Tag 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 Point.fr : 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

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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

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ATLANTICO.fr, The LIBOR scandal : are bankers totally untrustworthy?

The LIBOR scandal : are bankers totally untrustworthy??

Translated from the French by Tim Gupwell

Can a banker be trusted? This is indeed the question one is obliged to ask in the light of the “LIBOR affair” which broke in April 2008 and saw a dramatic turn of events four years later, on the 27th June, when the British bank Barclays was publicly condemned to pay an exceptionally large fine, equivalent to 365 million Euros, for having manipulated the family of rates known as LIBOR, determined daily at the time by Barclays plus 15 other banks, and today by 17 others.

The process for determining these LIBOR rates, applying to dollar-denominated loans, consists of contacting a certain number of banks on a daily basis, and asking them what rate the other banks charge them to lend over a variety of short-term durations (one month, three months, six months, a year) and merging together this information, having eliminated the most extreme values, to produce a rate that constitutes the reference, the floating rate determined by the ‘market’. A consumer loan could for example be defined as ‘6 month LIBOR plus 50 basis points’, one basis point being a hundredth of one percent.

With regard to what is asked of them to determine the LIBOR rates, banks are far from indifferent; the information demanded of them is in fact extremely sensitive as far as they are concerned. The reason for this is the following: the rate charged by a bank for lending includes a risk premium – which, when things are going badly, may account for the greater part of the rate – which generally reflects with a great deal of accuracy the degree of confidence that other lenders have of its capacity, not only to pay back the amount borrowed, but also to pay back the interest payments which have been contractually promised. The more there is a perception of a risk of non-repayment, the more the premium included in the rate charged will be elevated.

By being entirely candid about the interest rates it is charged for loans, a bank therefore reveals the confidence that its peers have in it. The issue would be relatively unimportant if it were not for the existence of a financial derivative instrument called a Credit-default Swap (CDS), which allows a lender to insure itself against the risk on non-payment, but which a simple speculator can also acquire in order to bet on the financial deterioration of a firm’s situation , meaning that if it seems to be in difficulty, its competitors will have the possibility, not only of betting on its downfall, but also, in so doing, of contributing to its downfall (something seen in particular in 2008). The reason for this is that the markets (and ‘economic science’) consider that a bet – even though entirely motivated by the pursuit of profits – nonetheless constitutes nothing more than a neutral appreciation of an objective risk. Consequently, it is essential, for the survival of a firm in difficulty, to conceal to the greatest extent possible the exact value of the rates charged by peers who are prepared to lend to it.

In a context like that of the determination of LIBOR rates, a bank playing by the rules of the game, will find itself – if the economic situation deteriorates – in the totally unmanageable situation of triggering its own extinction if it supplies honest information to the British Bankers’ Association (BBA), which is responsible for the centralization of the data. By revealing that the risk premium in the rate charged by its peers has increased, it is effectively offering its jugular to its competitors who would like to bet on its downfall. How can it therefore be criticized for lying, when it is clear that telling the truth would inevitably lead to its collapse?

It is obvious therefore that the way in which the LIBOR rates had been defined contained a blatant error of logic: it encouraged the firms involved to lie the moment the economic context ceased to be ideal. This highlights the fact – as is unfortunately so often the case in finance – that the issue had only been imperfectly conceptualized by the parties involved, confirming one again that, in the vast majority of cases, the incompetence of bankers constitutes a more serious danger than their deliberate destructive tendencies. Of course, we find it much more exciting to invoke the malevolence of the participants, rather than being forced to acknowledge their stupidity, but facts nevertheless remain the facts.

Is this to say that we can never trust a banker? The answer, viewed in the light of the ‘LIBOR affair’ would seem to be yes. But the framework in which the LIBOR rates are determined puts the banks in an impossible situation when the economic situation worsens, since for them telling the truth means compromising their very existence.

Would it not be better, then, to candidly acknowledge our incapacity to correctly conceptualize the problems posed by finance?

