And each time the amounts get larger. It looks like we have a nice pair of scandals developing...
The LIBOR scandal looks like it could be biggest financial scandal EVER, maybe by an order of magnitude... Overly briefly, LIBOR is the set of interest rates set by 16 banks in London each day, and these rates affect almost every other rates (as well as MANY derivatives) in the world.
You may think that this does not affect you... Wrong! If you borrow any money, or save any money, you ARE affected!
Depending on exactly what happened and how this all of this shakes out, this may involve MANY trillions of dollars... Again. Look carefully in the Wikipedia article below, you will see that the Big Kahuna of derivatives (Interest Rate Swaps) depend on LIBOR...
Here is (most of) Wikipedia's article on LIBOR:
The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is usually abbreviated toLibor ( //) or LIBOR, or more officially to BBA Libor (for British Bankers' Association Libor) or the trademark bbalibor. It is a benchmark, along with the Euribor, for interest rates all around the world.
Libor rates are calculated for different lending periods: overnight, one week, one month, two months, six months, etc., and published daily at 11:00 by the British Bankers' Association. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to (and typically higher than) Libor.
In 1984, it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest rate swaps, foreign currency options andforward rate agreements. While recognizing that such instruments brought more business and greater depth to the London Interbank market, bankers worried that future growth could be inhibited unless a measure of uniformity was introduced. In October 1984, the British Bankers' Association (BBA)—working with other parties, such as the Bank of England—established various working parties, which eventually culminated in the production of the BBA standard for interest rate swaps, or "BBAIRS" terms. Part of this standard included the fixing of BBA interest-settlement rates, the predecessor of BBA Libor. From 2 September 1985, the BBAIRS terms became standard market practice.
BBA Libor fixings did not commence officially before 1 January 1986. Before that date, however, some rates were fixed for a trial period commencing in December 1984.
Member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated professional firms (as of 2008).
The LIBOR is widely used as a reference rate for many financial instruments, such as:
- forward rate agreements
- short-term-interest-rate futures contracts
- interest rate swaps
- inflation swaps
- floating rate notes
- syndicated loans
- variable rate mortgages
- currencies, especially the US dollar (see also Eurodollar).
They, thus, provide the basis for some of the world's most liquid and active interest-rate markets.
For the euro, however, the usual reference rates are the Euribor rates compiled by the European Banking Federation, from a larger bank panel. A euro Libor does exist, but mainly for continuity purposes in swap contracts dating back to pre-EMU times. LIBOR is an estimate and not interred in the legally binding contracts of an LLC. It is, however, specifically mentioned as a reference rate in the market standard International Swaps and Derivatives Association documentation, which are used by parties wishing to transact in over-the-counter interest rate derivatives.
Definition of Libor
Libor is defined as:
The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.
This definition is amplified as follows:
- The rate at which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.
- Contributions must represent rates formed in London and not elsewhere.
- Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets.
- The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank’s cash, rather than a bank’s derivative book.
- The definition of “funds” is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.
For other details of BBA Libor, see the BBA guide: BBA LIBOR explained.
Libor is calculated and published by Thomson Reuters on behalf of the British Bankers' Association (BBA) after 11:00 AM (and generally around 11:45 AM) each day (London time). It is a trimmed average of interbank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year. Libor is calculated for 10 currencies. There are eight, twelve, sixteen or twenty contributor banks on each currency panel, and the reported interest is the mean of the 50% middle values (the interquartile mean). The rates are a benchmark rather than a tradable rate; the actual rate at which banks will lend to one another continues to vary throughout the day.
Libor is often used as a rate of reference for pound sterling and other currencies, including US dollar, euro, Japanese yen, Swiss franc, Canadian dollar, Australian dollar, Swedish krona, Danish krone, and New Zealand dollar.
In the 1990s, the yen Libor was influenced by credit problems affecting some of the contributor banks.
Six-month USD Libor is used as an index for some US mortgages. In the UK, the three-month GBP Libor is used for some mortgages—especially for those with adverse credit history.
The Chicago Mercantile Exchange's Eurodollar contracts are based on three-month US dollar Libor rates. They are the world's most heavily traded short term interest rate futures contracts and extend up to ten years. Shorter maturities trade on the Singapore Exchange in Asian time.
Interest rate swaps
Interest rate swaps based on short Libor rates currently trade on the interbank market for maturities up to 50 years. In the swap market a "five year Libor" rate refers to the 5 year swap rate where the floating leg of the swap references 3 or 6 month Libor (this can be expressed more precisely as for example "5 year rate vs 6 month Libor"). "Libor + x basis points", when talking about a bond, means that the bond's cash flows have to be discounted on the swaps' zero-coupon yield curve shifted by x basis points in order to equal the bond's actual market price. The day count conventionfor Libor rates in interest rate swaps is Actual/360, except for the GBP currency for which it is Actual/365 (fixed).
Matt Taibbi and Elliot Spitzer discuss the LIBOR scandal, this piece is easy to understand:
Taibbi & Spitzer (and their other guest) note that Barclay's alone CANNOT manipulate (much) the LIBOR. They mention two other banks now involved: UBS and RBS. (Lloyd's may also be involved, probably are.) They say that not even THREE banks can do manipulate LIBOR (much). Because the actual LIBOR rate is set at the "Interquartile Mean" (see above in the Wikipedia piece), it is the eight banks "in the middle" whose average becomes the new LIBOR. They then go on to say that it logically HAS TO BE cartel-like behavior among MOST of the banks to manipulate LIBOR. In other words, they're all in it together...
Two stories from Zero Hedge just today:
Above piece is from "George Washington" who is an article contributor at ZH. "GW" provides this link with a synopsis of Barclay's role in the LIBOR scandal, this too is short and easy to understand:
"GW" finishes his piece with this comment:
"The big banks have robbed the whole world.
Indeed, the scandal is so big that it will further destroy trust in our financial system and drive many people from investing in the capital markets altogether."
--"rcwhalen", another ZH article contributor provides another article:
"rcwhalen" notes that once executives are nestled inside large companies, even public-owned ones (like most banks), there is ample incentive for them to skirt whatever rules are there for financial gain. The author writes that we should not have been surprised by this. And goes on to say that the regulators have also been captured...
The Regulatorz have been captured!!!
The below just hit the wires. It is about how PIIGSs' banks and governments are skimming along the way as well.
Dollarcollapse's John Rubino writes:
Bloomberg is reporting on what looks like a brazen con being pulled on taxpayers by eurozone banks and governments. It goes like this: During the recent credit bubble the PIIGS country banks created and then sold a bunch of low-quality mortgage bonds. Now they’re buying them up at big discounts to the original price, booking a profit on the trade, and using those securities as collateral for low-interest-rate loans from the European Central Bank.
That is a nice little scam as well. Buying up your own bad debt, and using that for collateral to borrow more...
The financial system more and more seems to be built on quicksand! This will not end well.
All of these scandals mean that enormous capital is being stolen to the detriment of the WHOLE WORLD.
The banksters must be stopped. But, who will do stop them?
NONE of our financial problems have been solved.
NO ONE of any significance has gone to jail.