive ‘fund short/lend long’ deals.

I’m also intrigued as to who was on the other side of these deals? Which traders didn’t routinely have access to the LIBOR submission desks? Answers to that might reveal some quite interesting power asymmmetries between the investment banks and the rest of the world of high finance, some of which would presumably feed back to the real world in terms of losses gained to Barclays’ et al’s gains. i.e. on the losing side it might not have all been about personal trading positions.

David Kirkham

yes, if any of this stuff did contribute to the financial crisis then clearly the impact on ordinary people is huge. I can’t think of how, and I don’t see a story that involves shadow banking, but maybe there is one. Otherwise low-balling rates during the crisis probably made it less severe – case in point, it might have relieved the taxpayer of having to bailout Barclays too.

Paul

yes, who was on the losing end of the derivative trades? My knowledge isn’t good enough here, but here’s some speculation … if you take out something to hedge against interest rates moving against you, akin to insurance, that will pay out for example if Libor exceeds X, then the person who wrote that insurance contract can ensure Libor does not exceed X they won’t pay out. But then the thing you were insuring against hasn’t happened – so have you lost? It’s a bit like taking out fire insurance and the insurer ensuring your house does not catch fire! But maybe plenty of people weren’t really hedging anything, they were just gambling and lost.

But there’s a key point to remember. When manipulating the rate, Barclays pretended to have a higher rate (making them more money) before the 2008 crash, and then pretended to have a lower rate after the crash to look like they were able to borrow money cheaply.

As several have pointed out here, Sunny is wrong in the first part.

They were trying to move Libor to suit their trading books. Sometimes this would be higher. Sometimes this would be lower. It would not be in either direction more than 50/50.

As to the second part: yes, lying is bad, yes, I have indeed written at the Torygraph that we want to hang them high for having done so.

However, looking at the larger economic picture I’m rather happy they did so lie: all of the banks. Let me just emphasise the above though: people who lie to fix markets should be prosecuted yes. But back to the major economic effect.

Back in Oct 2008 the Libor market pretty much disappeared. This was the very thing that would have caused the ATMs to close: recall that 2 hours until they do scare? Banks just weren’t willing to lend to other banks at that time.

That’s why it all works through the Bank of England now: excess cash is not lent bank to bank, it’s lent to the BoE which then lends it out again. The BoE now taking the counter party risk.

But back in Oct 08, without the lying, Libor rates would have taken off into the stratosphere. Actual real reporting of the rates could have brought reports of 20%….heck, make up your own number. If banks just don’t trust other bans then why wouldn’t the rate reach 50% or more?

That would have screwed those contracts linked to Libor pretty badly really.

@ 15 Luis

Firstly, if I do a trade with another bank (and most trades are done interbank) then the other guy has got just as much incentive to move LIBOR down as I do for it to go up. Net effect it goes nowhere. Normally books have so much offsetting risk it makes little difference anyway. The overall interest risk of the derivative trades also swamps any gain for fudging LIBOR, so most people simply aren’t that concerned.

Let me give you an example.

Let’s say I do a 1bn GBP 5y Interest rate swap – a pretty big trade. Big enough to put most trading desks over their risk limit i’d guess.

For every basis point (0.01%) 5y swap rates move (and they move significantly more than LIBOR on a daily basis, and over time hugely so) I can make or lose 500k GBP.

For every point LIBOR moves I can make or lose 25k GBP.

So to have the same effect on my PNL, LIBOR has to move 20 times as much as 5y swaps, when in reality the opposite occurs. It’s simply not worth my time and effort to even bother trying to influence LIBOR when my real risks lie elsewhere and my potential upside is pretty tiny in comparison to my other risks. Clearly others have tried to influence LIBOR, but I’d hazard a guess that these guys are pretty small minded beasts.

Even if you assumed that all 800tr of global derivatives trades were the same way (and they’re not. Most of them as I say offset one another) if you somehow managed to moved LIBOR 1 basis point the whole global profit would be only 20bn, and this being a zero sum game…it would be other banks paying for it. In comparison, if we used our example above and assume that all derivatives were 5y swaps, the profit from the swap rate moving 1bp would be 400bn…..

I’ll let you decide which is more important.

Hi Luis Enrique

At the moment all we are seeing is speculation and hearsay; as far I can see the full story can only be revealed by an independent, judicial inquiry. But politicians questioning bankers? What hope have we ever got of getting the truth?