For the LIBOR, the question which the bank being questioned has to answer to determine the rates is, “what rate do the other banks (‘the market’) charge you?” When it answers, a bank can either tell the truth, or lie. For the EURIBOR, the rate applying to the Euro, the question posed is different, “What is the interbank rate charged by a quality bank to another quality bank?” It is clear that in this case, to the question, “have you told the truth or a lie?” the answer will always be the same “ I thought I had told the truth, but if I didn’t it is not because I lied but because I was badly informed!” There will never be any fraudsters, only incompetents.

Is that really any better? I doubt it: it is in accordance with the spirit of the particular philosophy that has modified commercial law over recent years. Fraud has now been excluded; there remains only the clumsy – whose bonuses are contractually guaranteed. The bankruptcy of the French-Belgian bank Dexia is one recent example.

Thus, the question has to be posed in different terms. Could one trust a banker if the fact that he told the truth was not the equivalent of obliging him to commit financial suicide?

 

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LE MONDE-ÉCONOMIE, The LIBOR affair…… a scandal postponed from 2008, Monday 16 – Tuesday 17 July 2012

My most recent column in the French daily paper Le Monde : Le scandale du Libor, c’était en 2008. Translated from the French by Tim Gupwell.

When the LIBOR affair first broke in April 2008, the press comments were laconic to say the least. Last month, when the fire that had been smouldering flared up again with the conviction of Barclays for having manipulated the rates that govern the loans (in dollars) that banks contract amongst themselves, we saw media fireworks. At the time Barclays was one of the 16 banks (which number 18 today) responsible for submitting the data which allows the rates to be calculated.

An event which had led to little more than raised eyebrows in the spring of 2008 is now rocking the very foundations not only of the City but also of the entire world of finance. One has to wonder how the principle governing the dynamics of indignation works, when, at two distinct moments, public reactions to the same event can be of such differing orders of magnitude.

How could there be such indifference at the time when the facts emerged, and yet such a seismic shock over recent weeks that it lead to the resignation of three senior Barclays managers, as well as casting suspicion upon the candidate expected to take over as head of the Bank of England, and by association, on the British Government at the time. George Osborne, Chancellor of the Exchequer, declared that the facts revealed were symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees” and added that “fraud is a crime in ordinary business; why shouldn’t it be so in banking?”

The payment of a sizeable fine by Barclays (365 million Euros) ought to have been a way of turning the page on events that already dated back several years. All the more so since it is clear that, of the sixteen banks, Barclays was certainly one of the lesser offenders in the LIBOR affair, and had shown good faith by cooperating with the authorities, something which explains why it benefited from a 30% reduction in its fine in Great Britain.

It would be over-simplistic to talk of a simple communications exercise gone wrong since we are talking here about judicial decisions, but the regulators might have hoped that the end of the affair would be received by the public with the same sort of indifference they exhibited when the story first broke in April 2008. It was nothing of the sort. But why did it take four years for this public indignation to finally be ignited?

The explanation requires an allusion to what physicists would call a ‘non-linear’ effect: the very act of crossing the threshold suddenly causes the nature of a situation to change. One thinks of the Wizard of Oz (1900) of Frank Baum, where the accidental opening of a curtain leads to the discovery that the enchanted world (which could be seen as a metaphor for the American monetary system) is nothing more than an artifice produced by an old man pushing levers.

The thing that brutally lifted the curtain for the British and showed them in what light the LIBOR affair should be viewed, was of course the Rupert Murdoch affair.

The British were to make the discovery in 2011 that 4000 of them had had their voicemails hacked into by The News of the World, part of the gutter press belonging to the media empire of Rupert Murdoch, an American citizen of Australian origin. Amongst his victims were celebrities, members of the Royal Family, but also ordinary people: soldiers back from Afghanistan and survivors of the London bombings.

The affair came to prominence when the telephone of a murdered teenage girl was hacked into, and certain messages deleted, by a News of the World journalist, giving her closest family false hopes that she was still alive. The victims’ complaints never came to anything, because, at the time, Murdoch was also corrupting the police services who therefore attempted to cover the affairs up. As public opinion exploded into anger attention quickly switched to the revolving doors policy which existed between Murdoch’s cronies and members of the British Government. The relations between David Cameron, the Prime-Minister, and Rupert Murdoch himself, were undoubtedly a little too close for comfort.

