Is There No Limit To Banks' Misdeeds?

[jyl]

You may have missed this story, if you get your news from a blonde Fox anchor.

http://dealbook.nytimes.com/2012/06/27/barclays-said-to-settle-regulatory-claims-over-benchmark-manipulation/

A huge British bank, Barclays, will pay $450 million for fraudulently manipulating LIBOR over several years. It looks like other large banks, including Citigroup, are under investigation for doing the same.

LIBOR is the London interbank overnight borrowing rate. It is the variable interest rate that determines borrowing rates on most other forms of variable rate debt. Corporate borrowing, consumer loans, and some bonds are all set on LIBOR. As LIBOR goes up, those interest rates go up and those borrowers pay more. As LIBOR goes down, those rates decline and the lenders get less.

LIBOR is determined every day by aggregating the reported rates from numerous large global banks. Each bank reports what interest rate it would half to pay, or it would charge, for an overnight loan from another large global bank.

Naturally, if a bank, or multiple banks, could manipulate LIBOR, that bank, or banks, could find a way to profit handsomely from it. To prevent this, there are supposed to be Chinese walls between the bank's departments who handle overnight lending, and the bank's traders and other departments.

At Barclays, these Chinese walls were ignored. The bank reported the LIBOR rates that the bank's traders wanted to be reported. Thus Barclays, and apparently other major banks, manipulated a key interest rate that determines the borrowing costs of, quite literally, almost the whole world.

As punishment, Barclays' CEO is giving up his bonus - for one year. The traders involved have so far paid nothing, nor have they been criminally indicted. The fine paid by the bank is, while not small, not terribly big. It will probably be a tax deduction.

In the four years since the financial crisis blew up, the banking industry has been caught performing misdeed after misdeed. There seems to be no end to it. No bank CEO has gone to jail. No bank has been broken up. No bank has been placed under regulatory handcuffs. The Dodd-Frank attempt to tighten bank regulation has been tied up in legislative and lobbyist delay, and half the politicians in America now want to repeal it (and guess which industry is their biggest donor?)

This is ridiculous. I am in the financial industry, and I understand this crap better than most. This is ridiculous. We need FDR.

[Hugh R]

And none of the fines go to people who got hurt.

[Jim Bremner]

We need a crap ton of things. We have Obama, he's done enough damage. To add in fdr? That's extreme.

[tabs]

JYL U do not need a FDR..maybe a TR though.

[911-32]

As always, these things are more complicated than they appear. Once you get past some of the media hysteria you see there are 2 types of conduct involved. First there are individual traders who influenced Barclays LIBOR submissions in order to benefit positions they had in their own books. Hard to defend. From an institutional perspective its very hard to stop every bad apple though - ie., you may have rules that are well policed, but if someone is determined enough to break them then what can you do? More complex, is where some as yet unknown level of management has applied pressure to lower the LIBOR submissions. The Barclays story is that their submissions looked high relative to other banks which prompted concerns in the market over Barclays liquidity - ie., if they are paying more to borrow than other banks, then its probably because they are having to access the market for large amounts. Barclays concluded others were falsely putting in low submission to flatter their own liquidity position and so joined the club.

Its worth remembering that this was in 2007/2008 when there was massive market dislocation and no banks were lending to each other anyway. So what difference did this make? And if the net effect was to lower a floating interest rate benchmark, is the level of excitement warranted?

Yes, systematic dishonesty should be punished.

[kach22i]

Originally Posted by 911-32

1. Barclays concluded others were falsely putting in low submission to flatter their own liquidity position and so joined the club.

2. ...........And if the net effect was to lower a floating interest rate benchmark, is the level of excitement warranted?

3. Yes, systematic dishonesty should be punished.

1. Where did you read this?

2. Didn't jyl say the net effect was raising interest rates?

3. I agree, and perhaps as hinted at they should be paying their victims back.

[911-32]

Try any of the uk broadsheet newspapers (Telegraph, Gaurdian, Independent are all still free access websites IIRC). Bob Diamond also sent a letter to a Parliamentary select committee giving detail which has been published. At the institutional or systemic level it was certainly lowering interest rates - the opposite would not make any sense at all. Avoid the media hysteria around this stuff - its always more interesting and complex than the mainstream press describe.

