Confidential Study Reveals Global Finance Is One Big Guesstimate

NYMag

Sadly it is probably too late for
Diamond's "but all the other
rate submitters are doing it!" defense.

A few months ago, when the Libor-rigging scandal hit, casual finance-watchers were aghast at the idea that an interest rate that was used to set rates on trillions of dollars of mortgages, car loans, and other financial products was essentially calculated by polling a few banks and expecting them not to lie to everyone. The most important number in global finance run on the honor system? Couldn't be.

But it was, and Libor was in fact undone by its own trusting nature. As we now know, a coalition of overgrown frat boys conspired to rig the rate, jettisoning the gentleman's honor of Wall Street past and paving the way for Bob Diamond's ouster.

Surely, that was it, though, and replacing Libor with a transaction-based rate that took the prices of actual securities into account would solve the problem. There couldn't be more incredibly important financial numbers out there based on nothing more than a wink and a handshake, right?

Wrong, says Bloomberg, which obtained a confidential memo that revealed that Libor has lots of company when it comes to being easily manipulable:

Fewer than half of the benchmark interest rates surveyed in the U.S., Europe and Asia were based on actual transactions, according to a confidential International Organization of Securities Commissions discussion paper obtained by Bloomberg News. Instead, the rates were calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations, the group said.

[...] 

According to the discussion paper, about 80 percent of benchmarks were either compiled by associations or private entities. For survey-based benchmarks like Libor, the criteria for submitting data was not always objective and called for judgments about rates and prices, according to the discussion paper. Even in benchmarks that are based on actual transaction data, the compiling bodies retain discretion in producing the actual rates or prices.

Manipulation potential in 80 percent of the world's benchmark rates? That's a lot of Bollinger.

With 50 Million Americans Destitute, Austerity Cuts Mean Genocide– Forget Ron Paul and Occupy; Organize for the Five-Point Program to End Depression, Begin Recovery

Geithner Admits He Hid LIBOR Fraud From The DOJ

Alexander Higgins Blog

Secretary of Treasury Tim Geithner is forced to admit under oath that he did NOT inform the DOJ even though he was aware of specific cases of fraud.

Decent clip. More from Geithner’s Libor testimony July 25.

You can just skip to the 4-minute mark and watch the last 2 minutes. After considerable effort, Miller gets Geithner to admit that he ‘did NOT inform the DOJ of anything even though he was aware of specific cases of fraud involving LIBOR manipulation.’

The Ascendancy of a Criminal Financial Elite

The Two Faces of a Police State: Sheltering Tax Evaders, Financial Swindlers and Money Launderers while Policing the Citizens


Global Research
Prof. James Petras

    “The rotten heart of finance” The Economist

    “There is a degree of cynicism and greed which is really quite shocking” Lord Turner Bank of England , Financial Service Authority 

Introduction

Never in the history of the United States have we witnessed crimes committed on the scale and scope of the present day by both private and state elites.

An economist of impeccable credentials, James Henry, former chief economist at the prestigious consulting firm McKinsey & Company, has researched and documented tax evasion. He found that the super-wealthy and their families have as much as $32 trillion (USD) of hidden assets in offshore tax havens, representing up to $280 billion in lost income tax revenue! This study excluded such non-financial assets as real estate, precious metals, jewels, yachts, race horses, luxury vehicles and so on. Of the $32 trillion in hidden assets, $23 trillion is held by the super-rich of North America and Europe .

A recent report by a United Nations Special Committee on Money Laundering found that US and European banks laundered over $300 billion a year, including $30 billion just from the Mexican drug cartels.

New reports on the multi-billion dollar financial swindles involving the major banks in the US and Europe are published each week. England ’s leading banks, including Barclay’s and a host of others, have been identified as having rigged the LIBOR, or inter-bank lending rate, for years in order to maximize profits. The Bank of New York, JP Morgan, HSBC, Wachovia and Citibank are among scores of banks, which have been charged with laundering drug money and other illicit funds according to investigations from the US Senate Banking Committees. Multi-national corporations receive federal bailout funds and tax exemptions and then, in violation of publicized agreements with the government, relocate plants and jobs in Asia and Mexico .

Major investment houses, like Goldman Sachs, have conned investors for years to invest in ‘garbage’ equities while the brokers pumped and dumped the worthless stocks. Jon Corzine, CEO of MF Global (as well as a former CEO of Goldman Sachs, former US Senator and Governor of New Jersey) claimed that he “cannot account” for $1.6 billion in lost client investors funds from the collapse of MF Global in 2011.

Despite the growth of an enormous police state apparatus, the proliferation of investigatory agencies, Congressional hearings and over 400,000 employees at the Department of Homeland Security, not a single banker has gone to jail. In the most egregious cases, a bank like Barclay’s will pay a minor fine for having facilitated tax evasion and engaging in speculative swindles. At the same time, the principle ‘miscreant’ in the LIBOR swindle, Chief Operating Officer (COO) of Barclay’s Bank, Jerry Del Missier, will receive a severance payout of $13 million dollars.

