Libor scandal
The Libor scandal is a series of fraudulent actions connected to the Libor (London Interbank Offered Rate), and the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. Libor underpins approximately $350 trillion in derivatives. It is controlled by the British Bankers' Association (BBA).[1]
The banks are supposed to submit the actual interest rates they are paying, or would expect to pay, for borrowing from other banks. The Libor is supposed to be an overall assessment of the health of the financial system because if the banks being polled feel confident about the state of things, they report a low number and if the member banks feel a low degree of confidence in the financial system, they report a higher interest rate number.
Because mortgages, student loans, financial derivatives, and other financial products often rely on Libor as a reference rate, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide.
Early reports of Libor manipulation
Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot. [emphasis added]
13 September, 2006[2]
On 29 May 2008, The Wall Street Journal (WSJ) released a controversial study suggesting that some banks might have understated borrowing costs they reported for Libor during the 2008 credit crunch that may have misled others about the financial position of these banks. [3] They further reported in March 2011 that regulators were focusing on Bank of America Corp., Citigroup Inc. and UBS AG.[4] In response the BBA claimed that Libor continued to be reliable even in times of financial crisis. Other authorities contradicted The Wall Street Journal article saying there was no evidence of manipulation. In its March 2008 Quarterly Review, The Bank for International Settlements stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings."[5] Further, in October 2008 the International Monetary Fund published its regular Global Financial Stability Review which also found that "Although the integrity of the U.S. dollar Libor-fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar Libor remains an accurate measure of a typical creditworthy bank’s marginal cost of unsecured U.S. dollar term funding."[6]
In November 2008, the Governor of the Bank of England, Mervin King, described Libor to the UK Parliament saying "It is in many ways the rate at which banks do not lend to each other, ... it is not a rate at which anyone is actually borrowing."[7][8]
On 28 February 2012, it was revealed that the U.S. Department of Justice is conducting a criminal investigation into Libor abuse.[9] Among the abuses being investigated are the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an unprecedented amount of insider knowledge into global instruments. One trader's messages indicated that for each basis point (0.01%) that Libor was moved, those involved could net “about a couple of million dollars”.[10]
On June 13, 2012, at the request of Representative Randy Neugebauer, Chairman of the House Financial Services Subcommittee on Oversight and Investigations, the New York Federal Reserve released documents dating back to 2007 which showed that they were aware that banks were lying about their borrowing costs when setting Libor, and chose to take no action against them at that time. In one 2008 document a Barclays employee told a New York Fed analyst, "We know that we’re not posting um, an honest LIBOR, and yet we are doing it, because, um, if we didn’t do it, it draws, um, unwanted attention on ourselves." The documents also show that in early 2008 a memo written by then New York Fed President Tim Geithner to Bank of England chief Mervyn King looked into ways to "fix" Libor.[11] While the released memos suggest that the New York Fed helped to identify problems related to Libor and press the relevant authorities in the UK to reform, there is no documentation that shows any evidence that Geithner's recommendations were acted upon or that the Fed tried to make sure that they were. In October 2008, several months after Geithner's memo to King, a Barclays employee told a New York Fed representative that Libor rates were still "absolute rubbish."[12]
Barclays Bank fined for manipulation
On 27 June 2012, Barclays Bank was fined $200m by the Commodity Futures Trading Commission[13], $160m by the United States Department of Justice[14] and £59.5m by the Financial Services Authority[15] for attempted manipulation of the LIBOR and EURIBOR rates.[16] The United States Department of Justice and Barclays officially agreed that "the manipulation of the submissions affected the fixed rates on some occasions".[17][18]
Pls go for 5.36 libor again, very important that the setting comes as high as possible ... thanks. [emphasis added]
29 July, 2007[2]
Barclays manipulated rates for at least two reasons. Routinely, for years, traders sought particular rate submissions to benefit their financial positions. Later, during the 2007–2012 global financial crisis, they artificially lowered rate submissions to make their bank seem healthy.[14]
On 2 July 2012, Marcus Agius chairman of Barclays, resigned from the position following the interest rate rigging scandal. [19] Bob Diamond, the chief executive officer of Barclays, resigned on July 3, 2012. Marcus Agius will fill his post until a replacement is found.[20][21] Bob Diamond was questioned by the Parliament of the United Kingdom regarding the manipulation. He said he was unaware of the manipulation until that month, but revealed discussions with Paul Tucker, deputy governor of the Bank of England.[22] Tucker then voluntarily appeared, seeking to clear his name. He said he had never encouraged manipulation of Libor, and that other self-certification mechanisms like Libor should be reformed.[23]
Breadth of scandal becomes apparent
By July 4, 2012 the breadth of the scandal was evident and became the topic of analysis on news and financial programs that attempted to explain the importance of the scandal.[24] On July 6, it was announced that the U.K. Serious Fraud Office had also opened a criminal investigation into manipulation of interest rates. The investigation is not limited to Barclays.[25][26]
The United States Congress began investigating on July 10. Senate Banking Committee Chairman Tim Johnson (D., S.D.) said he will question Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke about the scandal during scheduled hearings. Rep. Randy Neugebauer (R., T.X.) chairman of the House Financial Services Committee, wrote New York Federal Reserve (New York Fed) President William Dudley. He is seeking records of communications between the New York Fed and Barclays between August 2007 and November 2009 related to Libor-like rates.[27]
References
- ^ http://www.bbalibor.com/technical-aspects/calculating-interest
- ^ a b "Behind the Libor Scandal". The New York Times. 10 July, 2012. Retrieved 13 July, 2012.