Under this new light, Barclays short-sighted fraud, revealed in the explanations given by the FSA (Financial Services Authority), the British regulatory body, could no longer be seen as everyday dishonesty and instead came to be seen as just one more revelation amongst many others of an arrogant managing class, which does not trouble itself with rules, and organizes its affairs as it sees fit, whilst still maintaining a bare minimum of appearances

The LIBOR affair is the story of the devotee who has always accepted as gospel truth the preaching of his priest, but who suddenly stops believing everything he has heard because he has accidentally discovered that the beard his priest wears is false.

The question which needs to be asked now is the following: if the fall of the least guilty of the banks responsible for the LIBOR has already provoked such a dramatic collapse, what can we expect when the punishment reserved for the others is revealed?

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THE FOUR YEARS NEEDED TO CREATE A SCANDAL

Translated from the French by Tim Gupwell

Over recent years you may have seen me carrying out extremely complex complications such as this: “it needed four years – between 1929 and 1933 – before any genuine measures were taken at the time of the Great Depression!” And it was this kind of calculation which led to my disenchanted musings– since nothing was being done – when I wondered on the 28th June whether I should put an end to the blog.

And then, and in fact it was on this very same day, the second episode of the LIBOR affair broke, an affair which has since grown to such an extent that it is difficult to say where it will end, the only sure thing being that Barclays, which is only one of the 16 banks involved and certainly one of the least guilty parties, finds itself in the firing line today, and that up to now we have only had caught a glimpse of the highly probable involvement of the regulators and governing class in the affair.

The first episode, namely the events themselves, took place in 2008; the second, which is the realization, is taking place now, in other words four years later. Exactly the time needed, as I mentioned, during the Great Depression.

What can explain this sort of delayed reaction? Doubtless the time needed for an administrative enquiry to pronounce justice, but there is something else. And this other thing is the object of my article in Le Monde-Économie which will appear shortly: it is a climate operating like a reverberation chamber, ensuring that what had been merely an anomaly in 2008 (see my article in French un taux LIBOR à 3 mois trop bas de 17 points de base*) becomes in the eyes of public opinion in 2012, a scandal.

How is such a climate created? By the coming together of a number of different developments – for which four years would be required before a critical mass was finally attained – constituted (more precisely) in this particular case, in Great Britain, by the Rupert  Murdoch affair, which revealed an incestuous collusion between business leaders and governments, scorning all principles, and revealing (to reemploy the terms used in my forthcoming article) “an arrogant managing class, which does not trouble itself with rules, and organizes its affairs as it sees fit, whilst maintaining a bare minimum of appearances.”

This is how – in the case of one particular country – a climate is created which means that after four years, what had initially appeared to be a fairly banal collection of simple facts saw itself transformed into an absolute disgrace.

* The 3 month LIBOR rate 17 basis points too low

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LIBOR: WE AIN’T SEEN NOTHING YET

Translated from the French by Tim Gupwell

From the Financial Services Authority’s Final Notice of their decision, dated the 27th June, to impose an 85 million Pound fine on Barclays Bank (less a reduction of 30% for exemplary co-operation with the enquiry) due to their manipulation of the LIBOR interbank rates, two separate periods need to be distinguished. In the first period, which loosely spans the period from 2005 to 2007, rates were manipulated on trading floors by operators at a subordinate level; in the second period, which runs from 2007 to 2009 and which corresponds to the height of the crisis, rates were manipulated by these same subordinates following instructions from above.

Unambiguous figures are to be found in the conversations reported in the documents. During the first period, the rate manipulations were usually around about 1 basis point (a hundredth of 1%) and sometimes 1.5 basis points; in the second period, it was a matter of manipulations varying from 17 to 46 basis points. In other words, they were of a completely different order of magnitude.

