Category Archives: Libor

LE POINT*, Understanding Liborgate – Friday, July 20th, 2012

Understanding Liborgate?

Paul Jorion worked from 1998 to 2007 in the American banking sphere as a pricing specialist. Here he sets out his vision of ‘Liborgate’ which is currently shaking British banks.

Le : What is the LIBOR rate and what is it used for?

Paul Jorion : It’s the rate at which the banks lend to each other. Each establishment declares the rates its competitors charge it in order to lend for three months, six months, a year. Other loan rates are then defined in relation to this rate (consumption, housing), particularly variable rates.

How did the British banks manipulate the LIBOR?

During the period from 2004 to 2007, the banks artificially revised their declarations, either upwards or downwards. But they only manipulated them by modest amounts, roughly one to one and a half basis points, or a hundredth of one per cent. As only one bank was cheating from the panel of 16 which is used to establish the LIBOR, the impact would have been extremely limited, unless they acted in a concerted manner, of course.

In that case, why did the banks try to manipulate the LIBOR?

During the period I just mentioned, from 2004 to 2007, it was a result of individual initiatives from traders in the banks. They would call up a friend in the service who was responsible for declaring the rates, and ask for a small reduction or increase, in order to help their market positions.

During a second period from 2007 to 2009, the mechanism was completely different. Politicians called the directors of the central bank, the Bank of England, to tell them to massively lower the LIBOR rate and save the financial system. These latter then called in turn the executive managers of the banks to get them to lower the rates. But this time, the reduction was by as much as 20 or 30 basis points, which was 20 or 30 times more than the manipulations in the preceding period! This can be explained by the fact that the rate a bank is charged is a sensitive piece of information: it includes a risk premium – the most substantial part of the rate in times of crisis –, which reflects the degree of confidence that other banks have in its capacity to reimburse the loan and make interest payments. The greater the risk of non-repayment, the higher the rate that is charged.

So the LIBOR scandal helped to prevent the global financial system from collapsing?

Absolutely. When a banker like the chief operations officer Jerry del Missier was asked why no alarm bells rang when he was ordered to manipulate the rates, he replied that it was a reasonable decision to take, since it was a means of saving the system….

Why is this affair causing such indignation at the moment?

First of all, it should be noted that this scandal dates back to some time ago. The reason why it has provoked such a scandal now is due to the climate of public opinion. Three or four weeks ago, the public learnt that the first bank to be convicted, Barclays’, had been required to pay a fine of 365 million Euros (it is not that the others are innocent, but that one bank at a time is being examined). This announcement was made in a context where the public was already incensed with the ruling class. It overreacted.  Moreover, the governor of the central Bank of England and the president of the Financial Services Authority admitted that they had been astounded by the strength of the backlash. The public had learnt the previous July that Rupert Murdoch had managed to build up an extraordinary influence over affairs and had hacked into 4000 mobile phones! Furthermore, not a day passes without an adverse story about financial establishments, like the HSBC money-laundering scandal which has just come to light. The indignation, one could almost say disgust, has reached such a level that news which might previously have been found on page 17, now finds itself on the front page.

Why were the banks not afraid of being punished?

Firstly because of the trend towards deregulation, and then the abrogation in the United States of the Glass-Steagall Act (a law which separated commercial banks from deposit banks, editor’s note) in 1999. Subsequent American Administrations have been extremely favourable to big business and funds for regulators have been cut. There has also been a decriminalization of financial crimes. This was one of Sarkozy’s major projects, in particular.

Is the separation of commercial banks from banks which hold savers’ deposits a solution?

I believe that the solution is not just to separate the speculative activity of banks and their classic role as intermediary. Speculation should purely and simply be banned. Preventing banks from using their savers’ deposits on the markets would merely put a brake on their speculative activities; they would borrow the money from elsewhere. One should not allow some banks to specialize in speculation as it makes no economic sense. Speculation plays no useful role in an economy. It was forbidden in France until 1885. Three articles forbidding speculation exist in the Penal Code and Civil Code. They should simply be reinstated.

* Le Point is a French weekly news magazine.

Translated from the French by Tim Gupwell

LIBÉRATION, “Plundering and looting must be punished”

Plundering and looting must be punished?

For the economist and anthropologist Paul Jorion, the financial system needs regulating.

The LIBOR scandal took place in 2008 against a backdrop of almost total indifference. This time there has been a huge outcry. Why?

It is a situation specific to Great-Britain. It is in this country that a context has appeared which has given the public the impression of being able to identify the real causes of the crisis. And suddenly, at the time when it was made known that a British bank, Barclays, had cheated and that it was going to have to pay a considerable fine, it was no longer possible for those who had set up the conviction in a rather bland, staged manner to control the public reaction. The performers, regulators and governments, thought that a conviction in principal would be enough and that the settling/liquidation of the scandal would be easily accepted. Their efforts were in vain: disgust won the day. The Governor of the Bank of England, Mervyn King and the chief regulator, Lord Adair Turner, were forced to admit that the reaction of the man on the street had entirely exceeded their expectations.

Why was there such a strong reaction?

Because, for a year now, the environment in England has been extremely difficult. In July 2001, the British found out that Rupert Murdoch’s company News Corporation was exercising an extraordinarily powerful grip on the way affairs were run in the country. It was not simply a question of a press group having an excessive influence on government policies, but of the implausible manner in which the company had perverted the smooth running of democracy. News of the World, mouthpiece of the gutter press, belonging to the Murdoch Empire, had hacked into the telephones of more than 4000 people in the country. And when complaints were made, they never came to anything because Murdoch was corrupting police services so that they smothered the affairs.

Is the population still in a state of shock?

Absolutely. So, when it has just been explained to them that the great banks of the country have been communicating falsified figures with regard to the interest rates prevailing in the interbank market, and all this just to fiddle a few paltry financial benefits here and there, the disillusionment rose to the surface. It was the straw that broke the camel’s back, or as they say in French, which is just as appropriate, the ‘last drop which made the vase overflow”.

But doesn’t this disillusionment also stem from the way in which the subprime crisis was handled, which was nearly four years ago?

Of course. We were told that “the subprime crisis is just the result of a malfunction in the normal operations of finance which will be quickly repaired!” But new scandals, in England or elsewhere, have demonstrated that the entire financial system is characterized by a web of short-sighted dealings. The world of finance cheats everywhere and on everything, but not even with panache – just blandly. And all this under the nonchalant gaze of an arrogant managing class which takes it for granted that those who dispose of the power can arrange their affairs however they see fit.

And yet, there has been no attempt to regulate it……

Who could believe that a financial regulation has been adopted and is about to be implemented? Fine words indeed! In the United States, the attempt to regulate with the Dodd-Frank Act is dead in the water, its adversaries having made sure that the funds destined for the recruitment of teams responsible for its implementation were never raised. On the contrary, the steam roller of deregulation continues to make inexorable progress, especially in Europe.

What do you mean by that?

What is the Troïka, made up of the ECB, the IMF, and the EU, proposing when it imposes its diktats in Greece? It is proposing nothing more than the pursuit of this movement towards financial deregulation. Finance has been ruling the world for more than thirty years. It is the explosion of credit, required for the concentration of wealth, which has allowed it to take everybody hostage, since wage-earners have lost all their purchasing power. The only way of force them to give back their ill-gotten gains is to punish plundering and looting: reduce to a decent level the payment of advances that dividends constitute, and the salaries of managers of large firms, whose behavior is often as shameful as their level of competence is low – a level very far removed from their personal opinion of it.

Translated from the French by Tim Gupwell