Barclays and other large banks – including Citigroup, HSBC, J.P. Morgan Chase, Lloyds, Bank of America, UBS, Royal Bank of Scotland– manipulated the world’s primary interest rate (Libor) which virtually every adjustable-rate investment globally is pegged to.
That means they manipulated a good chunk of the world economy....
We actually understated the impact of the Libor scandal.
Specifically, according to the CIA’s World Factbook, the global economy – as measured by the world’s gross domestic product – is less than $80 trillion.
In contrast, over $800 trillion dollars worth of investments are pegged to the Libor rate. In other words, a market more than 10 times the size of the entire real world economy is effected by Libor.
As the Wall Street Journal reports today:
More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans.
(Click here if you don’t have a subscription to the Journal).
Remember, the derivatives market is approximately $1,200 trillion dollars. Interest rate derivatives comprise the lion’s share of all derivatives, and could blow up and take down the entire financial system.
The largest interest rate derivatives sellers include Barclays, Deutsche Bank, Goldman and JP Morgan … many of which are being exposed for manipulating Libor.
They have been manipulating Libor on virtually a daily basis since 2005.
They are still part of the group of banks which sets Libor every day, and none have been criminally prosecuted.
They have received a light slap on the wrist from regulators, which – as Nobel economist Joe Stiglitz points out – is just the cost of doing business when fraud is the business model.
Indeed – as Bloomberg notes – they’re probably still manipulating the rate:
The U.K. bankers and regulators charged with reviewing Libor in the wake of regulatory probes are resisting calls to overhaul the rate because structural changes risk invalidating trillions of dollars of contracts.
The group, established by the British Bankers’ Association in March after probes into allegations that traders rigged the London interbank offered rate … won’t propose structural changes such as basing the rate on actual trades or taking away oversight of the benchmark from the BBA, the people said.
Libor is determined by a daily poll that asks banks to estimate how much it would cost them to borrow from each other for different time frames and in different currencies. Because banks’ submissions aren’t based on real trades, academics and lawyers say they are open to manipulation by traders. At least a dozen firms are being probed by regulators worldwide for colluding to rig the rate, the benchmark for $350 trillion of securities.
“I don’t see a significant enhancement to the reputation of Libor without basing it on actual transactions,” said Rosa Abrantes-Metz, an economist with Global Economics Group, a New York-based consultancy, an associate professor with New York University’s Stern School of Business and the co-author of a 2008 paper entitled “Libor Manipulation?” [the manipulation was well-known in England in 2007, Shah Gilani warned of Libor manipulation in 2008, and Tyler Durden, Max Keiser and others started sounding the alarm at or around the same time.]
“It would only be disruptive if current quotes are inaccurate,” so resistance “is suspicious,” she said.
Traders interviewed by Bloomberg in March at three firms said they were given no guidance on how Libor should be set and there were no so-called Chinese walls preventing contact between the treasury staff charged with submitting the rate and traders who stood to profit on where Libor was set each day. They regularly discussed where Libor would be set with their colleagues and their counterparts at other firms, they said.
“Sadly the response looks to be very consistent with the response of policy makers to the banking disasters we’ve seen over the last four years — cosmetic changes, but nothing substantial happens,” said Richard Werner, a finance professor at the University of Southampton. “It’s insufficient and doesn’t really go to the heart of the problem.”
JP Morgan Sucks at the Government Teat....
JP Morgan’s credit rating would be much lower without government backing.
As Bloomberg noted last week:
JPMorgan benefited from the assumption that there’s a “very high likelihood” the U.S. government would back the bank’s bondholders and creditors if it defaulted on its debt, according to the statement. Without the implied federal backing, JPMorgan’s long-term deposit rating would have been three levels lower and its senior debt would have dropped two more steps, Moody’s said.
And as the editors of Bloomberg pointed out a couple of weeks ago:
JPMorgan receives a government subsidy worth about $14 billion a year, according to research published by the International Monetary Fundand our own analysis of bank balance sheets. The money helps the bank pay big salaries and bonuses. More important, it distorts markets, fueling crises such as the recent outrageous and utterly criminal subprime-lending disaster and the sovereign-debt debacle that is now threatening to destroy the Euro and sink the global economy....while benefiting the global crooks
in USA's $ denominated instruments for now.....
With each new banking crisis, the value of the implicit subsidy grows. In a recent paper, two economists — Kenichi Ueda of the IMF and Beatrice Weder Di Mauro of the University of Mainz — estimated that as of 2009 the expectation of government support was shaving about 0.8 percentage point off large banks’ borrowing costs. That’s up from 0.6 percentage point in 2007, before the financial crisis prompted a global round of bank bailouts.
To estimate the dollar value of the subsidy in the U.S., we multiplied it by the debt and deposits of 18 of the country’s largest banks, including JPMorgan, Bank of America Corp. and Citigroup Inc. The result: about $76 billion a year. The number is roughly equivalent to the banks’ total profits over the past 12 months, or more than the federal government spends every year on education.
JPMorgan’s share of the subsidy is $14 billion a year, or about 77 percent of its net income for the past four quarters. In other words, U.S. taxpayers helped foot the bill for the multibillion-dollar trading loss that is the focus of today’s hearing. They’ve also provided more direct support: Dimon noted in a recent conference call that the Home Affordable Refinancing Program, which allows banks to generate income by modifying government-guaranteed mortgages, made a significant contribution to JPMorgan’s earnings in the first three months of 2012.
Way to suck at the government teat, Mr. self-proclaimed free market champion....