In contrast to the ‘lax’ law enforcement practiced by the burgeoning police state with regard to the swindles of the banking, corporate and billionaire elites, it has intensified political repression of citizens and immigrants who have not committed any crime against public safety and order.

Millions of immigrants have been seized from their homes and work-places, jailed, beaten and deported. Hundreds of Hispanic and Afro-American neighborhoods have been the target of police raids, shootouts and killings. In such neighborhoods, the local and federal police operate with impunity – as was illustrated by shocking videos of the police shootings and brutality against unarmed civilians in Anaheim , California . Muslims, South Asians, Arabs, Iranians and others are racially profiled, arbitrarily arrested and prosecuted for participating in charities and humanitarian foundations or simply for attending religious institutions. Over 40 million Americans engaged in lawful political activity are currently under surveillance, spied upon and frequently harassed.

The Two Faces of the US Government: Impunity and Repression

Overwhelming documentation supports the notion that the US police and judicial system has totally broken down when it comes to enforcing the law of the land regarding crimes among the financial, banking, corporate elite.

Trillion-dollar tax-evaders, billionaire financial swindlers and multi-billionaire money launderers are almost never sent to jail. While some may pay a fine, none have their illicit earnings seized even though many are repeat criminals. Recidivism among financial criminals is rife because the penalties are so light, the profit are so high and the investigations are infrequent, superficial and inconsequential. The United Nations Office on Drugs and Crime (UNODC) reported that $1.6 trillion was laundered, mostly in Western banks, in 2009, one fifth coming directly from the drug trade. The bulk of income from the cocaine trade was generated in North America ($35 billion), two-thirds of which were laundered in North American banks. The failure to prosecute bankers engaged in a critical link of the drug trade is not due to ‘lack of information’, nor is it due to the ‘laxness’ on the part of regulators and law enforcement. The reason is that the banks are too big to prosecute and the bankers are too rich to jail. Effective law-enforcement would lead to the prosecution of all the leading banks and bankers, which would sharply reduce profits. Jailing the top bankers would close the ‘revolving door’, the golden portal through which government regulators secure their own wealth and fortune by joining private investment houses after leaving ‘public’ service. The assets of the ten biggest banks in the US form a sizeable share of the US economy. The boards of directors of the biggest banks inter-lock with all major corporate sectors. The top and middle financial officials and their counterparts in the corporate sector, as well as their principle stockholders and bondholders, are among the country’s biggest tax evaders.

While the Security and Exchange Commission, the Treasury Department and the Senate Banking Committee all make a public pretense of investigating high financial crimes, their real function is to protect these institutions from any efforts to transform their structure, operations and role in the US economy. The fines, which were recently levied, are high by previous standards but still only amount to, at most, a couple of weeks’ profits.

As Libor Fault-Finding Grows, It Is Now Every Bank for Itself

NYTimes

The Barclays settlement prompted the resignation of top executives,
including the chief executive, Robert E. Diamond Jr., and helped to erase more than
$3 billion of the bank’s market value.

Major banks, which often band together when facing government scrutiny, are now turning on one another as an international investigation into the manipulation of interest rates gains momentum.

With billions of dollars and their reputations on the line, financial institutions have been spreading the blame in recent meetings with authorities, according to government and bank officials with knowledge of the matter. While acknowledging their own wrongdoing, institutions are pointing out actions at other banks that they believe are worse — and in some cases, extend to top executives.

One official involved in the case said that banks are emphasizing that “we’re not as bad as the next guy.”

The Swiss bank UBS, which has a history of regulatory run-ins, has shared e-mails, instant messages and other information suggesting it had colluded with traders at Deutsche Bank,HSBC and the Royal Bank of Scotland to manipulate key interest rates, according to court documents and bank employees. In talks with authorities, HSBC is providing its own account of the activities, according to a lawyer briefed on the matter. Citigroup has also detailed rate manipulation with other banks.

When the British bank Barclays recently negotiated a settlement with authorities, it highlighted that other European institutions took part in the rate-rigging scheme, said officials close to the case. Like UBS, Barclays has provided information on activities involving HSBC and Deutsche Bank.

Several banks are using Barclays’ $450 million settlement as a guidepost in preliminary discussions with authorities. JPMorgan Chase and Citigroup are each emphasizing to authorities that their chief executives were not implicated in the wrongdoing as in the case of Barclays, and therefore the banks deserve to be treated less severely, according to the officials.

A Deutsche Bank manager who oversaw traders is facing scrutiny, according to a person involved in the case. However, a Deutsche Bank spokesman said no managers or top executives had been aware of any rate manipulation, adding that the investigation was continuing.

JPMorgan, Deutsche Bank, HSBC and Citigroup have said they are cooperating with officials.