Although lowering rates during the crisis might have made the situation SEEM less severe, and protected Barclays reputation through it not needing a ‘direct’ bail-out, the manipulation doesn’t alter the actual exposure and scale of the crisis, the true damage was making, is making and will make to our economy and most people’s lives, the massive shift in burden and reparation that was visited on us. This incidence brings home the interconnected of banks and banking to people and proves that it was the entire banking industry, not just a couple of banks, that the country rescued. All of the banks on the UK’s high streets owe their existence to public financing. According to the Bank of England, the British taxpayer provided more than £1 trillion of public money to rescue the banks from collapse. Through short-term loans, loan guarantees and quantitative easing (pumping money directly into the economy), the Bank of England helped to bolster bank’s balance sheets. Banks such as Barclays therefore benefit from a promise that taxpayers will never let them fail, because it would be too damaging to the UK economy. Thus, even though it did not take any direct state help during the financial crisis, former Barclays boss, John Varley, had to acknowledge the crucial role played by the government in rescuing the City as a whole:

‘Even those banks who did not take capital from governments clearly benefited (and continue to benefit) from these actions. We are grateful for them, and our behaviour should acknowledge that benefit.’

By hiding the scale of their exposure to the collapse in the shadow banking system, protecting their reputation falsely, Barclays were than able to take advantage of the supported banking system, scooping up assets from the US arm of investment bank Lehman Brothers at bargain rates in the days following its collapse. That business has since proved extremely profitable and what remains of Lehman is suing Barclays for a £3 billion profit it says the British bank made on the deal. If Barclays were hiding the scale of their exposure losses and had not done so, then they wouldn’t have been allowed near those assets.

Consider this: of the initial tranche of QE only someting like 11% reached the wider economy. QE has now extended to £375billion, in addition to the credit easing scheme and mortgage underwriting plans yet banks are still not loaning out money. If banks were and are hiding the true scale of their exposure to shadow banking losses from the crisis, this might go a good way to explaining the truth about why they are hanging onto that money to recapitalise, rather than loaning.

Which is very good reason for banks and politicians to want a quick and dirty parliamentary inquiry.

Tyler

well evidently the traders that were buying bottles of Bolly for their friends making Libor submissions thought there was a pay-off to them. I find your attitude rather baffling, they are on bloody record as fixing the rates to help traders, and here you are telling us traders have no reason to want to fix the rates.

David I think you are rolling up everything wrong with banking, which obviously has had huge costs for us all, with Libor fixing, which (probably) hasn’t.

“I have indeed written at the Torygraph that we want to hang them high”

Oh let them carry on, their mistake was getting caught. In fact, let’s get the state out of the economy and once and for all show capitalism to be the system it is.
And, in the spirit of Marx, the last capitalist to hang shall be the one who sold us the rope.

Hi Luis Enrique

I think the (probably) is the relevant part there; it’s too early to say either way, which is why a full, thorough, parliamentary inquiry is needed. If one looks at Leveson, many things are coming out of that which could never have been brought out by a parliamentary inquiry.

I suspect that the truth about the financial crisis and its ramifications will be revealing itself for many years, even decades to come.

David,

I don’t think it makes any sense to say of QE banks are “hanging onto that money to recapitalise, rather than loaning.” – to receive the money in the first place they must have held a gilt, so their capitalisation isn’t changed by swapping a gilt for cash. It is not the case that if banks were lending they’d have less money held on reserve, the quantity of cash held in reserve is set by the central bank (I am grateful to a link Frances provides on another thread for making that point clear).

Hi Luis Enrique

By which I meant a full, thorough judicial inquiry is needed. Apologies.

David

fair enough – maybe it would emerge how Libor fixing contributed to the crisis.

Months before the rigging of Libor came to light, Bob Diamond – the ex-CEO of Barclays – said in a BBC Today interview, broadcast on 4 November last year, that the banks must accept responsibility for what went wrong.

In the interview – which I listened to – he repeatedly said that banks must work towards a situation where banks could fail without taxpayer support and without causing systemic instability. The FT reported the interview (subscription barrier):
http://www.ft.com/cms/s/0/292c4e48-0658-11e1-8a16-00144feabdc0.html#axzz1cmIopk8y

@ Luis

As shown by the emails, clearly some guys out there were clearly very concerned about where LIBOR set.

For the majority of traders out there though, and I speak from 10 years experience at some of the biggest global banks, trading a variety of different markets, LIBOR moving a basis point is very low on the list of their priorites. When your PNL can be up or down several million USD in a day, making or losing a few thousand thanks to LIBOR moving really is the equivalent of pi**ing in the wind.

