Regular readers know that opacity in setting the Libor rates allowed bankers to engage in bad behavior. What is now coming out is how pervasive this bad behavior was.
Since there are $300+ trillion of securities tied to Libor, it cannot simply go away. Instead, a solution is needed that not only prevents future manipulation, but cleans up the culture of the banks that would allow manipulation to occur in the first place.
Your humble blogger has stated repeatedly that the only solution that does this is requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
Only ultra transparency uses the bright light of sunshine to disinfect both the Libor rate setting mechanism and the banks that are involved in providing the actual transaction data on which Libor should be based.
The Telegraph's article on the behavior of the Libor 'cartel' highlights why nothing less than ultra transparency is an appropriate response by the financial regulators.
Senior traders working for RBS’s investment banking arm openly discussed fixing the world’s key borrowing rate in the months running up to the bank's collapse, according to legal documents cited by Bloomberg.
In one exchange in April 2008, Neil Danziger, a former London-based trader at RBS, messaged Tan Chi Min, a Singapore-based trader for the bank, saying “Our six-month fixing moved the entire fixing, hahahah”....
The court documents purport to show that even as late as August 2008, less than six weeks before RBS collapsed, some of the bank's traders were attempting to manipulate borrowing rates to make money.
The revelations in the legal documents obtained by Bloomberg, show that the actions of the traders could have cost British savers millions and potentially even billions of pounds in lost interest on their deposits.The cost of providing ultra transparency is less what the British savers lost in interest on their deposits.
In one instant message dated August 21 2007, Jezri Mohideen, RBS’s former head of yen products in Singapore, asked Mr Danziger, who was sacked along with three other colleagues last year, “What’s the call on Libor”. Mr Danziger replied, “Where would you like it, Libor that is.”
Another trader unnamed trader replied: “Mixed feelings, but mostly I’d like it all lower so the world starts to make sense.”
“The whole HF [hedge fund] world will be kissing you instead of calling me if Libor move lower,” said Tan.
The Singapore court filings are part of a wrongful dismissal claim being brought by Mr Tan against RBS. Mr Tan has alleged that senior staff at RBS where aware of Libor fixing and condoned it.
“It’s just amazing how Libor fixing can make you that much money or lose if opposite,” wrote Mr Tan in a message to traders at other banks dated August 19 2007. “It’s a cartel now in London.”So if depositors lost from the manipulation of Libor, who won?
Why the banks!
Given how much the banks 'earned' from manipulating Libor, a fine similar to what Barclays paid is simply not going to change the culture of the banks or behavior.
This fact simply reinforces the need for the financial regulators to require ultra transparency not just for the bank on the Libor panels, but across the entire industry.