Authorities around the world are investigating more than 10 big banks for their roles in setting global interest rates like the London interbank offered rate, or Libor. Such benchmarks underpin trillions of dollars of financial products, including mortgages and student loans.

Regulators are examining whether banks colluded to move the rates up or down to get extra profits and limit losses on their trading positions. Some banks are also under investigation for reporting artificially low rates to make themselves appear financially healthier.

When banks first started conducting internal investigations at the behest of regulators two years ago, they figured the potential penalties would be manageable, according to bank officials.

But the size of the Barclays settlement and the growing public outcry have left banks scrambling to limit their culpability as the threat of criminal actions increases. Part of the banks’ problem is that their internal investigations have created a road map that authorities are using to pursue criminal and civil cases.

Those findings provide a detailed portrait of the wrongdoing.

Interviews with dozens of government and bank officials who spoke on the condition of anonymity because the investigation is developing, and a review of court documents and regulatory filings show varying degrees of exposure. Banks like UBS, Deutsche Bank and Citigroup uncovered that employees had worked with traders at other firms to influence rates, according to government and bank officials. A small number of institutions, including Credit Suisse and Bank of America, found more limited actions.

The extent of the evidence has created an every-bank-for-itself attitude.

The financial industry often tries to negotiate a common deal to avoid getting singled out for bad behavior. This year, five banks collectively struck a multibillion-dollar agreement with federal authorities to address foreclosureabuses.

With the rate investigation, institutions are not sharing information or even discussing the case with rivals, according to lawyers involved in the matter. In part, they do not want to appear to have close ties with their rivals, since such cozy relationships are part of the government’s inquiry.

“There is no information-sharing among banks unlike the past 15 years of federal investigations,” said a lawyer involved in the case.

The Biggest Banking Scandal The World Has Ever Seen

REPORT: ABC, NBC Evening News Shows Ignore Massive Banking Scandal For More Than A Month

Media Matters

American television news outlets continue to devote sparse time to one of largest banking scandals in history. The controversy over whether major banks have been manipulating the LIBOR, a crucial interest rate that banks use to borrow money from one another, has been gathering steam for more than a month since U.S. and U.K. regulators fined British bank Barclays $450 million for its role in trying to rig the rate. 

CNN's Erin Burnett has explained that LIBOR is "an interest rate at the core of our entire economy," adding, "It's really not wrong to say that if you can't trust LIBOR, you can't trust anything in banking." According to The Economist, the LIBOR is used "as a benchmark to set payments on about $800 trillion worth of financial instruments." Baltimore City filed a lawsuit against major banks in the first of what may be a wave of such actions, alleging that the LIBOR manipulation potentially cost it millions of dollars in investment returns.

Despite the enormous implications of the scandal, ABC's World News and NBC's Nightly News both ignored the story in the 16 days after news of the Barclays fine broke, as we documented earlier this month. In the 16 days following the period of our original study, the LIBOR blackout has continued on ABC and NBC's flagship evening news programs. Those programs have gone more than a month without mentioning the controversy. 

CBS Evening News devoted more than five and a half minutes to the story in the first 16 days following the Barclays fine, but has not returned to the scandal in the subsequent 16 day period despite a host of new developments.

After spending roughly six and a half minutes combined covering the scandal on their evening newscasts and opinion programming between June 27 and July 12, MSNBC, CNN, and Fox News devoted less than 32 minutes to stories related to the controversy from July 13 to July 28, with more than two-thirds of that coverage coming from CNN. 

These same news outlets spent significantly more time on trivialities like shark sightings and the Tom Cruise/Katie Holmes divorce than on the banking scandal. For context, ABC, NBC, CBS, Fox News, MSNBC, and CNN spent 44 minutes combined on the LIBOR scandal during their evening programming from June 27 to July 28. By contrast, these same outlets devoted nearly 65 minutes to stories about sharks for only the first sixteen days of that period.

Far from being a dormant story, fallout from allegations that the LIBOR has been manipulated has been steady.

Tim Geithner Admits Banks Bailed Out With Rigged Libor, Costing Taxpayers Huge Amount

Huffington Post
Mark Gongloff

 Timothy Geithner claimed on Wednesday that the government had no choice during the financial crisis but to lend to banks and AIG using an interest rate, Libor, that everybody knew was flawed.

Call it a back-door bailout: By using an artificially low Libor, the government saved the banks and AIG millions, maybe billions -- and cost the taxpayers the same amount.

The use of Libor in the bailouts also rubber-stamped that hopelessly manipulated interest rate as a market measure, raising still more questions about just how worried Geithner and other regulators really were about it.

In a House Financial Services Committee hearing on Wednesday, Treasury Secretary Geithner was asked why Treasury and the Fed used the London Interbank Offered Rate as a basis for loans to insurance giant American International Group and to U.S. banks under the Term Asset-Backed Securities Loan Facility -- even though Geithner and other regulators had long suspected that Libor was artificially low, as Geithner testified.

