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If you’ve heard of the LIBOR scandal (Matt Taibbi covered it in one of his best pieces at Rolling Stone last year, “Everything Is Rigged: The Biggest Price-Fixing Scandal Ever”), University of Missouri at Kansas City professor Bill Black has just published an article worthy of note about it, over at the New Economic Perspectives’ blog, regarding the directly-related, Federal Deposit Insurance Corporation’s (FDIC) lawsuit against 16 of the world’s largest banks.  (I’ve also provided links and excerpts with coverage of this story from a variety of perspectives by: Taibbi, The Economist and world renowned finance expert and author Satyajit Das, farther down.)

To those giving this a quick read, I would strongly encourage you to peruse topic expert Satyajit Das' commentary, toward the end of this post, where he notes, as a direct result of the LIBOR scandal...

...Many American corporations and municipalities entered into interest rates swaps where low rates would have resulted in significant losses. The International Monetary Fund estimates the amount lost by municipalities at US$250 billion to US$500 billion in 2010. If successful action is brought under US anti-trust regulation, then banks may be liable for punitive triple damages...
(h/t Naked Capitalism)

(Note: Diarist has received written authorization from Professor Black to reproduce his posts in their entirety for the benefit of the Daily Kos community.)

The Most Dishonest Number in the World: LIBOR
New Economic Perspectives
(Posted on March 15, 2014 by Devin Smith)

By William K. Black

The FDIC has sued 16 of the largest banks in the world plus the British Bankers Association (BBA) alleging that they engaged in fraud and collusion to manipulate the London Inter-bank Offered Rate (LIBOR).  BBA called LIBOR “The most important number in the world.”

LIBOR is actually many numbers that depend on the currency and term (maturity) of the loan.  The collusion involved manipulating most of these rates.  A vast number of loans and derivatives are priced off of these “numbers.”  Estimates of the notional dollar amount of deals affected by the collusion range from $300-550 trillion in deals manipulated at any given time.  The LIBOR frauds began no later than 2005 and continued through 2011.

The BBA and the banks claimed to the world that LIBOR was simply the prices (interest rates) set by the market for what it cost the world’s largest banks to borrow from each other.  The banks would report to the BBA those interest rates and, after excluding outliers, the average reported cost to borrow for X days in Y currency would be reported as the LIBOR “number.”

The system was not regulated.  The theory was that the banks self-regulated.  LIBOR was the City of London’s “crown jewel” and theoclassical economics predicted that the elite banks’ self-interest in their reputation and the value they gained from having LIBOR as the global standard would ensure that the banks would report honestly.  As my readers know, any discussion of the “banks’” interests is dangerously misleading.  The key question is the interests of the banks’ officers, particularly those that control the banks.  The “unfaithful agent” (bank officer) is the leading threat to the banks.  Theoclassical economists assumed away the “agency” problem.

The fact that the FDIC “only” sued 16 of the largest banks in the world does not indicate that the other elite banks were run honestly.  The other elite banks were not part of the group that set LIBOR so they could not join in the cartel.  The LIBOR conspiracy could only succeed and persist if none of 16 elite banks was controlled by honest officers and no regulator acted to end the collusion once they became aware of the collusion (which happened no later than April 16, 2008).  We ran a real world test of the ethics of the leaders of 16 of the world’s most elite banks.  The scorecard according to the U.S. government agency that investigated the matter (the FDIC) reports that each of the leaders failed.  Our twin emergencies are financial and ethical.

According to the FDIC investigation, the three largest banks in America (including the world’s two largest banks), the four largest banks in the U.K, the largest bank in German, the largest bank in Japan (plus one of the handful of surviving “main banks”), the third largest bank in France, the two largest Swiss banks, the second largest bank in Canada, and the second largest bank in the Netherlands conspired together to manipulate LIBOR and not only lied about it but also covered up the cartel and the fraud scheme it used.  The 15 surviving banks’ total assets were nearly twice as large as the U.S. GDP as of September 30, 2013.