When Bob Diamond, the former Chief Executive of Barclays, explained last Thursday to a British Parliamentary Select Committee that he had been “shocked” and “disgusted” by the behaviour of some of his employees, was he talking about the rank and file traders (the dozens of Kerviels that I discussed (in French) in my Friday video) during the period from 2005 – 2007, or about the Senior Bank Officers from the period 2007 to 2009? In my opinion, to ask the question is to know the answer.

That said, as I recalled in my accounts of the ‘LIBOR affair’, from the earliest in April 2008 (L’affaire du LIBOR) [in French], to the most recent (LIBOR: Delayed indignation), it can be said that on the one hand, minimizing the rates submitted by the 16 banks concerned for the calculation of the  LIBOR virtually amounted to a national duty in the climate of panic which had caught hold of the financial markets; and, on the other hand, according to what we already knew in 2008 and which was confirmed in the Final Notice, of all the London Banks it was in fact Barclays which was the most reluctant to falsify the figures. The following observation is representative of this point of view:

“….on 18 September 2008, a Submitter stated in a telephone conversation with Manager D that he would put in a one month US dollar LIBOR submission of 4.75 because that was where he had obtained money in the market…. The Submitter agreed to lower Barclays’ one month LIBOR submission to 4.50. The next highest submission was 50 basis points lower than Barclays’ submission on that day.” (p.30)

Let us be clear about this: 1) From 2005 – 2007, a “dozen Kerviels” working for Barclays regularly submitted, for the purpose of calculating the LIBOR ( at the same time as the 15 other banks), rates that had been manipulated upwards or downwards to the tune of 1 to 1.5 basis points. 2) From 2007 – 2009, in the case reported, a Senior Bank Officer instructed a subordinate to minimize the rate observed by 25 basis points. 3) On the same day, in another bank in the city of London (the one which manipulated the rates the least amount after Barclays), a senior Bank officer instructed a subordinate to submit in the bank’s name a rate which had been manipulated by at least 75 basis points – 25 [like Barclays] plus 50 [additional].

In conclusion, we can say that of the sixteen banks which submitted rates for the calculation of the LIBOR (18 nowadays), fifteen cheated even more than Barclays. This latter had a 85 million Pounds (107 million Euros) fine imposed upon it (before it was reduced), and has lost, since last week, Chief Executive Bob Diamond, Chairman Marcus Agius, and Chief Operating officer Jerry del Missier – who were all firmly shown the door by the FSA, the Bank of England and the Chancellor of the Exchequer. This latter, George Osborne, declared that the facts revealed were “symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees” and added that “fraud is a crime in ordinary business; why shouldn’t it be so in banking?”

We can only approve of the British Chancellor’s remarks. But what do the mangers of the other 15 banks who were responsible for submitting rates for LIBOR think of all this? In any case I would rather be in my shoes than theirs.

 

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LIBOR: DELAYED INDIGNATION

Translated from the French by Tim Gupwell

The paradox of the 2008 ‘LIBOR scandal’ – in addition to its familiar ring in 2012 – is that, as I alluded to at the time and as I recalled a few days ago, the fraud was well-intentioned for once: the ‘philia’ of Aristotle, the good will exercised by everyone so that a common activity can be pursued – in this case the very existence of the financial system.

Yesterday’s ‘surprise’ was that Paul Tucker, Vice-Governor of the Bank of England, was said to have advised Bob Diamond, who resigned yesterday from Barclays, to tone it down when the bank transmitted the amount of the rates that its peers were charging it over various terms.

In a memorandum addressed by Diamond on the 29th October 2008 to John Varley, Chief Executive of Barclays at the time, he explained that Tucker had called him the day before to ask him why the bank often gave higher rates than the other banks whose opinions contributed to determining the LIBOR rate. Tucker explained that his call was motivated by the fact that he was receiving numerous phone calls from members of the Government. Mr. Tucker reiterated that the calls he was receiving from the government were “senior”, according to Diamond, and that while he was certain that we did not need advice it did not always need to be the case that the rates appeared as high as we have recently”.