"We were in the position of investors around the world," Geithner shrugged. "You have to choose a rate, and we did what everybody did -- use the best rate available at the time."

Geithner repeated his claim that he warned other U.S. and British regulators in the spring of 2008 about possible manipulation of the key interest rate and recommended changes to the way the rate was set.

But he also said that, months later, when it came time to set bailout terms for the Too Big To Fail Set, the government just had no other choice but to use Libor.

Sure, that's one way to look at it. Another, less charitable way to look at it is that the Fed was fully aware that Libor was being manipulated lower, and was fine charging an artificially low rate to lend money to banks and to AIG, in what amounted to yet another kind of bailout. Why make life harder for them, right? They had enough problems dealing with the crisis they had created. Raising red flags about Libor might have only made the crisis worse, making it harder for banks to borrow money.

But in the process, the government left untold mountains of cash on the table for U.S. taxpayers. Even if Libor was only manipulated a tiny bit lower, these small breaks add up.

Crime of the century with Max Kesier

The Libor Scandal In Full Perspective

Global Research
Paul Craig Roberts

The article about the Libor scandal, coauthored with Nomi Prins, received much attention, with Internet repostings, foreign translation, and video interviews. To further clarify the situation, this article brings to the forefront implications that might not be obvious to those
without insider experience and knowledge.

The price of Treasury bonds is supported by the Federal Reserve’s large purchases. The Federal Reserve’s purchases are often misread as demand arising from a “flight to quality” due to concern about the EU sovereign debt problem and possible failure of the euro.
Another rationale used to explain the demand for Treasuries despite their negative yield is the “flight to safety.” A 2% yield on a Treasury bond is less of a negative interest rate than the yield of a few basis points on a bank CD, and the US government, unlike banks, can use
its central bank to print the money to pay off its debts.

It is possible that some investors purchase Treasuries for these reasons. However, the “safety” and “flight to quality” explanations could not exist if interest rates were rising or were expected to rise. The Federal Reserve prevents the rise in interest rates and decline in bond prices, which normally result from continually issuing new debt in enormous quantities at negative interest rates, by announcing that it has a low interest rate policy and will purchase bonds to keep bond prices high. Without this Fed policy, there could be no flight to safety or quality.

It is the prospect of ever lower interest rates that causes investors to purchase bonds that do not pay a real rate of interest. Bond purchasers make up for the negative interest rate by the rise in price in the bonds caused by the next round of low interest rates. As the Federal Reserve and the banks drive down the interest rate, the issued bonds rise in value, and their purchasers enjoy capital gains.

As the Federal Reserve and the Bank of England are themselves fixing interest rates at historic lows in order to mask the insolvency of their respective banking systems, they naturally do not object that the banks themselves contribute to the success of this policy by fixing the LIbor rate and by selling massive amounts of interest rate swaps, a way of shorting interest rates and driving them down or preventing them from rising.

The lower is Libor, the higher is the price or evaluations of floating-rate debt instruments, such as CDOs, and thus the stronger the banks’ balance sheets appear.

Does this mean that the US and UK financial systems can only be kept afloat by fraud that harms purchasers of interest rate swaps, which include municipalities advised by sellers of interest rate swaps, and those with saving accounts?

The answer is yes, but the Libor scandal is only a small part of the interest rate rigging scandal. The Federal Reserve itself has been rigging interest rates. How else could debt issued in profusion be bearing negative interest rates?

As villainous as they might be, Barclays bank chief executive Bob Diamond, Jamie Dimon of JP Morgan, and Lloyd Blankfein of Goldman Sachs are not the main villains. The main villains are former Treasury Secretary and Goldman Sachs chairman Robert Rubin, who pushed Congress for the repeal of the Glass-Steagall Act, and the sponsors of the Gramm-Leach-Bliley bill, which repealed the Glass-Steagall Act. Glass-Steagall was put in place in 1933 in order to prevent the kind of financial excesses that produced the current ongoing financial crisis.

President Clinton’s Treasury Secretary, Robert Rubin, presented the removal of all constraints on financial chicanery as “financial modernization.” Taking restraints off of banks was part of the hubristic response to “the end of history.” Capitalism had won the struggle with socialism and communism. Vindicated capitalism no longer needed its concessions to social welfare and regulation that capitalism used in order to compete with socialism.

The constraints on capitalism could now be thrown off, because markets were self-regulating as Federal Reserve chairman Alan Greenspan, among many, declared. It was financial deregulation–the repeal of Glass-Steagall, the removal of limits on debt leverage, the absence of regulation of OTC derivatives, the removal of limits on speculative positions in future markets–that caused the ongoing financial crisis. No doubt but that JP Morgan, Goldman Sachs and others were after maximum profits by hook or crook, but their opportunity came from the neoconservative triumphalism of “democratic capitalism’s” historical victory over alternative socio-politico-economic systems.