Here are the data on the banks sued by the FDIC

Bank                                               ($ billions, IFRS, as of 9/30/13)
Bank of America Corp    3063^
Barclays PLC                                       2275
Citigroup Inc                                       2693^
Credit Suisse Group AG                       1643^
Deutsche Bank AG                               2420
HSBC Holdings PLC                               2723
JPMorgan Chase & Co                               3678^
The Royal Bank of Scotland Group PLC       1829
UBS AG                                               1160
Rabobank                                               908
Lloyds Banking Group PLC                       1409
Societe Generale                               1698
Norinchukin Bank                               846
Royal Bank of Canada                               825
Bank of Tokyo-Mitsubishi UFJ               2469

Total:                                       29639

Source: SNL Financial

^Data for banks that follow U.S. generally accepted accounting principles (GAAP) (yes; that includes Credit Suisse) adjusted to the International Financial Reporting System (IFRS) basis to make data comparable.  (The difference is how financial derivative positions are measured.)

*I excluded one of the banks the FDIC sued, WestLB AG, because the (infamous) German Landesbank was sold as part of a German bailout during the crisis.  It had over $400 billion in total assets before its collapse during the crisis.


Consider the ethical and political implications of what the FDIC investigation has confirmed.  The entire barrel of apples is rotten.  Every CEO failed the ethical test, and the ethical bar that they failed to surmount was set exceptionally low.  That can only happen when a “Gresham’s” dynamic has been allowed to persist for years because of the three “de’s” (deregulation, desupervision, and de facto decriminalization).  Such a dynamic can cause “bad ethics to drive good ethics out of the markets.”  No one should be able to view the facts the FDIC cites without a sense of horror combined with an urgent commitment to transform the industry that has done so much financial and ethical harm to our nations.  The twin emergencies are global.

Crony Capitalism and Politics

There are two possibilities:  the Obama administration knew for six years that the world’s largest banks were endemically led by frauds or the administration learned of that fact recently when it learned of the results of the FDIC investigation.  The LIBOR scandal became public knowledge with the Wall Street Journal’s April 16, 2008 expose, so the Bush administration also knew it was dealing with elite frauds.  If the Obama administration has long known that fraud was endemic among the leaders of the world’s largest banks, then its policies toward those CEO and the banks they control have been reprehensible and harmful.

If the administration has just learned from the FDIC investigation about the true nature of the CEOs that it has refused to hold accountable and allowed to retain and even massively increase their wealth through leading control frauds then we can doubtless expect a series of emergency actions transforming the administration’s finance industry policies.  The FDIC lawsuit provides a “natural experiment” that allows us to test which of the possibilities was correct.

Let’s review the bidding.  The U.S. government, through the FDIC, has found after a lengthy investigation that the leaders of 16 of the world’s largest banks conspired together to form a cartel to manipulate the LIBOR “numbers” and to defraud the public about the scam.  This should have led the criminal justice authorities to prosecute large numbers of senior officers of these banks – but none of them have been prosecuted.  It obviously poses a grave threat to the “safety and soundness” of the entire financial system.  The endemic frauds led by elite CEOs demonstrate such a pervasive failure of integrity and ethics by the leaders of the finance industry that there is a moral crisis of tragic proportions.  So here are some questions (along with the usual who, when, where details) I request that the media formally ask the administration:

1.    Did the FDIC brief the administration before it brought its LIBOR suit?
2.    Why didn’t Attorney General Holder and the FDIC leadership conduct a news conference announcing the suit and emphasizing its implications?
3.    Why didn’t the FDIC’s “home page” or press release site even note the suit?
4.    Did the suit cause the administration to transform its finance industry policies?
5.    When will the President address the Nation about fixing the twin emergencies?

