Art by William Banzai
By Catherine Austin Fitts, Published July 12
Basic Facts:
LIBOR = London Interbank Offered Rate See: http://en.wikipedia.org/wiki/Libor
LIBOR is an estimate set daily in London by a poll of 18 banks for interest rates for 10 currencies for 15 maturities. The banks estimate the rate that they would be charged if borrowing from other banks. The four highest and four lowest estimates are thrown out and the remaining 10 estimates are averaged to generate the daily estimate.
Who cares? Interest rates on an estimated $800 trillion of financial assets, including $350 trillion of interest rate swaps aka derivatives and 2 million US adjustable rate mortgages (reportedly 80% sub-prime and 40% prime) are priced from or influenced by LIBOR.
LIBOR Scandal: The Official Story
From Wikipedia:
28 February 2012: US Department of Justice is revealed to be conducting a criminal investigation into LIBOR abuse. Among the abuses being investigated is the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them insider knowledge into global instruments.
27 June 2012: Barclays Bank was fined $200MM by the Commodity Futures Trading Commission, $150MM by the United States Department of Justice and £59.5MM by the Financial Services Authority for attempted manipulation of the LIBOR and EURIBOR rates. The United States Department of Justice and Barclays officially agreed “the manipulation of the submissions affected the fixed rates on some occasions.”
2 July 2012: Marcus Agius, Chairman of Barclays, resigned from his position following the alleged interest rate rigging scandal. Bob Diamond, the chief executive officer of Barclays, resigned on July 3, 2012. Marcus Agius will fill his post until a replacement is found.
6 July 2012: U.K. Serious Fraud Office had also opened a criminal investigation into the alleged manipulation of interest rates. The investigation is not limited to Barclays.
10 July 2012: The United States Congress begins an investigation. 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.
TWENTY QUESTIONS
OK, let’s play twenty questions.
Question: Who is trying to lower interest rates?
Answer: The Federal Reserve Bank. Indeed, they just announced an extension of Operation Twist. See http://en.wikipedia.org/wiki/History_of_Federal_Open_Market_Committee_actions#Operation_Twist
Question: Why does the Fed want to keep interest rates low?
Answer: Low interest rates protect against higher costs to the US government and other municipal and sovereign governments that borrow to fund ongoing operations. Lower interest rates also protect against rises in rates that could cause dislocation in the bond and credit markets and raise interest rates for numerous corporate, consumer and mortgage borrowers. Lower interest rates mean lower rates in the mortgage market that result in higher prices for housing
Question: What did Barclays do that was so offensive during the fiscal crisis?
Answer: Barclays’ estimated borrowing rates that it provided for LIBOR were higher than those of other banks such as JPMorgan Chase and Bank of America, although Barclays lowered its estimates after allegedly being pressured by the Bank of England.
Question: What did Barclays do that was illegal?
Answer: I don’t know.
There seems to be confusion as to whether Barclay’s estimates were above market, or below market, or simply coordinated with their trading positions.
The financial system was made more fragile by Barclays’ declining to take over Lehman Brothers despite promises of US Treasury and Fed guarantees. Looks like the Fed is eager to make sure Barclays toes the line going forward. See http://www.zerohedge.com/news/fed-and-libor-biggest-manipulator-them-all
I am watching lots of commentators being shocked that rates are being manipulated down. Where have they been for the last 20 years? And what do they think will happen if interest rates are allowed to rise to market levels? So now we are mad at Barclays for lowering the rate they charge customers money?
And if, as a result of their criticism, the Bank of England and Federal Reserve have more power to control interest rates, what do they think the result will be?
Then there is the question of leaking the information ahead of time to trade the futures market, that is “front running.” Given the extent of the front running throughout the markets, why this, why now?
Is this payback for Lehmans? Could be…
It certainly looks like projective identification to me – the US is attacking Barclays for doing what the US is trying to force them to do. See: http://en.wikipedia.org/wiki/Projective_identification
Question: Wouldn’t that be particularly outrageous thing for the DOJ to do?
Answer: In my opinion it is standard operating procedure. My firm Hamilton Securities was accused of bid rigging and spent many years litigating with the Department of Justice only to prove that indeed the US government wanted the honest people out so they could rig the housing bubble, introducing trillions of dollars of fraud into the entire mortgage market.