Titanic Banks Hit LIBOR Iceberg: Will Lawsuits Sink the Ship?

Web of Debt
Ellen Brown

At one time, calling the large multinational banks a “cartel” branded you as a conspiracy theorist.   Today the banking giants are being called that and worse, not just in the major media but in court documents intended to prove the allegations as facts.  Charges include racketeering (organized crime under the U.S. Racketeer Influenced and Corrupt Organizations Act or RICO), antitrust violations, wire fraud, bid-rigging, and price-fixing.  Damning charges have already been proven, and major damages and penalties assessed.  Conspiracy theory has become established fact.

In an article in the July 3^rd Guardian titled “Private Banks Have Failed – We Need a Public Solution”, Seumas Milne writes of the LIBOR rate-rigging scandal admitted to by Barclays Bank:

It’s already clear that the rate rigging, which depends on collusion, goes far beyond Barclays, and indeed the City of London. This is one of multiple scams that have become endemic in a disastrously deregulated system with inbuilt incentives for cartels to manipulate the core price of finance.

. . . It could of course have happened only in a private-dominated financial sector, and makes a nonsense of the bankrupt free-market ideology that still holds sway in public life.

. . . A crucial part of the explanation is the unmuzzled political and economic power of the City. . . . Finance has usurped democracy.

Bid-rigging and Rate-rigging

Bid-rigging was the subject of U.S. v. Carollo, Goldberg and Grimm, a ten-year suit in which the U.S. Department of Justice obtained a judgment on May 11 against three GE Capital employees.  Billions of dollars were skimmed from cities all across America by colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion.  Other banks involved in the bidding scheme included Bank of America, JPMorgan Chase, Wells Fargo and UBS.  These banks have already paid a total of $673 million in restitution after agreeing to cooperate in the government’s case.

Hot on the heels of the Carollo decision came the LIBOR scandal, involving collusion to rig the inter-bank interest rate that affects $500 trillion worth of contracts, financial instruments, mortgages and loans.  Barclays Bank admitted to regulators in June that it tried to manipulate LIBOR before and during the financial crisis in 2008.  It said that other banks were doing the same.  Barclays paid $450 million to settle the charges.

The U. S. Commodities Futures Trading Commission said in a press release that Barclays Bank “pervasively” reported fictitious rates rather than actual rates; that it asked other big banks to assist, and helped them to assist; and that Barclays did so “to benefit the Bank’s derivatives trading positions” and “to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.”

After resigning, top executives at Barclays promptly implicated both the Bank of England and the Federal Reserve.  The upshot is that the biggest banks and their protector central banks engaged in conspiracies to manipulate the most important market interest rates globally, along with the exchange rates propping up the U.S. dollar.

CFTC did not charge Barclays with a crime or require restitution to victims.  But Barclays’ activities with the other banks appear to be criminal racketeering under federal RICO statutes, which authorize victims to recover treble damages; and class action RICO suits by victims are expected.

Geithner did not show evidence of rigged Libor, British bank official says

Washington Post
Zachary A. Goldfarb
Jia Lynn Yang

Federal Reserve Chairman Ben S. Bernanke told lawmakers Tuesday that the central bank did all it was required to do after learning in 2008 of the ma­nipu­la­tion of the Libor interest rate, including notifying counterparts in Britain.

But Bank of England Governor Mervyn King, addressing Parliament earlier in the day, said he received none of the evidence of misreporting that the Fed had gathered.

Libor — the London interbank offered rate— serves as a benchmark for mortgages, student loans, auto loans and many other financial contracts and is an indicator for the health of the banking industry.

The scandal was exposed late last month when the British bank Barclays agreed to pay $450 million to regulators to settle allegations it manipulated Libor in years preceding and during the financial crisis.
Barclays admitted to artificially lowering its Libor rate, which made the bank appear to be healthier than it really was in the midst of the crisis. It also acknowledged that several traders rigged the rate for personal profit. Other banks are also being investigated.

Libor is calculated in Britain and reflects the borrowing costs of 18 banks, including firms in Europe and Japan and three American institutions: Bank of America, Citigroup andJPMorgan Chase.
On Tuesday, elected officials wanted to know from top financial policymakers what they knew and when they knew it.

In Britain, a parliamentary committee asked King about evidence amassed by the Federal Reserve Bank of New York in April 2008 that Barclays was manipulating Libor.

The New York Fed on Friday disclosed that it had early evidence of ma­nipu­la­tion — including a phone call in which a Barclays executive admitted to a Fed staffer that the British bank was manipulating the rate.

“The New York Fed did not raise any evidence of wrongdoing with regards to Libor,” replied King, who said that he received only a memo of suggestions from then-New York Fed President Timothy F. Geithner, now the U.S. Treasury secretary,on reforming the rate.

Later in the day, Bernanke defended the Fed’s actions. He noted that beyond providing advice to the Bank of England, the New York Fed also presented its concerns to a broader group of U.S. financial regulators.