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Over at Rolling Stone at the time, Matt Taibbi explained the implications of this story to all of us “little people,” from my post here on April 26th, 2013

Everything Is Rigged: The Biggest Price-Fixing Scandal Ever

The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There's no price the big banks can't fix

Matt Taibbi
Rolling Stone
April 25, 2013    1:00PM
(This story will appear in the May 9th edition of Rolling Stone Magazine)

Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world's largest banks may be fixing the prices of, well, just about everything.

You may have heard of the Libor scandal, in which at least three – and perhaps as many as 16 – of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that's trillion, with a "t") worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history – MIT professor Andrew Lo even said it "dwarfs by orders of magnitude any financial scam in the history of markets."

That was bad enough, but now Libor may have a twin brother. Word has leaked out that the London-based firm ICAP, the world's largest broker of interest-rate swaps, is being investigated by American authorities for behavior that sounds eerily reminiscent of the Libor mess. Regulators are looking into whether or not a small group of brokers at ICAP may have worked with up to 15 of the world's largest banks to manipulate ISDAfix, a benchmark number used around the world to calculate the prices of interest-rate swaps.

Interest-rate swaps are a tool used by big cities, major corporations and sovereign governments to manage their debt, and the scale of their use is almost unimaginably massive. It's about a $379 trillion market, meaning that any manipulation would affect a pile of assets about 100 times the size of the United States federal budget…

...Translation: When prices are set by companies that can profit by manipulating them, we're fucked...

...The only reason this problem has not received the attention it deserves is because the scale of it is so enormous that ordinary people simply cannot see it. It's not just stealing by reaching a hand into your pocket and taking out money, but stealing in which banks can hit a few keystrokes and magically make whatever's in your pocket worth less. This is corruption at the molecular level of the economy, Space Age stealing – and it's only just coming into view.

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And, here’s The Economist, with a brief summary of the initial, post-settlement commentary. (Various lawsuits relating to a variety of aspects concerning this travesty could easily remain in some courts for the remainder of this decade.)

The Libor scandal

Fixed harmony
The Economist
Dec 4th 2013, 22:23 by J.R.

THE drumbeat of investigations, lawsuits and settlements in the widening scandal over the fixing of benchmark interest rates such as LIBOR has been so steady as to be almost soporific, reducing their ability to shock. The penalty of €1.7 billion ($2.3 billion) six financial institutions agreed to pay the European Commission this week for colluding to rig interest rates seems if anything a slowing of the tempo. Yet it could lead to a new crescendo of legal troubles for the banks involved.

The agreement, which was announced by Joaquín Almunia, the EU's competition commissioner (pictured), and imposes large fines on several European firms including Deutsche Bank, Société Générale and Royal Bank of Scotland, also implicates two big American banks. Both JPMorgan Chase and Citigroup admit in it that their employees were involved in efforts to manipulate benchmark interest rates for borrowing in yen. The fines they agreed to pay are relatively modest, €80m and €70m respectively, but they are the first to be levied against American institutions in relation to the LIBOR scandal. This should add to the pressure on American regulators to be more even-handed, amid complaints that they have been quick to prosecute and fine foreign banks over the LIBOR scandal but have yet to reach any settlements or impose fines on any American firms...

…In the agreement the banks admit not only to attempting to rig rates, but also to doing so in collusion with other banks. This lays them open to especially damaging lawsuits from investors in assets affected by the rate-rigging, lawyers say, thanks to a quirk of American law. If the banks are shown to have colluded, the courts can apply a provision of America’s competition rules subjecting them to damages of three times the harm done. Several class-action lawsuits over the alleged manipulation of LIBOR for dollar-denominated borrowing are already under way. The banks have argued in court in New York that such collusion was implausible. This week’s settlement indicates that it did occur in several similar markets.

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For those interested in the more technical aspects of the story, here are excerpts and links from a two-part series, published over at the Naked Capitalism blog eight months ago, from one of the most highly-regarded experts in the world on the subject matter, Satyajit Das…

Satyajit Das: The LIBOR Fix – Part 1
Posted on July 23, 2012 by Yves Smith
Naked Capitalism

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk and Traders Guns and Money. Jointly posted with

The scandal surrounding the manipulation of LIBOR sets raises a number of issues. In the first part of the two part piece, the known facts are outlined. In the second part, the broader implications of the episode are discussed.