[scottbombedout]

Originally Posted by 911-32

As always, these things are more complicated than they appear. Once you get past some of the media hysteria you see there are 2 types of conduct involved. First there are individual traders who influenced Barclays LIBOR submissions in order to benefit positions they had in their own books. Hard to defend. From an institutional perspective its very hard to stop every bad apple though - ie., you may have rules that are well policed, but if someone is determined enough to break them then what can you do? More complex, is where some as yet unknown level of management has applied pressure to lower the LIBOR submissions. The Barclays story is that their submissions looked high relative to other banks which prompted concerns in the market over Barclays liquidity - ie., if they are paying more to borrow than other banks, then its probably because they are having to access the market for large amounts. Barclays concluded others were falsely putting in low submission to flatter their own liquidity position and so joined the club.

Its worth remembering that this was in 2007/2008 when there was massive market dislocation and no banks were lending to each other anyway. So what difference did this make? And if the net effect was to lower a floating interest rate benchmark, is the level of excitement warranted?

Yes, systematic dishonesty should be punished.

Are you in the banking industry?

How does this affect me. In 2008 we remortgaged (It was with the Halifax).We weren't desperate to do it so we could wait as long as we wanted. However, the mortgage advisor was constantly on the phone saying the rates have changed etc due to LIBOR rates. Did LIBOR rates even have anything to do with it or how do we know we weren't manipulated or had to pay too much because of this?

A good discussion on the radio today asking who is the greatest threat to Britain, someone like Diamond or Bob Crowe (big union leader).

Diamond and his cronies everytime. Pure utter greed.

[Rick Lee]

Scott, it sounds like you just had a typical sales guy who was trying to get the deal done to get his commission check. In the US I think we are most affected by LIBOR as a benchmark for some adjustable rate mortgages. I have one that's tied to LIBOR and it's so damn low, that it'd never make sense to refinance. I haven't watched it since last year, but will again as November nears - my adjustment date. But it's only gone down for me over the last three years.

[911-32]

Originally Posted by scottbombedout

Are you in the banking industry?

Yes - but not Barclays and nothing to do with LIBOR or any type of trading, so no skin in this game.

Mortgages may be tied to LIBOR or a bank lending rate or some other benchmark. It all depends. Banks fund at LIBOR + margin so it make sense to lend at LIBOR + or some similar benchmark to minimise the basis risk.

You can see how rates spiked 06-08 until govt backed liquidity schemes came into play.



If there is a secret agenda in all this its probably that Barclays don't want anyone to know just how close they came to a full blown liquidity crisis - and they were not alone. Lehman crisis would have seemed insignificant in comparison with the fall of a much larger bank. Desparate men do desparate things - maybe manipulating LIBOR was one of those those things. BTW 20-odd banks are under investigation for the same thing.

Maybe, the stupid thing is that the LIBOR setting system (and other benchmarks) is ripe for manipulation because it relies on all the contributing banks to submit what they would borrow and land to each other at. Nothing objective or verifiable. Its uniquely vulnerable, but regulators thought it was ok. Rumours of manipulation have been well known for at least 5 years.

Edit - In case it looks like I am being cagey, I have largely been selling aircraft for the last 18 months and now I am looking at infrastructure lending. I am truly, not close to this scandal in any way. I just liked the way you read the OP's quoted article and assume that banks were hiking rates to rip off consumers and make money (at least I thought that was implied), when actually it was the opposite as they fought tooth and nail to survive.

[Robert Adams]

Is There No Limit To Banks' Misdeeds? .....Apparently not!
Just happened to have caught this program last evening on Bill Moyers, didn't sleep to well.... again.

Interesting read if you have the time.