“There was rapid follow-up,” Bernanke said in testimony before the Senate banking committee.

In response to questions, Bernanke said he could not assure lawmakers that the problems with Libor have been remedied by its supervisory body, the British Bankers’ Association.

“I can’t give assurance with full confidence, because the British Bankers’ Association did not adopt most of the suggestions made by the Federal Reserve Bank of New York,” Bernanke said. “It’s likely the concerns are less now because we’re no longer in the crisis.”

Ben Bernanke and Mervyn King describe Libor fixing as 'fraud'

Guardian

Federal Reserve chairman could not say 'with full confidence' that Libor is reliable in testimony to Senate banking committee

Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs 

The heads of the US and UK central banks have described as "fraud" the manipulation by Barclays of the international lending rate, Libor.

The US Federal Reserve chairman, Ben Bernanke, said the process for setting the rate was "structurally flawed" and that he could not guarantee its reliability.

Mervyn King, the Bank of England governor, said that deliberately rigging the Libor rate for private gain was "my definition of fraud".

The bankers were testifying before lawmakers on both sides oof the Atlantic. Bernanke told a Senate banking committee hearing that there was little the US central bank could do to reform the system, which has rattled investor confidence in financial markets, because it has no control over how it is set.

The reliability of the London Interbank Offered Rate, the interest rate that underpins transactions worth trillions of dollars, is under question with the revelations that bankers sought to move rates to profit on trades and to hide its borrowing costs during the 2007-09 financial crisis.

"I would like to see additional reforms to the Libor process, assuming that Libor will continue to be a benchmark for financial contracts," Bernanke said at a Senate banking hearing held to discuss the state of the economy.

Libor is set by a panel of banks, which submit estimates of how much they believe they have to pay to borrow from each other. Barclays is the only bank so far to settle with US and UK regulators over allegations that it manipulated the key interest rate. Dozens of other big banks – including at least two American institutions – are currently under investigation.

Bernanke said the Fed had little power to change the way the benchmark rate is set. "We are and need to continue advocating for reforms to the Libor process. It is constructed by private organization in the UK, and so our direct ability to influence that is limited," he told lawmakers.

Bernanke said he could not say "with full confidence" that Libor is reliable, because the "British Bankers' Association did not adopt most of the recommentations made by the New York Fed".

Documents released last week by the New York Fed showed that US and British regulators were aware of the weaknesses in how Libor was set. Treasury secretary Timothy Geithner, then the head of the New York Fed, went as far as to email Bank of England Governor Mervyn King in 2008 with recommendations on how to boost the credibility of Libor.

There was no documentation showing that the Fed followed up on its concerns. At the time, Geithner and the Bush administration had their hands full with a financial crisis that was spiraling out of control.

Bernanke told lawmakers that the traders and banks involved in the Libor manipulation scandal have had the effect of undermining public confidence in the financial system.

In London, King told a parliamentary committee that the Bank of England could not be blamed for the Libor scandal. He said he only learned that Barclays had been deliberately misreporting its Libor rates two weeks ago.

He conceded there were concerns about the accuracy of Libor during the financial crisis. But he said that was not the same as proof that the figures had been manipulated for private gain, adding: "That's my definition of fraud."

In his testimony, King said that he had solicited the email from Geithner, saking him to send his concerns in writing, after learning of them at a conversation in Basel. The Bank of England passed Geithner's concerns on to the British Bankers' Association the next day.

On Capitol Hill, Bernanke offered few new clues on whether the Fed was moving closer to a fresh round of monetary stimulus. He said the US economic recovery was being held back by tighter financial conditions due to Europe's debt crisis and uncertainty surrounding fiscal policy.

Financial markets had looked forward to Bernanke's testimony for any signs the central bank was moving closer to a third round of bond purchases – or QE3 in market parlance – to support the economy.

But the Fed chief disappointed investors, hewing closely to the message of watchful waiting that the central bank's policy panel delivered in June.

"Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action," Bernanke said in his testimony on the Fed's semi-annual monetary policy report.

US stocks prices slipped and the dollar hit session highs against the euro. Prices of treasury securities trimmed losses.

Why is Nobody Freaking Out About the LIBOR Banking Scandal?

Rolling Stone
Matt Taibbi

The LIBOR manipulation story has exploded into a major scandal overseas. The CEO of Barclays, Bob Diamond, has resigned in disgrace; his was the first of what will undoubtedly be many major banks to walk the regulatory plank for fixing the interbank exchange rate. The Labor party is demanding a sweeping criminal investigation. Mervyn King, Governor of the Bank of England, responded the way a real public official should (i.e. not like Ben Bernanke), blasting the banks:

It is time to do something about the banking system…Many people in the banking industry are hardworking and feel badly let down by some of their colleagues and leaders. It goes to the culture and the structure of banks: the excessive compensation, the shoddy treatment of customers, the deceitful manipulation of a key interest rate, and today, news of yet another mis-selling scandal.