Damage & Damaged…

LIBOR is not used for all financial transactions. They are primarily used in wholesale loan transactions and derivative transactions. Retail or small business loans are based on the bank’s own base rate reflecting its funding cost. Bank retail deposit rates are rarely based on LIBOR.

According to the US Office of the Comptroller of the Currency, the proportion of US mortgages priced directly off LIBOR is estimated at around 2-3% of all mortgages, about 900,000 loans totalling $275 billion. The proportion of UK mortgages priced off LIBOR is similar. In the US the predominance of fixed rate mortgages makes a money market benchmark like LIBOR irrelevant.

BBA LIBOR is not used in some markets at all due to history or differences in market convention such as settlement protocols. Derivative and loan transactions in Australia are priced off the indigenous A$ bank bill rate (BBSW). Transactions in the US use a variety of rates including US Prime Rate or US Commercial Paper rates.

Manipulation could indirectly affect interest rates. Changes in a bank’s wholesale funding might affect its lending and deposit rates. Retail mortgages and credit card loans are refinanced through securitisation transactions, which are linked to LIBOR.

Determining the affected parties is also complex. During the GFC, low rates benefitted borrowers but penalised depositors. Low LIBOR sets penalised payers of fixed rate in an interest rate swap but benefitted receivers.

In derivative transactions, there may have been transfers of value between banks. One swaps trader states that a large bank is on the other side of a fix with opposing financial interests. Individual desks or traders within a bank may have different interests in a particular LIBOR set. There will also be differences between banks that contribute to the LIBOR fix and those who do not.

End-users, corporate or retail borrowers and investors, would be the major parties affected.

A perverse outcome is likely in litigation. As banks act as intermediaries in the main, there would be a transfer of wealth between parties. Losers will sue banks who will be unable to recover their losses from the parties that may have benefitted.

Clients suing banks is now passé. The sight of banks suing each other seeking compensation promises ribald entertainment. Goldman Sachs (who do not contribute to the fix) claiming that they were innocent victims and unsophisticated investors may provide a suitable coda to the episode.

Satyjit Das: The LIBOR Fix – Part II
Posted on July 24, 2012 by Yves Smith
Naked Capitalism

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk and Traders Guns and Money. Jointly posted with

The scandal surrounding the manipulation of LIBOR sets raises a number of issues. The first part of this two part piece set out the known facts. In the second part, the broader implications of the episode are discussed.

In The Fix…

…Civil suits, including class actions brought on behalf of affected parties, are likely. Assuming rates were set too low investors whose returns were reduced may seek redress. Parties to derivative transactions where payments increased as a result of low LIBOR levels may seek to recover losses.

Many American corporations and municipalities entered into interest rates swaps where low rates would have resulted in significant losses. The International Monetary Fund estimates the amount lost by municipalities at US$250 billion to US$500 billion in 2010. If successful action is brought under US anti-trust regulation, then banks may be liable for punitive triple damages.

Investment bank Morgan Stanley estimates that losses to banks could total (up to) US$22 billion in regulatory penalties and damages to investors and counterparties, equivalent to around 4-13% of banks’ 2012 earnings per share and 0.5% of book value. In reality, it is difficult to accurately quantify potential losses.

Other rates and prices set by banks will come under scrutiny. The US DoJ is prosecuting US energy trading companies for allegedly submitting false trade data to Platts and other publishers of price indices used to price and settle natural gas transactions.

There is now significant uncertainty about potential litigation and unquantifiable losses faced by banks. Already facing weak earnings, asset quality problems, higher funding costs and increased regulations, banks are likely to remain under severe pressure…

(Bold type is diarist's emphasis.)

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