Regardless, the data (should you have a bloomberg terminal to chart it) shows real interbank lending rates (from OIS) and LIBOR moving almost totally 1 for 1. It doesn’t look to me like LIBOR was significantly manipulated, and it woud be very hard to prove in a court of law, rather than the court of public opinion.

But isn’t all this talk of whether it worked is a bit moot – it’s criminal conspiracy to even try, no?

@ 32 Abigail

Except that LIBOR is a poll of where banks *think* they can borrow in size, which is based on an opinion. LIBOR is NOTdirectly derived from a market price.

Criminal conspiracy would have to be some form of market fixing in a security…it will be near impossible to prove a criminal conspiracy in opinion forming, even if some people were dumb enough to put on paper/email that they wanted it higher/lower, before you even prove that those requests were even acted on.

Over some time Tyler’s postings here have demonstrated that he’s a thicko. Now he tells us he’s a derivatives trader. Are we getting towards the heart of the problem with our financial sector?

Tim Worstall:
As several have pointed out here, Sunny is wrong in the first part.

They were trying to move Libor to suit their trading books. Sometimes this would be higher. Sometimes this would be lower. It would not be in either direction more than 50/50.

This is rubbish. Can you offer anything to back that up? We already know they reported Libor rate lower after 2008, but the work done by the Economist (see latest issue) and on Ezra Klein’s post points to frequently having the rate higher pre-2008 to make some extra profits.

Tyler: This idea that somehow the banks have ripped people off for the tune of billions, form the likes of Sunny, comes from a fundamental misunderstanding of how LIBOR works.

Rubbish. The fine against Barclays, and the case against other banks, is on the basis that investors were ripped off by what was essentially a cartel.

Even the Economist calls it a cartel. Give up trolling with misinformation.

@Sunny

“Rubbish. The fine against Barclays, and the case against other banks, is on the basis that investors were ripped off by what was essentially a cartel.”

Actually there is no mention of “ripping off investors” as a reason for the Barclays fine according to the FSA.

They hold Barclays to fault for manipulating data and seeking to collude in manipulating data for their own purposes and for having inadequate internal controls.

There’s no mention (or even interest) that ordinary individuals may have lost out. The FSA’s concern seems to be entirely with the integrity of LIbor as a financial benchmark and the effect manipulation would have on other market participants.

http://www.fsa.gov.uk/library/communication/pr/2012/070.shtml

.

but the work done by the Economist (see latest issue) and on Ezra Klein’s post points to frequently having the rate higher pre-2008 to make some extra profits.

But that’s what I’m saying Sunny. “Frequently” the rate would be higher to make extra profits, yes.

Ad “frequently” it would be lower in a similar attempt to make extra profits.

This is derivatives we are talking about remember: sometimes Barclays will have bet on rising interest rates, sometimes on falling. They would have manipulated the rate in order to suit their bet.

The manipulation would not always be upwards: it would be up sometimes and down others.

There’s nothing at all in either Ezra’s or the Economist’s piece that says any different.

Sunny we can all read The Economist article, I link to it at 10

this is how it describes the manipulation of Libor:

“In the case of Barclays, two very different sorts of rate fiddling have emerged. The first sort, and the one that has raised the most ire, involved groups of derivatives traders at Barclays and several other unnamed banks trying to influence the final LIBOR fixing to increase profits (or reduce losses) on their derivative exposures. The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars”

quite clearly this is about moving Libor around (not just increasing it) to suit the bets made by derivative traders. There is nothing in that article about Barclays wanting higher Libor rates so then can make more money from lending indexed to Libor. .

sure, investors have been ripped off by a cartel, but the investors in question are people taking the other side of derivative contracts from the libor-setters’ buddies. This is about players in the casino fixing the odds, at the cost of other players in the casino.

@ Cherub

*yawn*

I’ll raise you two physics degrees from Cambridge. Your move.

@ Sunny

Looks like Shinsei, Tim W and Luis have already corrected the rubbish you posted. You might want to actually read the FSA press release on the matter, helpfully linked by Shinsei above.

Or, you could look at the LIBOR-OIS spread and the LIBOR-Base rate spread on a chart to see what LIBOR *actuallly* did historically. Pre-2008 LIBOR actually moved marginally closer to OIS over a long period, with almost no volatility of the spread, suggestiing the banks were charging their customers LESS. And we all know that post 2008 it was about artifically LOWERING LIBOR.

I know you love a bit of banker bashing, as it suits your lefty ideals that all banks and bankers are somehow inherently poisonous and evil, but don’t let the facts get in the way of a good story will you?