Question: How would banks and central banks communicate with each other over the last ten years?
Answer: Typically by digital means – including phone and e-mail.
Question: The head of the Bank of England IT department (please read “keeper of the digital records”) was found dead of multiple stab wounds to the chest and arms in his car on April 21, 2012. He was reported to be very involved in transfer and responsibility and power for bank regulation from the Financial Services Authority to the Bank of England. His death was ruled a suicide on July 4, 2012, immediately after the Barclays settlement with DOJ. Would the head of IT at the Bank of England be expected to manage the response to multiple subpoenas from the Department of Justice and other regulators for digital records related to communications between the 18 banks that set LIBOR and the Bank of England?
Answer: Yes. Please note that there is no more dangerous job in this environment than managing the digital data about large amounts of money, particularly securities.
Question: Are US regulators under financial pressure?
Answer: Yes. The US budget deficit has risen and the Congressional budget and appropriations committees are under pressure to cut spending. This puts pressure on many agencies to find ways to justify their requested appropriations and cut budgets. Indeed, if interest rates were to rise, the pressure to cut budgets would be even greater.
Question: How could the US regulators protect their budgets from being cut?
Answer: They could generate revenues from cash settlements of civil and criminal enforcement actions. If you find this hard to believe, check out the operations of the Department of Justice asset forfeiture fund. Given the highly charged political environment in a Presidential election year, it would be important to do this in a way that would be politically popular – such as being tough on banks.
Question: Do the US enforcement agencies have any reason to want a distraction?
Answer: The Department of Justice and the Attorney General have been managing serious allegations of gun running in connection with the so-called “Fast and Furious” scandal. The Commodities Futures Trading Commission has been under criticism because of the disappearance of funds connected to MF Global and the loopholes related to regulation of accounts through London. The CFTC is now grappling with another futures firm’s failure and it appears that additional customer accounts may be missing.
Question: What other banks are under investigation?
Answer: News reports indicate that the Department of Justice is also investigating JP Morgan Chase, UBS, Citibank and Bank of America.
Question: Hasn’t JPMorgan Chase played a critical role in US intervention in the interest rate, mortgage and gold markets?
Answer: Yes. Indeed, JPMorgan and the lead NY Fed banks play a critical role for the NY Fed as agent for the US Exchange Stabilization Fund.
Question: Bob Diamond, the chief executive officer of Barclays, resigned on July 3, 2012. What does his resignation mean?
Answer: Looks like the US wanted his head on a chopping block and will now get a Barclays CEO who is much more obedient to central bank and US orders. It also appears that he was smart enough not to be entrapped by his hotel maid.
Question: OK, what’s the real story here?
Answer: Time will tell. It looks like the Fed and the Bank of England intend to exercise greater control over interest rates and bank regulation. The fact that they want to do so is a sure sign that the financial system is fragile right now. After all even the Vatican announced a deficit and Italian regulators are rumored to be investigating inside the Vatican. The long knives seem to be everywhere.
Now that the financial coup d’état is over, there is excess banking capacity. Given the dependency on federal credit, it makes sense to move the large banks to a utility business model. They will do what they are told and will work for lower margins. One thing we don’t understand is what this squabble has to do with getting the Brits to go along with a financial transaction tax in Europe.
Question: What is the most important question we should be asking?
Answer: WHERE IS THE MONEY? Between fraudulent securities and bailouts, over $27 trillion dollars disappeared through the financial coup d’état.
All these banks have the digital records of where that money went. Before we willy nilly accept the notion that there is not enough money to honor government debts and pension fund liabilities, let’s do an inventory of what is missing that can be and should be returned.
So what if banks are fined, bank chairmen are fired and banks are converted to utilities? Do you have the money? No, the people who stole it have the money.
Let’s keep our eyes on the ball!
Stay tuned….there is more to this story that we do not know. I will be adding more questions as events unfold.
Related reading:
20 Fragen zum LIBOR-Skandal
Lars Schall (13 July 12)
Solari Report Blog Commentaries
Lloyds Could Face £1.5bn Claim Over Libor
July 12, 2012
The Rotten Heart of Finance
(6 July 12)
LIBOR Settlements and Head Chopping Roll On…
(2 July 12)
