Court transcripts confirm Libor manipulation

Bloomberg published a must read article on how Libor interest rates were manipulated by the banks for their benefit for years.

Regular readers know that the only real solution to permanently end the banks' ability to manipulate Libor and to reopen the interbank lending market is to require all banks to provide ultra transparency.

With ongoing disclosure of each bank's global asset, liability and off-balance sheet exposure details, banks with deposits to lend can assess the risk of bank's looking to borrow.

With this information, market participants can calculate Libor for themselves based off of actual trades.

For years, traders at RBS, Barclays Plc (BARC), UBS AG (UBSN), Deutsche Bank AG (DBK), Rabobank Groep and other firms that stood to profit worked with employees responsible for setting the benchmark to rig the price of money, according to documents obtained by Bloomberg and interviews with two dozen current and former traders, lawyers and regulators. 

Those interviews reveal how the manipulation flourished for years, even after bank supervisors were made aware of the system’s flaws.

Since the banking regulators were aware that the system for setting Libor had flaws and chose not to act, their credibility to oversee Libor in the future is none existent.

Fortunately, requiring the banks to provide ultra transparency does not require the regulators to be credible.  It simply requires that they use their authority.

The conspiracy wasn’t confined to low-level employees. Senior managers at RBS, Britain’s largest publicly owned lender, knew banks were systematically rigging Libor as early as August 2007, transcripts of phone conversations obtained by Bloomberg show. 

Some traders colluded with counterparts at other banks to boost profits from interest-rate futures by aligning their submissions. Members of the close-knit group knew each other from working at the same firms or going on trips organized by interdealer brokers such as ICAP Plc (IAP) to Chamonix, a French ski resort, or the Monaco Grand Prix. 

“We will never know the amounts of money involved, but it has to be the biggest financial fraud of all time,” said Adrian Blundell-Wignall, a special adviser to the secretary general of the Organization for Economic Cooperation and Development in Paris. “Libor is the basis for calculating practically every derivative known to man.”...

Hence, the policy response needs to be appropriate for the problem.  Requiring ultra transparency is this response.

Anything less is subject to the question of what are banks hiding.

The scandal demonstrates the failure of London’s two-decade experiment with light-touch supervision, which helped make the British capital the biggest trading hub in the world. 

In his 10 years as Chancellor of the Exchequer, Gordon Brown championed this approach, hailing a “golden age” for the City of London in a June 2007 speech. 

Even after the FSA pledged to toughen its rules following the 2008 financial crisis, supervisors failed to act on warnings that the benchmark was being manipulated....

Only ultra transparency takes the issue of how the banks are supervised off the table.

Sheila Bair, a former acting chairman of the U.S. Commodity Futures Trading Commission and chairman of the Federal Deposit Insurance Corp. from 2006 to 2011, said the scope of the scandal points to the flaws of light-touch regulation. 

“When a bank can benefit financially from doing the wrong thing, it generally will,” Bair said in an interview. “The extent of the Libor manipulation was eye-popping.”....

Actually, what the scope of the scandal points out is that where there is opacity, bankers will engage in bad behavior.

It has been known since the 1930s that sunshine in the form of transparency is the best disinfectant.

So, a scandal based on opacity should be resolved by bringing the strongest form of transparency possible.

The manipulation of Libor was discussed openly at banks. 

“We have an unbelievably large set on Monday,” one Barclays swaps trader in New York e-mailed the firm’s rate- setter in London on March 10, 2006. “We need a really low three-month fix, it could potentially cost a fortune.” 

The rate-setter complied with the request, according to Britain’s Financial Services Authority, which published the e- mail following its investigation of the bank’s role. 

The 2007 credit crunch increased the opportunity to cheat. 

With banks hoarding cash and not lending to one other, there was little trading in money markets, making it impossible for rate- setters to assess borrowing costs accurately. Instead, traders said they resorted to seeking input from interdealer brokers, colleagues and acquaintances at other firms, many of whom stood to benefit from where the rate was set. They described it as legitimate information-sharing in the absence of trading.

This is the fundamental reason that banks must be required to provide ultra transparency:  it unfreezes the interbank lending market by making it possible for banks with deposits to lend to assess the risk of banks looking to borrow.

There is no other solution to ending the manipulation of Libor that unfreezes the interbank lending market.

The interbank lending market needs to be unfrozen because Libor is suppose to represent the cost to banks to borrow on an unsecured basis.