Just because some traders were putting pressure on the submitters to adjust the submission to suit their book does not mean that the bank as a whole was making money from the adjustment. For that you would need to demonstrate the net position of the bank because it is perfectly feasible for one desk in the same bank to be losing from the adjustment as one desk gained. The net position of Barclays on days when ‘ inaccurate ‘ submissions had a material effect on the Libor calculation is what we need before we can assume Barclays benefited.

Clearly its hard to understand since you don’t seem to understand it yourself Sunny. A high LIBOR submission doesn’t mean Barclays made more from people at all. Duh.
I’m afraid explaining why LIBOR hurts the people has been done already, and better.
We demand lighnting reflexes thanks.

Luis, you’re talking about people betting against each other by raising the Libor rates charged.

What do you think they were trading in? If a package containing mortgages is priced higher – you’re telling me it won’t affect those mortgages?

Erm, when even Tories are saying it, its perhaps time to stop pretending?

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9371150/Libor-scandal-may-have-cost-families-their-homes.html

All absolutely true I reckon and all these politicians from both sides didn’t know anything did they. But no one is going to do anything about it. The British people will just grumble and grumble again next time innit.

Stupid author thinks LIBOR applies to normal personal mortgages. It doesn’t – it applies to commercial and sub-prime. Your average mortgage is based on the BoE rate, not LIBOR.

Also Barclays were LOWERING the rate so those who borrowed did so at a LOWER rate than they would have done without the fiddling.

“Erm, when even Tories are saying it, its perhaps time to stop pretending?”

Sunny: you believe that Tory Ministers are lying ignorant little shits anyway. It’s a little odd to call out that they must be right all the same when they agree with you.

I also believe that Tory Ministers (any Ministers) are lying ignorant shits which is why I don’t take Grant Shapps’ point seriously.

Please just think this through for a moment. Let us imagine that Barclays were always trying to raise Libor. No, just pretend. And let us also look at how much they might have managed to raise it by: one or two basis points is the general conclusion.

Now, how much is 1 bps on a mortgage?

1 basis point is one hundredth of one percent. 0.01%. On £100,000 worth of mortgage this is, umm, 10% of £100k is £10k, 1% is £1k, a tenth of a percent is £100 and one hundredth of one percent is £10.

So, if Barclays managed to raise Libor by 1 bps through their manipulation then the interest paid on a mortgage for one year would rise by £10. Less than £1 a month.

No, I don’t think that has led to anyone losing their house either. Shapps is an idiot.

And now let us look at reality. As before, in the early stage of the manipulation it was the traders trying to please their book. Sometimes this would be up, sometimes down. And yes, we are looking at 1 or 2 bps either way each time. £20 a year…..yes, very naughty, I too would like to see people prosecuted and jailed. But responsible for some wave of repossessions? No.

The second stage was the deliberate manipulation down of Libor. That was much larger. tens of basis points at least. Hundreds of pounds a year. But that was *down*, remember?

The effect on mortgages of the first set was pretty much nothing. The effect of the second set was beneficial.

Still wrong, all of it. But not what you make out.

Sunny,

What do I think the derivative traders wanting to manipulate libor rates are trading? I think they are trading interest rate derivatives

http://en.wikipedia.org/wiki/Interest_rate_derivative

I don’t think it would be a “package containing mortgages”. Those who be mortgage backed securities whose prices, I think, are quite unmoved by libor.

And “pretending”? Don’t be an ass.

@4

The whole point about capitalism and free markets is that private companies and their managers and shareholders have to live with the consequences of their actions. The threat of bankruptcy is what prevents people making stupid or reckless business decisions.

I can’t help but be reminded of Rob Newman’s description of the justification for the invasion of Iraq – namely:

“The level of naiveté necessary to believe in such a thing is almost unheard of – outside of a 70s porno film.”

“Free-market” libertarians often advance the viewpoint that it is in fact government’s involvement in regulating business that is the root cause of all corruption and that if that connection was severed then all businesses would be forced to behave rationally. There are so many holes in that assertion that one almost doesn’t know where to begin, but let’s scratch the surface a little.

For starters, let’s look at the lifecycle of executive hiring and retention. Setting aside the fact that these people are already so wealthy that they could be summarily dismissed without recompense from every company they ruin and still live a lifestyle out of reach of all but (ballpark estimate) about 3% of the western population, what happens is that they won’t even look seriously at an appointment unless a six-figure sum is guaranteed regardless of performance. The government has no hand in this process – it is directly derived from the de facto practice dating back to the middle-ages whereby people of wealth and standing would never allow one of their own to fall into penury. So even if they drive the company off a cliff, they collect their payment, lay low for a few years and before long all is forgotten and they find themselves at the reins somewhere else. Only two types of organisation endorse this practice. One is big business and the other is organised crime.

