The “LIBOR scandal”, which really should be called the “Lying Bankers scandal”, is more than simply the newest example of bankers systematically stealing from everyone else. In its scale, simplicity, and government complicity the Lying Bankers scandal is perhaps the purest distillation of all that’s gone wrong with our financial system and the government that’s supposed to police it.
The Lying Bankers scandal also offers the clearest opportunity to send bankers to jail. Opportunities, of course, are not outcomes. No one should be sanguine that even this exquisitely clear showcase of banker illegality will necessarily produce meaningful law enforcement. Signs out of Britain are sort of hopeful.
The Lying Bankers scandal in a nutshell: All the biggest banks (allegedly) conspired to manipulate the interest rate underlying trillions of dollars of complex investments and public perceptions of bank health, to increase personal and corporate profits. And governments looked the other way.
How did the bankers manage rig the interest rate? Easy. They lied.
See, the interest rates involved are based on what bankers say their banks are paying to borrow money, without proof they’re telling the truth. Even little lies have a big impact, because the rate only had to change by .01% or so for banks’ traders to cheat their counterparties out of tens of millions each day. Since only 16 banks’ borrowing costs are considered, and only the 8 numbers in the middle are used to calculate the rate, one bank, or some banks working in concert, can shift the rate the tiny amounts necessary. [Other variants involve different numbers of banks and percentages, but the point stands for all of them.]
If anyone doubts the banks have the skill to function as a market-rigging cartel, they only need remember the market rigging scandal that cost each of us (via our municipalities) huge sums. That scandal led to convictions of a few ex-GE bankers and cost-of-doing-business payouts by some of the big boys (JPMorgan Chase, $228 million; Wells Fargo, nee Wachovia, $148 million; UBS, $160 million; BofA, nee Merrill Lynch, nee Banc of America Securities, $137 million, and GE, $70.4 million.)
The “Statement of Facts” appended to Barclay’s Agreement with the Justice Department opens a window on the scale of lying and price fixing that went on. The lying involved two types. One, traders asked their and other banks to lie in small ways, to help the traders cheat their counterparties. The second type of price fixing came directly from banks’ top management, and aimed to make the banks look healthier than they were. With this kind of lie, both shareholders and counterparties suffered. Unlike the traders’ minute manipulations, these shifts could be 30 to 40 times greater and thus correspondingly more damaging.
Trading on Lies
From the Statement of Facts:
11. From approximately 2005 through 2007, and occasionally thereafter through approximately 2009, certain Barclays swaps traders [asked certain Barclays's rate submitters to lie to] benefit the traders’ trading positions[.] …[the Barclays's rate] submitters agreed to accommodate, and accommodated, the swaps traders’ requests …on numerous occasions.
Paragraphs 12-22 make clear this price fixing affected LIBOR, Dollar LIBOR, Yen LIBOR, and EURIBOR transactions.
Paragraphs 23-29 indicate Barclays wasn’t always acting alone:
24. Certain Barclays swaps traders made requests of traders at other [interest rate setting] banks for favorable LIBOR or EURIBOR submissions from those banks [and] received requests from traders at other banks for favorable LIBOR or EURIBOR submissions from Barclays rate submitters. When Barclays swaps traders did not have trading positions conflicting with their counterparts’ requests, those Barclays swaps traders sometimes would agree to [pass on the request to Barclays' rate submitters]. …The likelihood that the LIBOR or EURIBOR [rate] would be affected increased when other…banks also manipulated their submissions as part of a coordinated effort.
In fact, a Bloomberg story from February focused on UBS, noting that it was seeking immunity from Canadian regulators after having gotten immunity from the US and others in exchange for its cooperation with an investigation on manipulating Yen based LIBOR. That story also pointed out the breadth of the conspiracy:
According to the affidavit filed by the [Canadian regulator], Canadian officials were informed that HSBC Holdings Plc (HSBA), JPMorgan Chase & Co., Citigroup Inc. (C), Deutsche Bank AG (DBK), Royal Bank of Scotland Group Plc, ICAP Plc (IAP) and RP Martin Holdings Ltd. took part in the scheme. Employees at the banks agreed to make artificially high or low submissions for Yen Libor to improve the outcomes of trades tied to the rate[.]“
Note Barclays isn’t in that list. So perhaps multiple conspiracies abounded. Bank of America isn’t on that list either, but BofA is also being investigated for manipulating LIBOR.
The Barclays’s Statement of Facts focuses on manipulation starting in 2005. However, a report by The Economist puts the pricefixing timeline much earlier:
some current and former traders say that problems go back much further than that. “Fifteen years ago the word was that LIBOR was being rigged,” says one industry veteran closely involved in the LIBOR process. “It was one of those well kept secrets, but the regulator was asleep, the Bank of England didn’t care and…[the banks participating were] happy with the reference prices.” Says another: “Going back to the late 1980s, when I was a trader, you saw some pretty odd fixings…With traders, if you don’t actually nail it down, they’ll steal it.” [Bold mine.]
Lying About The Banks’ Financial Condition
The Statement of Facts explains the link between the manipulated interest rate and market perception of the banks’ health:
“If a bank’s LIBOR submission is relatively high…a bank could be perceived to be experiencing financial difficulties because lenders were charging higher rates to that bank. In addition, higher LIBOR contributions could signal that a bank is willing to pay higher amounts for funds, indicating potential liquidity problems.” [See paragraph 35]
Similarly Paul Krugman and others keyed into the difference between what banks paid to borrow money (LIBOR) and what the U.S. Government paid as an indicator of bank health/the depth of the financial crisis.
