Tuesday, July 17, 2012

Ben Bernanke and Mervyn King see British Bankers' Association as responsible for dealing with Libor 'fraud'

Since the beginning of the financial crisis, we have had a number of 'you could not make this stuff up moments'.  Today's testimony by Fed Chairman Ben Bernanke to Congress and by Bank of England's Governor Mervyn King to Parliament provided one of those moments.

Both men indicated that it was the responsibility of the British Bankers' Association to deal with the fact that Libor could be manipulated by the banks for their benefit.

The British Bankers' Association that just happens to be run for the benefit of the banks that were engaged in manipulating Libor for their benefit.  As David Zervos at Jeffries & Co said,

It should come as no surprise to anyone that major commercial banks manipulate Libor submissions for their own benefit. 
The OTC derivatives markets was designed by the big banks, for the big banks, to ensure that as they set up their own private securities exchanges - away from regulatory scrutiny - they could control the interest rate settings. 
Money center commercial banks did not want the "truth" of market prices to determine their loan rates. Rather, they wanted an oligopolistically controlled subjective survey rate to be the basis for their lending businesses.
It was not just anyone who was saying it was and is the British Banker's Association's responsibility.
  • Mr. Bernanke is the chairman of the US central bank that just happens to have full responsibility for the supervision and regulation of the large US banks involved in the Libor scandal.
  • Mr. King is the governor of the UK central bank that just happens to be in the process of having full responsibility for the supervision and regulation of the large UK banks involved in the Libor scandal transferred to it.
At a minimum, this recommendation to outsource supervision to the banks who are committing fraud suggests that PhD economists are unfit for heading up or having any involvement with an organization responsible for bank supervision.

From a Guardian article on their testimony,
The heads of the US and UK central banks have described as "fraud" the manipulation by Barclays of the international lending rate, Libor
The US Federal Reserve chairman, Ben Bernanke, said the process for setting the rate was "structurally flawed" and that he could not guarantee its reliability.
The solution of course is to base Libor off of actual trades that are disclosed as part of the requirement that banks provide ultra transparency and disclose on an ongoing basis all of their current global asset, liability and off balance sheet exposure details.
Mervyn King, the Bank of England governor, said that deliberately rigging the Libor rate for private gain was "my definition of fraud"....
Bernanke told a Senate banking committee hearing that there was little the US central bank could do to reform the system, which has rattled investor confidence in financial markets, because it has no control over how it is set.
Actually, there was plenty the US central bank could do, but so far has elected not to do.

For example, it could have required US banks that are on the Libor panel to disclose their trades.

For example, it could have mentioned the fact that Barclays had confessed to manipulating Libor prior to the debate over the Dodd-Frank Act.  The Financial Times' Martin Wolf showed that this would have resulted in transparency being included in the Dodd-Frank Act as he linked the need for transparency to the Vickers Commission reforms.
The reliability of the London Interbank Offered Rate, the interest rate that underpins transactions worth trillions of dollars, is under question with the revelations that bankers sought to move rates to profit on trades and to hide its borrowing costs during the 2007-09 financial crisis. 
"I would like to see additional reforms to the Libor process, assuming that Libor will continue to be a benchmark for financial contracts," Bernanke said at a Senate banking hearing held to discuss the state of the economy. 
Libor is set by a panel of banks, which submit estimates of how much they believe they have to pay to borrow from each other. Barclays is the only bank so far to settle with US and UK regulators over allegations that it manipulated the key interest rate. Dozens of other big banks – including at least two American institutions – are currently under investigation. 
Bernanke said the Fed had little power to change the way the benchmark rate is set. "We are and need to continue advocating for reforms to the Libor process. It is constructed by private organization in the UK, and so our direct ability to influence that is limited," he told lawmakers. 
In short, it is up to the British Bankers' Association.
Bernanke said he could not say "with full confidence" that Libor is reliable, because the "British Bankers' Association did not adopt most of the recommentations made by the New York Fed".
The recommendations by the New York Fed that came from the very banks manipulating Libor.  Had all the recommendations been adopted, it would not have prevented the ongoing manipulation of the Libor interest rates.

From a Telegraph article on Mr. King's testimony,
The BBA had to be nudged to get into the right direction, but once they had been nudged...they did work very hard to make a successful consultation.
So successful that the banks could continue to manipulate Libor through at least 2010.

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