On Friday I explained in The Manipulation of the LIBOR why it was in the interest of banks like Barclays, in the interest of the Bank of England, in the interest of senior Government figures, in the interest of Great Britain and in the interest of financial markets as a whole, to fiddle the rates since at that time everyone in some form or another would have been heading to their downfall if they had behaved nay differently.

It is a particularity of the time required for criminal prosecution (the fine of 359 million Euros imposed on Barclays on the 27th June) and for popular indignation to be ignited, that the scandal – despite being known about in April 2008 (see my French article L’affaire du LIBOR) – only created a real buzz in the media four years later; sweeping before it (some might say “finally”), those in charge of commercial banks, central banks, and senior politicians, all of them sharing an uncustomary “surge of philia”, for which, irony of ironies, they were roundly punished.

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THE MANIPULATION OF THE LIBOR

Translated from the French by Tim Gupwell

In my Friday morning video (in French), I said that when a pirate (Rupert Murdoch) does business with a ship wrecker (the City of London), it tends to weaken the entire system, and I went on to add that this is particularly the case when the population, which is observing all this from afar, starts to exhibit a certain degree of indignation.

The LIBOR affair has been widely discussed for several days now, due to the 290 million pound fine imposed on the British bank Barclays. My reaction hitherto has been limited to referring back to two articles which I wrote in 2008 at the moment when the story first broke L’affaire du LIBOR  (the LIBOR affair) , published on the 17th April, and LIBOR II ou mauvaise nouvelle pour les subprimes (Libor II or bad news for subprimes), published on the 20th April.

The proof that there has been an evolution in the way the facts are appreciated by the population – still known as ‘public opinion’ – is the fact that what had merely led to raised eyebrows in the spring of 2008 is now rocking the very foundations of the City itself.

To sum up for those who do not intend to re-read my previous two articles: the LIBOR with different maturities ( terms of 3 months, 6 months, 1 year etc) is the interbank rate practiced in London ( the rate at which the banks lend to each other), and is denominated in dollars. It is determined in the following manner: 16 banks in the City are asked to state what rate the other financial establishments charged them for borrowing on the previous trading day. To prevent the figure being fraudulently manipulated, the British Bankers’ Association (BBA) classifies the figures cited from the lowest to the highest, and then ignores the four weakest and the four strongest values, determining the average from the remaining eight.

As I said in my first article (in French), “at a stretch, [the system] can remain reliable even if up to 50% of the parties are not telling the truth. Of course, if nobody trusts anyone anymore, it will be in everyone’s interest to lie, and the published LIBOR rates will be meaningless”.

A news article published in the Wall Street Journal on the19th April led me to conclude in the second article, (in French), “therefore it seems perfectly clear: they were all lying”.

Why would a bank want to cheat? Because it has a vested interest in cheating, and what is worse, virtually everyone, and even more so the general population, has a vested interest in them doing so.

Why would it be in a bank’s interest to lie when it is asked what rate it is charged by the other financial establishments for loans? Because its very existence depends on it; if it tells the truth, its very existence can be threatened. Consequently, we can ask whether asking this question is indeed the best means of obtaining an authentic piece of information. Evidently not; quite the contrary in fact: it is the best means of obtaining a false piece of information.

Included in the interest rate a bank is charged by its lenders is the risk premium that the lender judges necessary to protect it against the risk of default. This signifies that if a bank honestly answers what rates it is charged, it is forced to reveal the poor esteem in which it is held by its peers. This is the reason I mentioned a friend in my second article in 2008 who wondered “why the banks are not asked what rates they charge to lend to others, rather than what rates others charge them?”

If a bank is in difficulty, it has every incentive to conceal this because as soon as the danger is perceived, its rivals are going to bet on its downfall. Why? Because finance is not charity; if there is money to be made, they make it. They do this by using naked positions on Credit-default Swaps (CDS); bets are placed on the collapse of the weakest one. There is no room for sentiment.