In short, if a bank was reporting higher borrowing costs than its peers it could have destabilized the bank. As a result, Barclays leadership told its rate submitters to report lower than true numbers:
39. Barclays’s submissions of improperly low Dollar LIBORs as a result of management instructions began in approximately late August 2007. That month, Barclays twice drew on the Bank of England’s emergency liquidity facility (known as the “window”), borrowing approximately £1.6 billion the second time. News articles about the withdrawals in late August 2007 noted a decline in Barclays’s share price and questioned Barclays’s liquidity position, while Barclays explained publicly that the visits to the window were due to technical glitches. …In early September 2007, Barclays received negative press coverage concerning Barclays’s high LIBOR submissions…
The Statement of Facts goes on to suggest pure motives for Barclays, by suggesting other banks were lying at least as much or more, so that by being honest, Barclays would be seen as much riskier relative to its peers than it in fact was. From paragraph 40:
“The managers…who gave the instruction to submit lower IBORs,…sought to avoid inaccurate, negative attention about Barclays’s financial health as a result of its high LIBOR submissions relative to other banks [and] prevent any adverse conclusions about Barclays’s …financial condition, because they believed that those conclusions would be mistaken and that other [rate setting] banks were submitting unrealistically low Dollar LIBORs. …”
Think about that–all the major banks appear to have been fundamentally and materially misrepresenting their financial condition to the marketplace. Surely that’s open and shut, epic securities fraud. Knowing and intentional securities fraud; criminal securities fraud. The whole reason the banks submitted the false rates is because they were material.
To Barclays’s credit, some of its employees did the right thing and tried to get regulators to clean up LIBOR:
“42. During approximately November 2007 through approximately October 2008, certain employees at Barclays sometimes raised concerns with individuals at the BBA, the Financial Services Authority, the Bank of England, and the Federal Reserve Bank of New York concerning …their views that the Dollar LIBOR fixes were too low and did not accurately reflect the market. In some of those communications, those employees advised that all of the [rate setting] banks, including Barclays, were contributing rates that were too low. Those employees…expressed the view that Barclays [could give honest rates] if other banks submitted honest rates.”
The Government Enablers
The Lying Bankers scandal doesn’t distill only the bankers’ part of recent scandals, it also shows in very pure form how governments facilitate this criminality.
In Britain, evidence is emerging that the Bank of England okayed Barclays’ financial-condition-misrepresenting low rate submission. The Statement of Facts suggests that no one responded effectively to Barclays’s employees’ efforts to sound the alarm:
–the BBA (the banking industry group that organizes LIBOR) asked the banks if they were lying and took their word when they said no; see paragraph 44
–The FSA (like our SEC) allegedly blessed Barclays’s approach (see paragraph 45, but see Barclays’s unwillingness to be candid, paragraph 46)
Beyond those hints, however, is the basic fact that the difference between what banks were claiming with their LIBOR submissions and what they were paying was well known in the marketplace. So much so that it’s simply not credible that law enforcement and policy makers didn’t know.
This article in The Telegraph, written by a banker not from Barclays, explains how the manipulation was very public knowledge and easy to spot:
It was during a weekly economic briefing at the bank in early 2008 that I first heard the phrase. A sterling swaps trader told the assembled economists and managers that “Libor was dislocated with itself“. It sounded so nonsensical that, at first, it just confused everyone, and provoked a little laughter. …
What the trader told us was that the bank could not be seen to be borrowing at high rates, so we were putting in low Libor submissions, the same as everyone. …
According to the trader, “everyone knew” and “everyone was doing it”. There was no implication of illegality. After all, there were 20 to 30 people in the room – from management to economists, structuring teams to salespeople – and more on the teleconference dial-in from across the country. The discussion was so open the behaviour seemed above board. In no sense was this a clandestine gathering. …
As the trader put it, everyone knew that we couldn’t borrow at Libor, you only needed to look at the price of our credit default swaps – effectively survival insurance for the bank – to see that.
So how could regulators and law enforcement not have known? This time around, will we again hear how so much happened that was immoral and wrong but not criminal?
The Lying Bankers’ Victims
The traders’ victims were their counterparties. According to the Barclays statement of facts, those included:
among others, asset management corporations, retirement funds, mortgage and loan corporations, and insurance companies. Those counterparties also included banks and other financial institutions in the United States or located abroad with branches in the United States.
Besides the traders’ specific victims, were all those indiscriminately hurt by the much larger thumb on the scale of the lie-about-our-financial-condition rate submissions. Such victims would include much larger numbers of such counterparties. Also, since the manipulation appears to have affected swaps a lot, what about all the municipal swaps deals out there? Were those deals pegged to a manipulated LIBOR?
And what about shareholders?
How about the fact that deals started pricing in the LIBOR discount? Once LIBOR wasn’t artificially suppressed, would those deals be artificially expensive? There’s no doubt the discount was getting priced in. As the Telegraph banker explains:
…even though Libor may have been, for example 2pc, the real Libor rate the bank was paying was more like 5pc or 6pc. So in fact, we needed to be lending money at Libor plus 3pc or 4pc just to break even. That is what we were telling clients.
The full extent of the victim class won’t be known until the full extent of the manipulation is. So far it seems to be concentrated in short term LIBOR rates. Longer term LIBOR underpins essentially all consumer debt with a variable interest rate–mortgages, credit cards, auto loans. If those rates were “fixed” too, it’s hard to see the end of the liability the banks created for themselves.
The Bottom Line
Regardless of who had how much stolen from them, the crucial points are these:
Rigging markets is illegal. Yet all or many of the world’s biggest banks appear to have rigged a very basic part of the market for personal and corporate gain, for years. And they did it with at least some key governmental blessing.