Another factor is the Anglo-Saxon practice of short-termism in business. Executives and shareholders are recompensed directly from the short-term gains of the company – and one of the easiest ways of doing that is shedding staff. So for a few years the executives can pursue a policy of shedding staff and year-on-year reap great rewards – up until the point where the downsizing has essentially cut the legs out from under the company and it can no longer function properly. Do the shareholders lose the dividends and the executives their bonuses from those years despite the fact that it was blindingly obvious what the end result would be (primarily thousands out of work and a failed company)? Hell no. Again – no government involvement to be seen here.

These people are venal and corrupt because they can afford to be, and have built an entire system around making it so which goes back for over a century. In my opinion, for any person to state that the market will protect against this kind of behaviour when we’re dealing with a very small group of wealthy people – whose wealth, in fact, insulates them from anything remotely resembling hardship no matter how often or how badly they fuck up – that statement is a flat denial of reality. The worst bit is that if you espouse these views and are not already a top-end multi-million- or billionaire, then you’ve been had. The people of this group who claim to be your fellow travellers in fact see you as useful idiots.

@BPN

The worst bit is that if you espouse these views and are not already a top-end multi-million- or billionaire, then you’ve been had. The people of this group who claim to be your fellow travellers in fact see you as useful idiots.

You make some good points, but the useful idiots are not those who argue that markets should be allowed to work but the corrupt politicians who, in the name of the people, foster cartels, create artificial barriers to entry into markets and protect the capitalist elite from the consequences of corporate failure.

See October 2008.

@bluepillnation

You said I was naive for thinking that capitalism should make companies and executives live with the consequences of their actions.

But I never said this happened all the time in practice. Of course I’m well aware that the likes of Fred Goodwin drove their company into effective bankruptcy and yet still live very comfortable lives. Materially comfortable albeit professionally disgraced.

There’s a huge difference between capitalism as it operates for 95% of businesses (people remortgaging their house to set up a business) and the likes of crony corporatist capitalism seen at the tops of big banks with their too big to fail ethos, implicit government guarantees and no actual ownership of the business by the executives.

And it is the ownership point that is crucial. The likes of Bob Diamond don’t have ownership of Barclays. He might have a few share options which he will cash in as soon as possible (hence short termism as you say) but he still makes a substantial living out of cash salary, cash bonus and pension payments regardless of share price.

One of the major problems with recent years is that CEOs of FTSE100 businesses pay themselves as if they were entrepreneurial owners of the business without taking on any of the risk.

This isn’t how capitalism is supposed to work. It’s been like this though because in the years of the boom shareholders took their eye off the ball and allowed CEOs to build up this “star” reputation (which was actually just luck being CEO in a boom) and inflate their salaries & bonuses.

51

Capitalism never works according to economic text-book rules on markets, if it did, there would now be a few monopolies remaining. The state has always acted within the capitalist system and overtime the interventions have been ever more greater, operationally, there is very little difference between late capitalism and the state capitalism of the USSR.

As I’ve already mentioned on another thread, there is a certain view proposed by pro-marketeers which suggests that everyone acting in markets does so honestly and there are a minority of dishonest traders who give the system a bad name, but there is now a constant stream of this minority, crawling out of the woodwork. Even with goverment intervention, the Murdochs and News International were able to get away with criminal offences over a long period, and, assisted by certain arms of the state.

Tim worstall: So, if Barclays managed to raise Libor by 1 bps through their manipulation then the interest paid on a mortgage for one year would rise by £10. Less than £1 a month.

No, I don’t think that has led to anyone losing their house either. Shapps is an idiot.

I’m stunned that even a half-intelligent guy like you would make this point.

We’re talking about assets worth 800 TRILLION being traded, and not just one mortage here and there but mortgages from around the world… and assets priced higher by multiple banks not just one.

People like you whine about how the minuscule Robinhood tax would lead to the costs being passed on to consumers just play down the Libor scandal as something very marginal and of no interest to consumers.

We’re talking about assets worth 800 TRILLION being traded, and not just one mortage here and there but mortgages from around the world…

The $800 trillion is not mortgages. The entire housing stock of the world isn’t worth that, let alone that small fraction of mortgages which are priced off Libor.

Almost all of this is interest rate swaps and the like between banks: derivatives, so a zero sum game. Whatever one bank has made another has lost.