As a result, in a crisis situation, each bank will cite a rate lower than the actual figure it is charged; each one will claim that the others are lending to it at lower rates because it is credit worthy. As I wrote in LIBOR II ou mauvaise nouvelle pour les subprimes, (Libor II or bad news for subprimes), “….by manipulating the figures, everyone is trying to conceal how hard they are finding it to finance themselves; in other words, they are trying to hide the precariousness of their situation”

Therefore, it is not even necessary for the banks to agree to conceal the real numbers amongst themselves: it is in the interest of every one of them to manipulate the figures.

The question which now needs to be asked is whether it is a problem for the financial system as a whole if each bank deliberately underreports the rates that others charge them?

The answer is no, quite the contrary, and I will now explain why.

By understating the amount of the rate it is charged by lenders, each bank has helped to present a more positive image of itself than would have realistically been justified otherwise, and also a far calmer image of the capital markets as a whole than would have been the case were the real truth known. And since a considerable number of loans were indexed on the LIBOR, the borrowers concerned benefited as well. In other words, everyone was benefiting from the fact that the lies of the various parties helped to create a far rosier image than the circumstances seemed to indicate in reality.

I wrote in 2008 in my second article about the LIBOR, “The rate for mortage loans in the United States is indexed on the 6 month LIBOR ‘2/28 Adjustable Rate Mortgage (ARM)’, better known under the name subprime

Thus, for as long as an ‘unrealistically’ low LIBOR prevailed, the effects of the crisis were mitigated.

When the authorities required the banks to tell the truth; to reveal the genuine rate at which their peers were lending to them, the 6 month LIBOR immediately shot up 0.33%, which helped nobody whatsoever, and on the contrary, led to a further degradation of the situation.

All this signifies, paradoxically perhaps, that by lying shamelessly, the financial establishments helped to save the system as a whole. Not that this was their real objective; it was merely an unintended by-product. After all this was finance, not the realm of intellectuals or geeks, but that of traders, which meant that if they didn’t understand exactly how it worked, but they had the feeling that it could pay, they wasted no time on reflection and eagerly carried on regardless.

Now the authorities have reacted, and Barclays has been the first to pay the price. But as I had already explained in April 2008, the 16 involved “were all lying” in reality, and so this is by no means over yet.

That said, by maintaining artificially low LIBOR rates, the banks’ deceptive practices have helped to mitigate the effects of the crisis in the larger scale of things; and for the banks themselves, they have minimized the risk of falling prey to the bloodthirsty speculators who were hoping to precipitate their downfall.

So, in this particular case, it would have been better for the regulators (this is not something I generally advocate), to turn a blind eye, since Adam Smith’s “invisible hand” had for once genuinely manifested itself. By pursuing their own narrow self-interests, the banks had involuntarily contributed to the general good.

But with the people/public opinion now in something of a frenzy, an example had to be made of them and Barclays was the first to be punished; it was to be its 359 million Euros fines which would make the front pages.

Why a fine rather than any other type of punishment? Firstly, because money is the thing which costs the banks the least, primarily because they make lots of it and because what can seem a considerable sum to the general public is often peanuts to them, having the capacity as they do to pass their losses on to their clients or investors; secondly, because not only are they too big to fail, but also they are too big to be interrupted (too big for it to be possible to stop even the activities in which they have behaved disgracefully); and finally, by virtue of the fact that with the financial sector having provided financial support for electoral campaigns in return for the decriminalization of financial misdemeanours, it is donkeys’ years since any bankers have actually been arrested for their crimes. At worst, they have had their wrists slapped, like Mr. Diamond, the chief executive of Barclays, who having been paid 15 million Pounds ( 18.6 million Euros) in 2011 – declared that he would forego his bonus for 2012. The people, astounded by so much generosity on his behalf, bowed down immediately to thank the Lord, while the inaction of the regulators seemed to demonstrate that they were convinced that his palpable sense of remorse was punishment enough.

Oh yes! Just a little remark to finish offt. Do you remember the article on The network of global corporate control, by Stefano Battiston and his colleagues, in which it is explained that the world is controlled by 147 companies with tightly-knit interests? In the list of the top 50, guess where Barclays is to be found? You guessed it! Yes it really is the N°1! (See here, Page 33)

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