August 9, 2012--Libor
Glued to CNBC in the fall of 2008 so I could watch the collapse of the stock market in real time and the vicissitudes of my own portfolio, I kept hearing about Libor.
Libor this, Libor that.
The Libor Rate seemed to be very important to investment professionals. Apparently more so than the Dow Jones Average, which was the focus of my untutored attention.
For reasons inexplicable to me, the Dow since then has substantially recovered and I had not been hearing about the Libor until a month ago when it was again in the headlines. Headlines of the sort that have become familiar about banks rigging the system so they can make unearthly profits at the expense of the rest of us and, more and more evident, at the expense of each other.
The Libor is called the "Emperor of Rates" by those on the white glove side of banking because (1) it is established by a bushel of classy English banks where bankers still wear bowlers and carry umbrellas even on sunny days; and (2) it is of and for the banks themselves and only indirectly effects proletarian investors.
Ah, but it seems that that indirect effect is where there is money to be made and mischief can come to rule.
After a little research I now know that Libor Rates are calculated daily by a group of England's leading banks and they determine how much interest a bank itself would have to pay if it obtained a loan from another bank. Heady stuff.
The rates are calculated for ten different currencies and 15 borrowing periods, ranging from overnight to one year and are published every day at 11:30 am, London time. Many financial institutions, mortgage lenders, and credit card companies peg their own rates to them. For example, at least $350 trillion in derivatives and other financial products are tied to the Libor.
So, if these banks were to rig the Libor and not tell anyone else in the financial community, it would allow these banks to increase their profits through a version of insider trading.
This is exactly what they did and thus the blazing headlines.
Unlike other recent bank scandals, however, where the banks banded together when under investigatory scrutiny so as not to go down one-by-one in too-small-to-be-rescued fashion and to insure that in the future they would be able to engage in unregulated hanky panky, they presented a united front to their protectors in Congress, this time they are turning against one another.
They are racing to be the first to get to government banking officials so they can cut deals by turning in those with whom they colluded.
The Swiss bank UBS has voluntarily shared thousands of e-mails, instant messages, and other information confessing how it had conspired with traders at Deutsche Bank, HSBC (my bank!), and Royal Bank of Scotland to manipulate key interest rates.
Why might they be doing this now--voluntarily turning over usually closely-guarded records and blowing the whistle on their colleagues? Likely because some of the investigations are reaching high up into the executive suites and there are possible criminal charges looming. Fear of spending decades in jail with less-washed felons is strong motivation for these bankers to try to cop a plea while turning in their former associates.
And while investigators are at it, two days ago the New York Times reported that another esteemed British bank, Standard Chartered, for decades has been laundering hundreds of billions of dollars for the Iranian government. Perhaps as much as $250 billion. They did it via their New York branch in ways, it is asserted, to leave "the U.S. financial system vulnerable to terrorists and corrupt regimes."
These days such is the state of global banking and the free market.
Libor this, Libor that.
The Libor Rate seemed to be very important to investment professionals. Apparently more so than the Dow Jones Average, which was the focus of my untutored attention.
For reasons inexplicable to me, the Dow since then has substantially recovered and I had not been hearing about the Libor until a month ago when it was again in the headlines. Headlines of the sort that have become familiar about banks rigging the system so they can make unearthly profits at the expense of the rest of us and, more and more evident, at the expense of each other.
The Libor is called the "Emperor of Rates" by those on the white glove side of banking because (1) it is established by a bushel of classy English banks where bankers still wear bowlers and carry umbrellas even on sunny days; and (2) it is of and for the banks themselves and only indirectly effects proletarian investors.
Ah, but it seems that that indirect effect is where there is money to be made and mischief can come to rule.
After a little research I now know that Libor Rates are calculated daily by a group of England's leading banks and they determine how much interest a bank itself would have to pay if it obtained a loan from another bank. Heady stuff.
The rates are calculated for ten different currencies and 15 borrowing periods, ranging from overnight to one year and are published every day at 11:30 am, London time. Many financial institutions, mortgage lenders, and credit card companies peg their own rates to them. For example, at least $350 trillion in derivatives and other financial products are tied to the Libor.
So, if these banks were to rig the Libor and not tell anyone else in the financial community, it would allow these banks to increase their profits through a version of insider trading.
This is exactly what they did and thus the blazing headlines.
Unlike other recent bank scandals, however, where the banks banded together when under investigatory scrutiny so as not to go down one-by-one in too-small-to-be-rescued fashion and to insure that in the future they would be able to engage in unregulated hanky panky, they presented a united front to their protectors in Congress, this time they are turning against one another.
They are racing to be the first to get to government banking officials so they can cut deals by turning in those with whom they colluded.
The Swiss bank UBS has voluntarily shared thousands of e-mails, instant messages, and other information confessing how it had conspired with traders at Deutsche Bank, HSBC (my bank!), and Royal Bank of Scotland to manipulate key interest rates.
Why might they be doing this now--voluntarily turning over usually closely-guarded records and blowing the whistle on their colleagues? Likely because some of the investigations are reaching high up into the executive suites and there are possible criminal charges looming. Fear of spending decades in jail with less-washed felons is strong motivation for these bankers to try to cop a plea while turning in their former associates.
And while investigators are at it, two days ago the New York Times reported that another esteemed British bank, Standard Chartered, for decades has been laundering hundreds of billions of dollars for the Iranian government. Perhaps as much as $250 billion. They did it via their New York branch in ways, it is asserted, to leave "the U.S. financial system vulnerable to terrorists and corrupt regimes."
These days such is the state of global banking and the free market.
posted by Steven Zwerling at
5:01 AM
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