The furor is over revelations that Barclays, the Royal Bank of Scotland, and other banks were monkeying with at least $10 trillion in loans (The Wall Street Journal is calculating that that LIBOR affects $800 trillion worth of contracts).

The banks gamed LIBOR for two semi-overlapping reasons. As noted here last week, there were instances of Barclays traders badgering the LIBOR submitters to "push down" rates in order to fatten their immediate bottom lines, depending on what they were trading or holding that day. They also apparently rigged LIBOR downward in order to produce a general appearance of better health, essentially tweaking their credit scores a few ticks upward.

Most intriguingly, or perhaps disturbingly, there were revelations last week that Bank of England deputy Governor Paul Tucker had a conversation with Diamond at the peak of the crisis in 2008. The conversation reportedly left Diamond, and subsequently his traders, with the impression that the bank had carte blanche to rig LIBOR downward in order to help allay spiraling public fears about the banks’ poor financial health.

British officials, and Tucker individually, deny that Tucker gave Diamond permission to rig rates. But a report by British regulators did conclude that the two were talking about Barclays LIBOR submissions on October 29, 2008, and that as a result of that conversation, Diamond came away with a “misunderstanding.” The Daily Mail quotes the Financial Services Authority report:

However, as the substance of the telephone conversation was relayed down the chain of command at Barclays, a misunderstanding or miscommunication occurred.

This meant that Barclays’ submitters believed mistakenly that they were operating under an instruction from the Bank of England (as conveyed by senior management) to reduce Barclays’ Libor submissions.

That is explosive stuff. Members of Parliament will be grilling Tucker tomorrow about those events in what is sure to be a far more combative and entertaining legislative inquiry than the Jamie Dimon dog-and-pony show we just went through here in the states in recent weeks.

The implications of that part of the story should be particularly chilling to Americans, who in recent years have been party to a number of revelations about strange and seemingly inappropriate contacts between senior regulatory officials and big bankers during the heat of the crisis.

We know that American officials in 2008-2009 were extremely concerned about the appearance of weakness in the financial markets, so much so that they may have resisted pursuing criminal prosecutions against big banks, and we also know that they spent a lot of time commiserating with Wall Street figures before and during the crisis.

If Bob Diamond and Paul Tucker were having these talks about LIBOR, is it fair to wonder what else Hank Paulson and Lloyd Blankfein were talking about in the 24 discussions they had in the six days following the AIG disaster? When Paulson had a secret meeting with the entire board of Goldman Sachs in, of all places, his hotel suite in Moscow, in June of 2008? Or what other material nonpublic information was exchanged when Paulson met with a gang of hedge fund chiefs at the offices of Eton Park management in July 2008, and laid out for them a possible scenario for putting Fannie and Freddie into receivership?

Anyway, the LIBOR story is leading the front pages of most of Britain’s dailies, it’s on TV, and it’s producing blistering editorials and howls of outrage amongst politicians and activists. But as compadre Yves Smith at Naked Capitalism put it, where’s the outrage here in America?

The big story on our shores in the last few weeks has been the health care ruling, which makes sense, but then after that… what? The heat? Tom and Katie? (There’s actually a story about how Katie can wear heels again, now that she’s not married to a short person). Joe Sandusky? Nightline’s big story tonight, which is already being hyped on the net, is about how fat Chris Christie is and why the hell he hasn’t done the bypass surgery yet:

New Jersey Gov. Chris Christie opened up about his weight problem in an interview with ABC News and stressed he is "trying" to lose weight, a battle he's waged for 30 years, but said he's never considered gastric bypass surgery because it's "too risky."

"I mean, see, listen, I think there's a fundamental misunderstanding among people regarding weight and regarding all those things that go into, to people being overweight," Christie said in an interview that will air Tuesday on "Nightline."

Glad to be informed! The New York Times, meanwhile, did chime in with a house editorial yesterday, and it was appropriately somber. And there has been some coverage in the financial press.

But to me what’s missing from all of this is the “Holy Fucking Shit!” factor. This story is so outrageous that it shocks even the most cynical Wall Street observers. I have a friend who works on Wall Street who for years has been trolling through the stream of financial corruption stories with bemusement, darkly enjoying the spectacle as though the whole post-crisis news arc has been like one long, beautifully-acted, intensely believable sequel to Goodfellas. But even he is just stunned to the point of near-speechlessness by the LIBOR thing. “It’s like finding out that the whole world is on quicksand,” he says.

So as far as the stateside press goes, I’ve got to assume the cavalry is coming soon. But when?

LIBOR Banking Scandal Deepens; Barclays Releases Damning Email, Implicates British Government

Rolling Stone
Matt Taibbi

Former Barclays Chief Executive Bob Diamond leaves Portcullis House
after appearing before the Treasury Select Committee in London, England.