{{cite news}}: Check date values in:|accessdate=and|date=(help) - ^ Mollenkamp, Carrick; Whitehouse, Mark (29 May 2008). "Study Casts Doubt on Key Rate". The Wall Street Journal. Archived from the original on 30 May 2008.
{{cite news}}:|archive-date=/|archive-url=timestamp mismatch; 29 May 2008 suggested (help) - ^ Enrich, David; Mollenkamp, Carrick; and Eaglesham, Jean (18 March 2011). "U.S. Libor Probe Includes BofA, Citi, UBS". Wall Street Journal.
{{cite news}}: CS1 maint: multiple names: authors list (link) - ^ Gyntelberg, Jacob (2008). "Interbank rate fixings during the recent turmoil" (PDF). BIS Quarterly Review. Bank for International Settlements: 70. ISSN 1683-0121. Retrieved July 10, 2012.
{{cite journal}}: Unknown parameter|coauthors=ignored (|author=suggested) (help); Unknown parameter|month=ignored (help) - ^ "Global Financial Stability Report" (PDF). World economic and financial surveys. International Monetary Fund: 76. 2008. ISSN 1729-701X. Retrieved July 11, 2012.
{{cite journal}}: Unknown parameter|month=ignored (help) - ^ http://www.bbc.co.uk/news/business-your-money-18701623
- ^ http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/1210/8112503.htm Q34
- ^ "U.S. conducting criminal Libor probe". Reuters. 28 February 2012.
- ^ "Libor: Eagle fried".
- ^ http://www.guardian.co.uk/business/interactive/2012/jul/13/libor-email-timothy-geithner-bank-england
- ^ http://www.huffingtonpost.com/2012/07/13/new-york-fed-libor-documents_n_1671524.html
- ^ "CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting concerning LIBOR and Euribor Benchmark Interest Rates".
- ^ a b http://www.justice.gov/opa/pr/2012/June/12-crm-815.html.
{{cite news}}: Missing or empty|title=(help); Unknown parameter|Title=ignored (|title=suggested) (help) - ^ "Barclays fined £59.5 million for significant failings in relation to LIBOR and EURIBOR".
- ^ Pollock, Ian (28 June 2012). "Libor scandal: Who might have lost?". BBC News. BBC. Retrieved 28 June 2012.
- ^ "Statement of Facts" (PDF). United States Department of Justice. June 26, 2012,. Retrieved July 11, 2012.
{{cite web}}: Check date values in:|date=(help)CS1 maint: extra punctuation (link) - ^ Taibbi, Matt, Why is Nobody Freaking Out About the LIBOR Banking Scandal?, Rolling Stone, July 3, 2012
- ^ Reuters (2 July 2012). "Barclays chairman resigns over interest rate rigging scandal". NDTV profit. Retrieved 2 July 2012.
{{cite news}}:|last=has generic name (help) - ^ Barclays boss Bob Diamond resigns amid Libor scandal
- ^ "Bob Diamond". 4 July 2012.
- ^ "Bob Diamond questioned by MPs on Barclays Libor scandal: as it happened". The Telegraph. July 4, 2012. Retrieved July 10, 2012.
- ^ "Bank of England deputy governor Paul Tucker fights Libor accusations – as it happened". The Guardian. July 9, 2012. Retrieved July 10, 2012.
- ^ Capitalism Without Failure coverage of a discussion among Matt Taibbi, Eliott Spitzer, and Dennis Kelleher on Viewpoint with Eliot Spitzer on July 4, 2012 regarding the emerging LIBOR Scandal
- ^ http://www.businessweek.com/news/2012-07-09/libor-criminal-probe-cftc-bank-exemptions-canada-compliance
- ^ Treanor, Jill (July 6, 2012). "Serious Fraud Office to investigate Libor manipulation". The Guardian. Retrieved July 10, 2012.
- ^ Reddy, Sudeep (July 11, 2012). "Congress Joins Libor Probes: Focus Includes U.S. Regulators Who Knew About Problem as Early as 2007". The Wall Street Journal. p. C2. Retrieved July 11, 2012.