LIBOR – How Many Shoes are Yet to Drop?

On June 27 Barclay’s Bank was fined a total of $453 million by the US Commodity Futures Trading Commission, the US Department of Justice and the UK Financial Services Authority for allegedly manipulating LIBOR and Euribor rates. This week Barclay’s CEO, Bob Diamond and COO, Jerry del Missier, decided to take beach time and stepped down. Given their record over the past several years, which is worse for Barclays: losing its top two executives or paying the fine? It’s certainly a shame that such stellar careers have reached such a turn. But there are other questions, too.

Like: Up to twenty banks are members of the LIBOR panels that submit estimates of the rate they think they can borrow from other banks. There are panels for 10 currencies, the members of which are drawn from the membership of the British Bankers Association, comprised of about 250 banks. Each bank that is a member of a panel submits its ‘estimate’. Then the outlier estimates are thrown out, leaving the 50% of the estimates in the middle. LIBOR is the mean of those estimates. Given that process, how did the boys at Barclay’s manipulate LIBOR all by themselves? Perhaps they hypnotized the other bankers?

Of course, what made Barclay’s the easier target for the authorities is that apparently they found some ‘smoking guns’ in the form of emails from the Barclay’s rate submitters to some of the bank’s traders that were far too, shall we say, ‘collaborative’. The rate submitters are supposed to be the cash managers of the bank, responsible for borrowing inter-bank funds, and they are not supposed to communicate in any way with its traders. I’m wondering what the authorities will find in other banks’ email streams. And when? Other shoes will surely drop. Here’s my suggestion for the other members of the BBA: now would be a bad time to lay off any employees involved in LIBOR rate submitting, unless very generous parting gifts are offered. Or as a friend of mine tells me frequently’ “don’t p**s me off.”

Like: Barclay’s was fined $200m by The Commodity Futures Trading Commission, $150m by the US Department of Justice and a measly £59.5m by the FSA for a total of about $453 million. How did they come up with that number? Could somebody please tell us? I know where I live a parking ticket costs fifteen bucks if paid within ten days and thirty-five if paid later. All parking tickets cost the same so it’s easy to understand.

Where on the scale is $453 million? According an FSA spokesperson speaking to the BBC, the fine was a “judgment call”. Funny that the smallest fine was levied by the jurisdiction where the offence allegedly occurred. I can’t find any reference to how the CFTC or the DoJ came up with their ‘judgment calls’.

Like: A senior executive at Barclay’s apparently got several calls from “senior persons” in Whitehall [the UK government] during the financial crisis that led him to believe the Bank of England was ordering Barclay’s to lower its LIBOR submissions [according to a recent Barclay’s statement]. It would be great to know if this is true and I’m sure there will be people keenly interested to find out. I hope some of them have the power to do so. Because it would be interesting to know how much ‘collaboration’ there is between governments and bankers and to what effect.

While they are at it, perhaps they could also find out why, during the height of the 2008 financial crisis, when investors typically run to things like gold, and one could expect the US dollar and all that US debt held by foreigners to drop in value, the price of gold and gold stocks plummeted [even though it was impossible to buy physical gold at that point because there was no supply] and the US dollar and US government debt strengthened? Were Wall Street banks, the Fed and US Treasury ‘collaborating’ too, to keep the US dollar up and treasury’s borrowing costs down? I wish someone would answer that so I could explain to my wife why after correctly anticipating a steep correction [I wouldn’t say I predicted a crisis] and positioning her investment portfolio in gold investments to benefit from it, it crapped out anyway. I should have shorted a CDO, I guess, and had a book or two written about me. But that’s not easy to do with a woman’s retirement account.

And finally, like: Didn’t any regulator notice that over the past 26 years the benchmark interest rates for 10 currencies used in trillions of dollars’ worth of financial transactions around the world were being set by – an industry lobby group?