Surprise, Geithner's Libor recommendations basically talking points from banks manipulating Libor

In his Huffington Post article, Ryan Grim looks at the recommendations the banks made for fixing Libor to the NY Fed and how they are almost exactly the same recommendations that Mr. Geithner forwarded to the Bank of England's Mervyn King.

Naturally, the British Bankers' Association found most of the recommendations acceptable as it was their banks that made the recommendations.

Mr. Grim's analysis confirms your humble blogger's observation that the recommendations would not prevent manipulation of the Libor interest rate.

This analysis also confirms my speculation about why Mr. Geithner's proposal did not include using transparency and the disclosure of actual trades.  The recommendations came from the banks (aka, the Opacity Protection Team) who were out to preserve their ability to manipulate Libor interest rates behind the veil of opacity.

But wait, weren't the Fed economists suppose to review these recommendations?

Of course they reviewed these recommendations, but transparency, as in there is a difference between trying to value the contents of a brown paper bag versus valuing the contents of a clear plastic bag, is a concept that is far too difficult for a PhD economist to understand.

Without a basic understanding of transparency, the Fed economists blindly accept what they are told by the banks.

The same banks who are lying and manipulating Libor.

But the Fed, along with its statement, also released the staff work that led to the recommendations. Those documents reveal that the recommendations Geithner sent to London did not come from staff, but rather were proposed by major banks and more or less forwarded on verbatim.

The policy recommendations Geithner forwarded in an attachment on June 1 first appear in a staff memo dated May 20 that reads: "A variety of changes aimed at enhancing LIBOR's credibility has been proposed by market participants, and seem to be under consideration by the BBA. These proposed changes include, but are not limited to..." 

A comparison between Geithner's recommendations and those put forward by "market participants" -- shorthand for banks -- makes it clear that Fed staff asked banks how to fix the problem, then presented those answers as their own. (Most of the banks consulted were likely U.S.-based institutions, as several of the recommendations are aimed at giving more power, not surprisingly, to U.S. banks.)

Libor is not the first example of financial regulators parroting what the bankers tell them.

Regular readers are familiar with how the Committee of European Bank Supervisors did exactly the same thing with the Public Consultation on Article 122a of the European Capital Requirements Directive.  Here, the financial regulators said that the disclosure provided by opaque, toxic subprime mortgage-backed securities was adequate for knowing what you own.

Valuing these securities is like valuing the contents of a brown paper bag.  You have no idea what is currently in the bag and are therefore left to blindly guess.

However, when you are a regulator parroting what the banks tell you, you end up saying things like you know what you own when you are blindly guessing.