Gary Gensler: 'Setting' Libor still not clean despite scandal

The BBC reports that Gary Gensler, head of the CFTC, sees a lot that much be done before 'setting' of Libor and other benchmark interest rates like Euribor and Tibor is done so that they cannot be manipulated.

Regular readers know that what must be done is that the banks must be required to provide ultra transparency so that these benchmark interest rates can be based off of actual transaction from a deep, liquid unsecured bank debt market.

Ultra transparency is the key to unfreezing and keeping unfrozen the interbank lending market as it provides the data that banks with deposits to lend need to assess the risk and solvency of banks looking to borrow.

Specifically, under ultra transparency banks disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Ultra transparency is also the key to basing benchmark interest rates off of actual transactions.  These transactions are disclosed by each bank.  Market participants can then determine which transactions to include in the benchmark interest rates.

Without ultra transparency, benchmark interest rates will still be subject to manipulation even if there are complex rules and regulatory oversight of setting process.

The way that the key Libor interest rate is set in the UK is still not clean and free of fraud, according to a top US regulator. 

"We have a lot more work to do," Gary Gensler, chairman of the Commodity Futures Trading Commission, told the BBC in London. 

He suggested that the rate was often "completely made up".....

Speaking of the scandal, Mr Gensler spoke of "pervasive rigging" and said authorities could not guarantee the rate is fraud-free, but refused to criticise the FSA or suggest that setting the rate should be moved to the US....

Please re-read the highlighted text again as Mr. Gensler has just confirmed what your humble blogger has been saying that the only way to guarantee that the benchmark interest rates are free of fraud is through ultra transparency.

Complex rules and regulatory oversight as suggested in the Wheatley Review will simply not guarantee an absence of fraud nor do they provide a reason for the market to trust the resulting benchmark interest rates.

So why did the Wheatley Review not publish your humble blogger's suggestion of ultra transparency and instead championed a combination of complex rules and regulatory oversight that will not work?

Mr Gensler compared the manipulation of rates to an estate agent trying to sell you a house. 

"They are trying to reference the price of the houses in the neighbourhood [when] there have been no transactions in the neighbourhood and furthermore, the agent is not willing to share the data and is often just making it all up," he said.

A problem that ultra transparency alone solves.

The BBA told the BBC it would not comment on Mr Gensler's comments but said: "The BBA has strongly stated the need for greater regulatory oversight of Libor". It added that it was working closely with the government and regulators to change the system. 

A government-commissioned review suggested taking the responsibility away from the BBA and placing it in the hands of an outside authority, such as a commercial body or an industry group.

This is an example of regulatory capture.

The British Banking Authority asked its regulator to do something that the combination of complex rules and regulatory oversight cannot accomplish.  Rather than respond by requiring ultra transparency, the regulatory response was to pursue a path that would allow the banks to continue manipulating the benchmark interest rates as before.