Also, note what I actually said: I doubt very much whether anyone lost their house as a result of this. I dodn’t say it wasn’t bad, I didn’t say that people should not be prosecuted. I said that I doubt very much that anyone lost their house over it.

The $800 trillion is not mortgages. The entire housing stock of the world isn’t worth that, let alone that small fraction of mortgages which are priced off Libor.

I didn’t say they were all mortgages. I’m saying mortgages were a significant part… especially since Libor involved 100% of sup-prime mortgages.

I like how you’re trying to play this down as “probably didn’t affect anyone” – without no proof.

Yet you’re equally 100% certain that a minuscule Robinhood tax on speculation would obviously lead to a big cost for ordinary consumers.

“I like how you’re trying to play this down as “probably didn’t affect anyone” – without no proof.”

That isn’t what I said in the slightest. I said that I doubted very much that the manipulation of Libor would have led to anyone losing their houses. Because the amounts it might have been manipulated up, when it was sometimes being manipulated up, wouldn’t make a noiceable difference to hte price of a mortgage.

I even showed you that: 1bps is £10 a year on £100,000 or mortgage. It’s just not enough to lose someone a house.

Now, if you want to talk about the effect in general, on the wider population, then it saved mortgage payers huge amounts. For the second set of manipulation, the one during the crash, this kept Libor *much* lower than it otherwise would have been.

Given that there pretty much wasn’t an interbank market there for a few weeks then no one could borrow in size. And Libor is supposed to be the rate at which you can borrow in size. That no one could borrow in size is why the BoE and the Fed pumped hundreds of billions of liqudity in, recall?

So, if no one could borrow in size then everyone was lying through their teeth. Libor, instead of being an annual 5% or whatever could well have been an annual 50%. But because everyone was lying mortgages did not reset to those higher rates.

Want to keep saying that the manipulation of Libor cost mortgage payers lots of money?

“Yet you’re equally 100% certain that a minuscule Robinhood tax on speculation would obviously lead to a big cost for ordinary consumers.”

Again that’s a misrepresentation of what I’ve said. What I have said that all of the tax raised will come out of the pockets of consumers. The banks won’t pay a penny of it Which makes it rather less attractive as a tax really.

I’ve also pointed to the theory first put forward by Joe Stiglitz, which is that it could cost consumers *more* than the amount raised in the tax. Which makes it a very bad tax indeed.

This isn’t a big cost to consumers: a couple of hundred billion out of global GDP of $60 trillion isn’t all that big a cost. But at least 100% of whatever is raised in the tax will come from consumers.

Tim @54:

Enlightenment me factually if you would, Tim.

You say: “Almost all of this is interest rate swaps and the like between banks: derivatives, so a zero sum game. Whatever one bank has made another has lost.”

Genuine Q:

Is the trading in interest rate swaps restricted to trade between banks for reason I’m unaware of, or is “banks” just shorthand for financial institutions, inclusive of fund managers, managing e.g. pension funds? I seem to remember something somewhere which suggested that in the early/mid-2000s pension funds increased their involvement in this derivative stuff massively, and that a huge % of top 500 plcs also engage in it via their fund managers.

Perhaps in your terninology the investment arms of banks are no no different from Blackrock et al.?

Sunny,

You are arguing about whether the libor fixing affected the man on the street, or just other city traders.

Even if every mortgage in the country was priced off libor, we would wish to know whether manipulating the rates cost mortgage holders thousands or tens of pounds. You can see the likely impact being discussed here:

http://www.thisismoney.co.uk/money/mortgageshome/article-2165987/Barclays-Libor-scandal-compensation-Homeowners-sue-proof-prove-pushed-mortgage-costs.html

With the opinion that “the amounts are probably not of the order to be concerning.’

The point that moving libor arou d by 0.02 of a percentage point has small costs to mortgage holders is relevant.

Which means your comment: “I’m stunned that even a half-intelligent guy like you would make this point.” is somewhat misplaced

Incidentally, I know details don’t interest you, but we are not talking about trillions of assets. If I enter into a 1bn notional value interest rate swap with you, neither of us has a £1bn asset, we have made a bet that might win either of us some tens of thousands of £.

The comparison is the FTT is an interesting one. Does anybody have an estimate for the impact of the FTT upon borrowing costs? How does it compare to the libor fixing.

@ 56 & 58

They are playing the old “Nothing To See Here! Look At That Benefit Scrounger Over There!!” game.

Manipulating Libor? A trivality!! Which is of course why the Serious Fraud Squad is now involved that’s SERIOUS FRAUD Squad BTW….