Matt Taibbi and Yves Smith: How the Wall Street Mafia Holds America -- and the World -- Hostage | | AlterNet

[911-32]

Originally Posted by Robert Adams

Is There No Limit To Banks' Misdeeds? .....Apparently not!
Just happened to have caught this program last evening on Bill Moyers, didn't sleep to well.... again.

Interesting read if you have the time.

Matt Taibbi and Yves Smith: How the Wall Street Mafia Holds America -- and the World -- Hostage | | AlterNet

Interesting article (I wish it had a bullet point summary). Does kind of paint everyone who works for a bank with a big broad brush. IMHO, like any big organisation, the vast majority of people are not engaged in crime, fraud, bridery etc, but work honestly and quite hard for a fair (maybe generous depending on your perspective) reward. A very small minority are overpaid, bottom feeding, scum - clearly the behaviour of the minority is what the headlines are about.

[scottbombedout]

Originally Posted by 911-32

Yes - but not Barclays and nothing to do with LIBOR or any type of trading, so no skin in this game.

Mortgages may be tied to LIBOR or a bank lending rate or some other benchmark. It all depends. Banks fund at LIBOR + margin so it make sense to lend at LIBOR + or some similar benchmark to minimise the basis risk.

You can see how rates spiked 06-08 until govt backed liquidity schemes came into play.
.

So is it possible that consumers like myself have been ripped off?

[911-32]

Did you lose money from a bank's action that resulted in lower floating interest rates? Most people would say that lower rates were good for them, but some people who bought complicated rates based derivatives may have lost money.

I think there are law suits underway already.

Like I said, its not my area of expertise, so what do I know.

[matthew-s]

Robert Adams: Howdy neighbor!

Originally Posted by 911-32

Interesting article (I wish it had a bullet point summary). Does kind of paint everyone who works for a bank with a big broad brush. IMHO, like any big organisation, the vast majority of people are not engaged in crime, fraud, bridery etc, but work honestly and quite hard for a fair (maybe generous depending on your perspective) reward. A very small minority are overpaid, bottom feeding, scum - clearly the behaviour of the minority is what the headlines are about.

I did not take the article that away. With the exception of the CEO's mentioned, I think it came across as a structural problem that allows these things to happen. Yeah there are crooks. However I suspect in most cases, when a person is surrounded by a certain culture that makes a behavior feel normal, and compensation is heaped on you as further reinforcement, you can get almost anyone to participate in a non-violent behavior.

A fix is a matter of changing incentives, and only one organization is (arguably) big enough to do that. A scary thought right there!

[jyl]

Before the financial crisis hit in 2008, Barclays was manipulating LIBOR both ways, both lower and higher, to increase profits on its proprietary trades. Higher LIBOR would have caused hundreds of millions of individuals and companies to pay higher interest rates on LIBOR-linked debt.

During and after 2008, Barclays manipulated LIBOR down, to conceal the extent of its own liquidity crisis. Does lower LIBOR hurt anyone? Yes. Producing artificially low interest rates via manipulation of LIBOR means that lenders are being paid too little for the risk they take, which means that holders of debt are being short-changed. This would include, for ex, pension funds and other institutions holding LIBOR-linked debt and individuals holding funds with LIBOR-linked debt. It also means there is going to be less new lending, since the lenders are being underpaid. Or, the lending will be at rates reset to a higher spread over LIBOR, e.g. not LIBOR + 3% but LIBOR + 4%, so that after the LIBOR manipulation is over, those borrowers will be permanently stuck with the higher rate.

There is no way to excuse this by saying no-one was hurt. Hundreds of millions of people and institutions were harmed.

Why does this happen? As far as I can tell, the banking industry as a whole has lost its moral compass. The game appears to be to make as much money in the short term as possible, and not get caught, or if you do get caught, to have made enough money that the punishment doesn't matter too much. Barclays' CEO Robert Diamond offered to give up one year's bonus, gee. Even if he is ousted, I suspect he has 9 figures of prior bonuses to enjoy his retirement on.

