30 May 2015

The Libor scam - updated

First the definition:
The Libor scandal is a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) and also the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were.
Now some excerpts from an article at Bloomberg:
Details are only now revealing just how far-reaching the scam was...
For years, traders at Deutsche Bank AG, UBS AG, Barclays, RBS and other banks colluded with colleagues responsible for setting the benchmark and their counterparts at other firms to rig the price of money, according to documents obtained by Bloomberg and interviews with two dozen current and former traders, lawyers and regulators. UBS traders went as far as offering bribes to brokers to persuade others to make favorable submissions on their behalf, regulatory filings show...

We will never know the amounts of money involved, but it has to be the biggest financial fraud of all time,” says Adrian Blundell-Wignall, a special adviser to the secretary-general of the Organization for Economic Cooperation and Development in Paris. “Libor is the basis for calculating practically every derivative known to man.”..

Some former regulators say they were surprised to learn about the scale of the cheating. “Through all of my experience, what I never contemplated was that there were bankers who would purposely misrepresent facts to banking authorities,” [facepalm] says Alan Greenspan, chairman of the U.S. Federal Reserve from 1987 to 2006. “You were honorbound to report accurately, and it never entered my mind that, aside from a fringe element, it would be otherwise. I was wrong.”

Sheila Bair, who served as acting chairman of the U.S. Commodity Futures Trading Commission in the 1990s and as chairman of the Federal Deposit Insurance Corp. from 2006 to 2011, says the scope of the scandal points to the flaws of light-touch regulation on both sides of the Atlantic. “When a bank can benefit financially from doing the wrong thing, it generally will,” Bair says. “The extent of the Libor manipulation was eye-popping.”..

Manipulating Libor was a common practice in an unregulated market big enough to span the world though small enough for most participants to know one another personally, investigators found.
The source link at Bloomberg is long and detailed.   Via Reddit.

Reposted from 2013 to add this information about the outcome of the trial and the resulting "punishment."
HENRY: The five biggest banks, Citigroup, JP Morgan Chase, Barclays, The Royal Bank of Scotland, and UBS, have all pleaded guilty to multiple crimes involving foreign currencies, interest rates, and collusion... They set up a cartel to rig one of the largest financial markets in the world. The $5.3 trillion per day foreign exchange market. And some of them, most of them were also involved in rigging what's called the LIBOR interest rate market, as well...

PERIES: Now, explain further in terms of what this pleading guilty actually means, and what is expected in terms of the next steps in this case.

 HENRY: Well, they've agreed under this settlement to pay $5.89 billion in fines in disgorgement of profit. But they've also, the five institutions here, four of them have pleaded guilty. Which is a corporate plea submission. And that's really unusual. The problem is that in advance of this settlement, essentially the collateral consequences that would have applied to a guilty plea by a corporate institution such as losing the right to be a prime dealer for Federal Reserve securities, or losing other rights to represent the pension funds and the U.S. pension fund system, those rights were all shielded, protected. So essentially this is a plea that has been deprived of any collateral consequences. So we also see nobody going to jail here... if they describe this penalty as less than 3 percent of JP Morgan net income last year, it would come off as a more realistic appraisal of how light the penalty is...

HENRY: I think there's a mentality in the part of the Justice Department that they really can't hold senior bankers responsible. In the 1980s under the first Bush administration something like 880 bankers went to jail in the United States for the savings and loan crisis and the financial fraud that was committed there. Here we have banks that are engaged in much more damaging global activity, costing tens of billions of dollars to financial markets, and no one's going to jail. There may be jail for lower-level traders going forward. But none of the CEOs at these institutions have experienced any kind of penalties. In fact, their payment schedules are going up as the stock market increases. JP Morgan's stock price has appreciated 20 percent in the last year alone.


  1. This, together with the market distortion that is high-frequency trading puts the lie to the belief that the financial markets 'generate' any money; instead they are scams that syphon of money from the rest of the economy.

    I'm actually pretty pessimistic about this being solved through democratic methods as imho it's reached the point that the people who are benefitting from these schemes have enough power over our politicians to stop any attempt at reform.

  2. Until, the punishment for 'wrong' is more then lame bad press and impotent fingers wagging....
    Until the reward for doing this 'wrong' is less then the power required to exist above the law in any nation (though I've read China has the right idea)...
    Until someone or something steps in and causes the punishment to be far worse than the crime, how could anyone expect this NOT to happen?
    Apparently, their gods (if they have any) don't mind and with big enough donations, I bet their holy men assure them everything is OK.

  3. It really bothers me that if you have enough money, you can get away with anything. A 5.8 billion dollar penalty is chump change for them--just the cost of doing business. If some of these guys actually had to go to jail, the whole business might get cleaned up. At least a little bit. At least for a while. They can destroy the economy, as they did in 2008, and just walk away, laughing up their sleeves. I wonder how many Congress people they own?

  4. I've long felt that until the Bankers themselves feel the pain, we will never truly get out of this situation. Look at the Savings and Loan Debacle, which has not repeated itself since, whereas Wall Street and the Bankers just keep on doing things as if they had done nothing wrong.


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