It’s all falling apart before their very eyes, even former Rose Garden romantic Matthew Parris today described their beloved as: “A zombie coalition reeling forward, loveless and mindless, into a blank future.”

In a few years time they will be sitting in the Adam Smith Institute (“The People Who Brought You The Poll Tax!”) weeping into their G&Ts as they remember “the good, old days with Maggie T.” and asking “where did it all go wrong?”

Before deciding “they were not right-wing and free market enough!” and emerging as a British version of the Tea Party.

I strongly suspect that nothing will happen to these dodgy Bankers, because, a couple of years ago, Directors of a business that about fifty people worked for (including myself), acted illegally and went on to exploit the workers, by using holes in Employment law to withhold staff wages and ultimately cheat employees out of the money that they had worked hard to earn ( http://bobblackmanmp.info/ ).

Despite Employment Tribunals agreeing that staff were treated badly, the High Court said that they are powerless to help because their is noting stopping this in law.

Now, to rub salt in the wound, Government officials and the local MP simply try to kick the issue into the long grass, by claiming that it’s not in the public interest to do anything about this matter, whilst refusing to have the Directors struck off, failing to introduce new laws to outlaw these kinds of sharp practices, and not even bothering to call for an inquiry into this scandal.

Is the trading in interest rate swaps restricted to trade between banks for reason I’m unaware of, or is “banks” just shorthand for financial institutions, inclusive of fund managers, managing e.g. pension funds?

There’s not much reason why a pension fund manager would enter into an interest rate swap. Certainly not as a speculator, running up large positions: that would almost certainly be illegal in fact.

Bu yes, I did mean that derivatives are, by definition, zero sum amongst all those who play with derivatives. Whatever one person wins another must have lost.

The benefit to the society as a whole is that it moves risk around.

Luis:

“The comparison is the FTT is an interesting one. Does anybody have an estimate for the impact of the FTT upon borrowing costs? How does it compare to the libor fixing.”

Yes, I did this sum years back. The FTT will be charged on overnight lending. At what is it? 0.1%? 0.05%?

No one is going to lend overnight if the tax is higher than the interest that can be earned from it. Obvious, eh?

250 banking days in a year? Libor is, before interest, 25% on an annual basis, or at the lower rate there’s 1.5% built into it.

Doesn’t look good.

Chip bitty,

It’s serious, it destroys any pretence investment banks have to be trustworthy providers of services to their clients, I’d like to see bankers jailed and the whole fabric of banking torn up and rebuilt. I don’t think it’s trivial at all.

I just don’t think it materially affected the most of us, in this case. I think it was about players in the City casino cheating.

Tim,

I’m afraid I don’t understand your answer – was it 1.5%? – okay so overnight lending markets might disappear and banks will have to fund themselves some other way, I’m sure various changes will occur, but what’s going to be the likely bottom line impact on how much firms and households have to pay to borrow? Let’s talk in terms of annual rates of interest. The impact might not be constant across all classes of borrower, but let’s ignore that. Didn’t that EU report that estimated the impact on growth do so from an estimated change in the cost of capital?

@ 57. Paul

I think fund managers trading swaps is misleading. Fund managers need to engage in hedging strategies to balance their liability mismatches and that requires a counterparty who will assume the risk that they can’t bear. An ageing customer base causes significant difficulty for pension funds trying to match assets with liability many years into the future. Shifting their portfolios away from equities to a fixed income bond bias is one of the ways they address the ageing population dilemma. However, there are not enough long-dated bonds for everyone to buy bonds to close the mismatch. Moreover, with a bond bias they are exposed to interest rate risk. Small changes have big effects when liabilities are calculated many years into the future. Therefore, they can engage in interest rate swaps, inflation swaps and CDS with investment banks to hedge their exposure to risk. Furthermore, if they buy foreign fixed income bonds they assume foreign currency exposure which they will also hedge with an investment bank.

Buying equity CDS protection can be tricky for a pension fund. It is expensive illiquid and can send out a dodgy signal. Buying the CDS of a company is effectively shorting that company. What kind of message would it be sending out if the BT pension fund is effectively shorting BT. However, that is where most of their exposure lies. Therefore, in recent years we have seen a huge shift towards fixed income bonds and at the same time hedging of that exposure to risk.

Here is the Danish national pension fund making a huge return from their strategy of hedging their risk.
http://www.efinancialnews.com/story/2012-02-01/atp-26-percent-return-2011

Some information that may interest you.

http://www.actuaries.org.uk/system/files/documents/pdf/swapsmadesimple.pdf

https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/PensionPlansExploreIntRateSwaps

@50

It’s not the politicians who enable that behaviour – it is the businesses and the executive/shareholding class that want it that way.