This Libor-manipulation story grows crazier with each passing minute. We have officially disappeared now down the rabbit-hole of the international financial oligarchy.

Former Barclays CEO Bob Diamond is testifying before parliament in London today, and that's sure to bring some shocking moments. But there's already been one huge stunner. In advance of that testimony, Barclays released an email from October 29, 2008, written by Diamond to then-Chairman John Varley and COO Jerry del Messier (who also stepped down yesterday). The email from the CEO to the other two senior Barclays execs purports to detail the content of the conversation Diamond had with Bank of England deputy governor Paul Tucker that same day.

In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from "a number of senior figures within Whitehall" – that is, the British government – expressing concern about Barclays' high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were.

Again: Libor, the London Interbank Exchange Rate, is the rate at which banks borrow from each other. A huge percentage of the world’s variable-rate investments are pegged to Libor. When Libor rates are high, it suggests that the banks’ confidence in each other is low, and high Libor rates are generally an indicator of shaky financial health among the banks. If the banks manipulated Libor, they did it to make themselves look healthier, but this had the consequence of affecting hundreds of trillions of dollars’ worth of financial products worldwide.

During the crash of 2008, governments understandably would have been concerned about high Libor rates – high rates and a lack of confidence in banks threatened economic stability – but the notion that governments would have encouraged banks to fake those rates would have been beyond unthinkable even a decade ago.

Libor Banking Scandal

Big Banks Have Criminally Conspired Since 2005 to Rig $800 Trillion Dollar Market

Washington's Blog

… But Receive Only a Light Slap on the Wrist

We noted Friday:

Barclays and other large banks – including Citigroup, HSBC, J.P. Morgan Chase, Lloyds, Bank of America, UBS, Royal Bank of Scotland– manipulated the world’s primary interest rate (Libor) which virtually every adjustable-rate investment globally is pegged to.
***

That means they manipulated a good chunk of the world economy.

We actually understated the impact of the Libor scandal.

Specifically, according to the CIA’s World Factbook, the global economy – as measured by the world’s gross domestic product – is less than $80 trillion.

In contrast, over $800 trillion dollars worth of investments are pegged to the Libor rate.   In other words, a market more than 10 times the size of the entire real world economy is effected by Libor.
As the Wall Street Journal reports today:

More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans.

(Click here if you don’t have a subscription to the Journal).

Remember, the derivatives market is approximately $1,200 trillion dollars.  Interest rate derivatives comprise the lion’s share of all derivatives, and could blow up and take down the entire financial system.

The largest interest rate derivatives sellers include Barclays, Deutsche Bank, Goldman and JP Morgan … many of which are being exposed for manipulating Libor.

They have been manipulating Libor on virtually a daily basis since 2005.
They are still part of the group of banks which sets Libor every day, and none have been criminally prosecuted.

They have received a light slap on the wrist from regulators, which – as nobel economist Joe Stiglitz points out – is just the cost of doing business when fraud is the business model.
Indeed – as Bloomberg notes – they’re probably still manipulating the rate:

The U.K. bankers and regulators charged with reviewing Libor in the wake of regulatory probes are resisting calls to overhaul the rate because structural changes risk invalidating trillions of dollars of contracts.

The group, established by the British Bankers’ Association in March after probes into allegations that traders rigged the London interbank offered rate … won’t propose structural changes such as basing the rate on actual trades or taking away oversight of the benchmark from the BBA, the people said.

Libor is determined by a daily poll that asks banks to estimate how much it would cost them to borrow from each other for different timeframes and in different currencies. Because banks’ submissions aren’t based on real trades, academics and lawyers say they are open to manipulation by traders. At least a dozen firms are being probed by regulators worldwide for colluding to rig the rate, the benchmark for $350 trillion of securities.
“I don’t see a significant enhancement to the reputation of Libor without basing it on actual transactions,” said Rosa Abrantes-Metz, an economist with Global Economics Group, a New York-based consultancy, an associate professor with New York University’s Stern School of Business and the co-author of a 2008 paper entitled “Libor Manipulation?” [the manipulation was well-known in England in 2007,  Shah Gilani  warned of Libor manipulation in 2008, and Tyler Durden, Max Keiser and others started sounding the alarm at or around the same time.]

“It would only be disruptive if current quotes are inaccurate,” so resistance “is suspicious,” she said.

***
Traders interviewed by Bloomberg in March at three firms said they were given no guidance on how Libor should be set and there were no so-called Chinese walls preventing contact between the treasury staff charged with submitting the rate and traders who stood to profit on where Libor was set each day. They regularly discussed where Libor would be set with their colleagues and their counterparts at other firms, they said.
“Sadly the response looks to be very consistent with the response of policy makers to the banking disasters we’ve seen over the last four years — cosmetic changes, but nothing substantial happens,” said Richard Werner, a finance professor at the University of Southampton. “It’s insufficient and doesn’t really go to the heart of the problem.”