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Sunday, July 1, 2012

How I manipulated the Libor interest rate

The Telegraph ran a stunning article in which a trader describes their personal involvement in manipulating Libor.

Regular readers know that the solution to Libor is a) base it off of actual trades and b) disclose those trades as part of requiring the banks disclose on an ongoing basis their current asset, liability and off balance sheet exposure details.

Ideally all of this information would be readily available in the 'Mother of all Financial Databases'.  This database would be managed in a data warehouse by two conflict of interest free firms.  One firm to coordinate the data warehouse to optimize the usability of the data and the other firm to run the data warehouse on a day to day basis.

Any solution less than this is completely unacceptable by market participants.

An anonymous insider from one of Britain's biggest lenders – aside from Barclays – explains how he and his colleagues helped manipulate the UK's bank borrowing rate....
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. 
Before long, though, I was drawing up presentations to explain the "dislocation of Libor from itself" for corporate relationship managers. I was deciphering the subject in emails, internally and externally. And I was using the phrase myself openly with customers of the bank. 
What I was explaining was that the bank was manipulating Libor. Only I didn't see it like that at the time. 
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. 
How could we do that? Easy. The British Bankers' Association, which compiled Libor, asked for a rate submission but there were no checks. The trader said there was a general acceptance that you lowered the price a few basis points each day.
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. 
The main business of the day was to deal with the deepening crisis.....
We accompanied the relationship managers to meetings to explain what was happening in the economy – why base rate lending could not be sustained, why margins had to increase, and of course to explain the general economic backdrop. 
As part of that, we had to explain the "dislocation of Libor from itself". 
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. 
What that meant was that 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. 
Looking back, I now feel ashamed by my naivety. Had I realised what was going on, I would have blown the whistle. But the openness alone suggested no collusion or secrecy. Management had been in the meeting, and so many areas of the Treasury division of the bank represented, that this was clearly no surprise or secret. 
Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.

Please re-read the highlighted text as it makes requiring the banks to provide ultra transparency mandatory.  Anything less confirms there is something to hide and that the policymakers and financial regulators will do anything to hide it.

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