@51

You misread me – steveb has it right. The naivete is not in believing that it *should*, the naivete is in believing that it *does*, for the reasons explained above.

It’s put very succinctly in the movie [i]”Dogma”[/i] when rogue angel Bartleby addresses the board of a corporation clearly based on a US fast-food giant:

“With the exception of Miss Pryce, there is not a decent human being amongst you. Do you know what makes a human being decent?

(beat)

Fear. And therein lies the problem. None of you has anything to fear
anymore. You rest comfortably in seats of inscrutable power, hiding behind
your false idol, far from judgement – lives shrouded in secrecy even from
one another. But not from God.”

In short, when the individuals that run a corporate entity have amassed so much personal wealth that they are shielded from the consequences of their actions (as has always been the case – even during the postwar period, when regulation was embraced wholeheartedly), then they have nothing to fear and will behave in a manner that reflects that.

When the human mind unleashes behaviour betraying no fear of consequence, such behaviour is known as psychopathy, and if caught, the human who behaves in that manner will end up prosecuted and imprisoned or even executed. Since the ’80s, corporations and the wealthy have behaved in such a manner and instead are feted as examples to admire and emulate. There’s something deeply wrong with this state of affairs.

In answer to a few of the questions above:

Derivatives are only traded between large financial institutions and some very large corporates, mostly because the barrier to entry is very high, as you need a good enough credit rating (and enough cash) to get ISDA docs and CSAs signed.

@ Sunny mainly

We CAN easily have a look at how much LIBOR was manipulated….as bloomberg (amongst others) keeps historical data for it, and also historical data for OIS, which is where overnight funding *actually* happens. The LIBOR-OIS spread would change dramatically if there was serious manipulation.

Looking at the REAL LIFE data though, pre-Lehmans, the LIBOR-OIS spread gently dropped (from 15bp to 10bp between ’00 and ’07 for example), with very little volatility. Given LIBOR is an ESTIMATE of were banks can borrow, and that the volatility to the LIBOR-OIS spread was within the bid/offer spread of the two itself, it does suggest that any manipulation had little or no effect, and the net effect was to REDUCE borrowing costs.

The 800tr figure you bandy includes mortgages, but they are a SMALL part. I don’t have time to get all the data together for the entire world, but outstanding mortgage debt in the US is apprx 13.3tr, and the US has the largest housing/mortgages market in the world. Of that 13.3tr not all of it will be tied to LIBOR.

http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm

I’d guess that the figure for the world didn’t add up to more than 10% of the total amount of outstanding derivatives, and that only a minority of that mortgage debt was actually tied to LIBOR.

That 800tr figure is mostly derivatives, traded between financial houses and large corporates, and a huge percentage of that number will be offsetting contracts, as that 800tr figure is a total nominal amount, and doesn’t take into account the massive offsets there are in the market.

Please, Sunny, please, for once in your life before you start ranting away, do some simple research – otherwise you end up looking like a fool.

Thanks Tyler @65:

Just a Q. You say:

“Derivatives are only traded between large financial institutions and some very large corporates, mostly because the barrier to entry is very high, as you need a good enough credit rating (and enough cash) to get ISDA docs and CSAs signed.”

How does that square with this from the Intelligence on European Pensions and Institutional Investment magazine:

“Barclay’s attempts to manipulate the LIBOR rate between 2005 and 2009 could affect UK pension funds “negatively”, depending on their derivatives trades, but it is still too early to assess the full impact of the scandal, a number of consultants have said.” (http://www.ipe.com/news/libor-scandal-could-hit-pension-funds-depending-on-derivatives-trades_46403.php?s=LIBOR registration needed)

Tim somewhere above suggested that pension funds wouldn’t be involved in this kind of interest rate derivative stuff (and indeed that it might be illegal) but the IEP coverage seems to tell a different story. Is it that it is the pension funds’ own fund managers are accredited/cahflowed in the way required, and that they (with the PF boards’ consent)were playing the derivatives market (and presumably losing because of lack of access to pre-trade info)?

@ 66 Paul

Some pension funds do trade derivatives – it really dpends on the exact type of pension fund. On the whole they are not big users of derivatives though, as they are what is known as “real money” and will overwhelmingly tend to match their liabilities buy buying bonds with cash.

The biggest users of interest rate derivatives by far are banks and hedge funds, followed then by corporates and pension funds for specific hedging purposes.

Excellent insight and a frightening exposure of coruption on an unbelievable scale.
Itmay be financial disasters may bring down normal society and values before natural causes