Libor: trustworthy?

[campbell]

http://www.bloomberg.com/news/2012-0...-controls.html

Global regulators have exposed flaws in banks’ internal controls that may have allowed traders to manipulate interest rates around the world, two people with knowledge of the probe said.

Investigators also have received e-mail evidence of potential collusion between firms setting the London interbank offered rate, said the people, who declined to be identified because they weren’t authorized to speak publicly. Regulators are focusing on a lack of so-called Chinese walls between traders and employees making interest-rate submissions on behalf of their banks, the people said. In some cases, the two groups may have sat close to each other, one person said.
....
Regulators worldwide are investigating whether banks attempted to manipulate the London, Tokyo and euro interbank offered rates, known as Libor, Tibor and Euribor. The U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, U.S. Department of Justice, and Japan’s Financial Supervisory Agency are all involved. The probes are being led separately, with individual regulators sharing some information among themselves, one of the people said.
....
Price-Fixing
Antitrust authorities are focusing on whether banks might have helped a competitor manipulate one rate in exchange for help moving borrowing costs in a different currency, said another person with knowledge of the investigation. Regulators may view the conduct as a form of price-fixing because it could affect the price of the derivative products, the person said.

The FSA is investigating whether banks’ Libor submissions reflected their actual cost of borrowing and is scrutinizing market data for potential anomalies, another person familiar with the investigation said. The watchdog is scanning e-mails between bankers for code words that could be used to manipulate Libor, said the person, who declined to be identified because they weren’t authorized to speak publicly.

[campbell]

http://seekingalpha.com/article/4391...mail_wsb&ifp=0

Stories over the possible manipulation of LIBOR have abounded in the financial press for some time now, but there has been precious little action. At stake is the integrity of $350 trillion of financial contracts that reference this key interest rate, not to mention the countless other financial products whose prices are ultimately linked back to LIBOR. The ripple effect of the potential mis-pricing of LIBOR is huge, ranging from complex swaps and derivatives traded among sophisticated investors to residential mortgages sold to ordinary households.

....
As stories like these continue to make the headlines, it is little wonder the financial industry continues to suffer from a lack of trust. If the allegations are true, then not only will they highlight widespread ethical shortcomings, they will have a financial impact on sophisticated investors and ordinary consumers alike — because of the centrality of LIBOR to the pricing of so many financial instruments and products. At this stage, it is too early to say what the financial ramifications might be, but it is possible that the legality of various contracts could be called into question if they are deemed to have been mis-priced. In other words, it might not be a “simple” case of market abuse of the type commonly found in the equity markets because the implications of LIBOR are so widespread.

[campbell]

http://www.professionalpensions.com/...ne-tip-iceberg

Barclays record FSA penalty for LIBOR manipulation will be superseded by other banks' fines as the investigation deepens, according to Schroders’ Richard Buxton.

The Financial Services Authority fined Barclays £59.5m this week for significant failings in relation to LIBOR and EURIBOR, after it attempted to profit from the settlement process.

The fine was the largest-ever fine by the FSA, and was accompanied by a further £230m in penalties from US regulators.

....
The FSA said Barclays made submissions which formed part of the LIBOR and EURIBOR setting process that took into account requests from Barclays' interest rate derivatives traders. These traders were motivated by profit and sought to benefit Barclays' trading positions.

It also sought to influence the EURIBOR submissions of other banks contributing to the rate setting process.

I would imagine that this news would open up these banks to suits by investors who were on the other side of these trades while LIBOR was being manipulated.

[campbell]

http://www.telegraph.co.uk/finance/n...wing-rate.html

It was during a weekly economic briefing at the bank in early 2008 that I first heard the phrase. A sterling swaps trader told the assembled economists and managers that "Libor was dislocated with itself". It sounded so nonsensical that, at first, it just confused everyone, and provoked a little laughter.

Before long, though, I was drawing up presentations to explain the "dislocation of Libor from itself" for corporate relationship managers. I was deciphering the subject in emails, internally and externally. And I was using the phrase myself openly with customers of the bank.

What I was explaining was that the bank was manipulating Libor. Only I didn't see it like that at the time.

What the trader told us was that the bank could not be seen to be borrowing at high rates, so we were putting in low Libor submissions, the same as everyone. How could we do that? Easy. The British Bankers' Association, which compiled Libor, asked for a rate submission but there were no checks. The trader said there was a general acceptance that you lowered the price a few basis points each day.

And more at the link

[campbell]

Kind of fits with my "everyone cheats" thread

The Chairman of Barclays is expected to resign today because of this scandal.

Of course I am sure that no one will serve prison time or be forced to openly admit to wrongdoing. Pathetic.

[icon41gimp]

In better days these people would be sent to the block to meet their end at the edge of an axe.

God help us all.

[DixieFlyer]

Originally Posted by campbell

Kind of fits with my "everyone cheats" thread

it sure seems that way, at least in the financial sector...all markets seem rigged these days, and this LIEBOR scandal is just more evidence of that...one of the elegant aspects of free markets is the mechanism of price discovery -- but when prices are all being manipulated, how can you have any confidence in the system?

[campbell]

http://online.wsj.com/article/SB1000...LEFTTopStories

The unfolding rate-fixing scandal at Barclays PLC took an unexpected turn on Tuesday when the British bank made public 2008 notes by now-resigned Chief Executive Robert Diamond suggesting that an official from the Bank of England, under pressure from the U.K. government, may have set off the chain of events that led the bank to lower its submission for calculating an important benchmark lending rate.