Friday, February 8, 2013

Libor scandal finally heads to executive suite

As reported by the Telegraph, one of the central figures in the global Libor interest rate manipulation scandal is saying that senior bank executives were involved.

The involvement of senior bank executives should come as no surprise.  Does anyone think for a moment that a trader can earn a bonus in the tens of millions of dollars and senior management would not know about it?
In a text message to the Wall Street Journal, Tom Hayes, the former senior trader charged by the US Department of Justice in connection with interest rate-rigging said: “This goes much, much higher than me.”... 
Jennifer Arcuri, described by the Wall Street Journal as a close friend of Mr Hayes, defended him saying he believed he was “innocent” and intended to implicate his seniors in the scandal. 
“He had no idea this was going to come back at him,” she told the newspaper. 
She added that Libor-rigging “was a common industry practice”....
Of course it was a common industry practice because banks were not required to do two things which would have prevented it:  provide ultra transparency and base Libor off of actual trades.

Without banks providing their current global asset, liability and off-balance sheet exposure details, market participants could not see that the bankers were manipulating not only Libor, but all the global benchmark interest rates (including Tibor and Euribor).

Without banks providing ultra transparency, these benchmark interest rates could not be based off of actual trades in deep liquid markets.
As well as the large fines, City analysts expect banks to face billions of pounds in potential payouts as a result of legal cases brought by customers that were financially hurt by the manipulation. 
Most analysts expect this to cost the industry just over $20bn (£13bn), however some say the eventual cost will be measured in hundreds of billions of dollars and could force another round of taxpayer bailouts.
Please note that there are literally hundreds of trillions of dollars of financial transactions based off Libor and related benchmark interest rates.  For everyone of these transactions, there is the potential for one side of the deal to have lost as a result of the interest rate manipulation.  The banks' potential liability is very large.

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