Perhaps this is inherent with corporations. It is all the fashion nowadays to say that corporations are people too, with all the rights of natural persons, including the right to make limitless campaign contributions to the politicians supporting "corporations = people". But there is an obvious difference between corporations and people. Corporations never get actually punished for crimes.

Oh, I know, corporations pay fines in criminal proceedings. That's like you and I paying a speeding ticket. If we commit a real, serious crime, we don't pay a fine. We go to jail.

Corporations don't go to jail. CEOs of corporations don't go to jail, CFOs don't, Presidents don't, Managing Directors don't, maybe eventually some mid-level guy goes to jail for a year, which frankly the corporation could care less about. Joe Who?

The people involved in this at Barclays need to go to jail. Their supervisors too. I don't know if existing law can reach higher up, but the laws need to be changed. When you are CEO of a global bank, and the rewards for incentivizing, allowing, not seeing, and not stopping misconduct are measured in the hundreds of millions, then the risks need to be equally large. If reward and risk are grossly mismatched, you know what happens.

[scottbombedout]

Originally Posted by jyl

Before the financial crisis hit in 2008, Barclays was manipulating LIBOR both ways, both lower and higher, to increase profits on its proprietary trades. Higher LIBOR would have caused hundreds of millions of individuals and companies to pay higher interest rates on LIBOR-linked debt.

During and after 2008, Barclays manipulated LIBOR down, to conceal the extent of its own liquidity crisis. Does lower LIBOR hurt anyone? Yes. Producing artificially low interest rates via manipulation of LIBOR means that lenders are being paid too little for the risk they take, which means that holders of debt are being short-changed. This would include, for ex, pension funds and other institutions holding LIBOR-linked debt and individuals holding funds with LIBOR-linked debt. It also means there is going to be less new lending, since the lenders are being underpaid. Or, the lending will be at rates reset to a higher spread over LIBOR, e.g. not LIBOR + 3% but LIBOR + 4%, so that after the LIBOR manipulation is over, those borrowers will be permanently stuck with the higher rate.

There is no way to excuse this by saying no-one was hurt. Hundreds of millions of people and institutions were harmed.

Why does this happen? As far as I can tell, the banking industry as a whole has lost its moral compass. The game appears to be to make as much money in the short term as possible, and not get caught, or if you do get caught, to have made enough money that the punishment doesn't matter too much. Barclays' CEO Robert Diamond offered to give up one year's bonus, gee. Even if he is ousted, I suspect he has 9 figures of prior bonuses to enjoy his retirement on.

Perhaps this is inherent with corporations. It is all the fashion nowadays to say that corporations are people too, with all the rights of natural persons, including the right to make limitless campaign contributions to the politicians supporting "corporations = people". But there is an obvious difference between corporations and people. Corporations never get actually punished for crimes.

Oh, I know, corporations pay fines in criminal proceedings. That's like you and I paying a speeding ticket. If we commit a real, serious crime, we don't pay a fine. We go to jail.

Corporations don't go to jail. CEOs of corporations don't go to jail, CFOs don't, Presidents don't, Managing Directors don't, maybe eventually some mid-level guy goes to jail for a year, which frankly the corporation could care less about. Joe Who?

The people involved in this at Barclays need to go to jail. Their supervisors too. I don't know if existing law can reach higher up, but the laws need to be changed. When you are CEO of a global bank, and the rewards for incentivizing, allowing, not seeing, and not stopping misconduct are measured in the hundreds of millions, then the risks need to be equally large. If reward and risk are grossly mismatched, you know what happens.

Very well said. Can't argue with any of that.

[Geary]

Icelandic Anger Brings Debt Forgiveness in Best Recovery Story - Bloomberg

[slakjaw]

Parf

[scottbombedout]

Originally Posted by Geary

Icelandic Anger Brings Debt Forgiveness in Best Recovery Story - Bloomberg

The comments from the Icelanders seem to dispute the article.