Fixing the Libor Rates – By Far the Greatest Financial Scandal Yet – Guest Post by Jonathan Sugarman.

This is the text of a speech (Which you can see here) given by  Irish whistle-blowing former banker Jonathan Sugarman speaking recently in Athens.  Τhe function was organized by ATTAC-Hellas in collaboration with the Greek Committee for a Public Debt Audit.  Sugarman spoke on the Libor scandal, the lack of transparency in banking practices, the problematic character of state supervision of the banking system (relevant to his own case for the indictment he issued was ignored/suppressed by the Irish regulatory authority), and the extent to which the recent Draghi measures represent a solution.

 

We all have to pay interest on our loans, and we all hope to get interest on our deposits.   When we the banks have money lying around idly it means they’re losing money, as it could be gaining interest as a deposit with another bank that needs the money. Part of my job as a banker was to ‘count the money’ towards the end of a trading day and make sure that any un-needed surplus – say 500 million euros – would be to deposited by the dealers. They would typically place this money on overnight deposits with other banks. The benchmark for interest payment on this deposit would be the LIBOR (or Euribor).   The LIBOR was allegedly an un-biased ‘weather report’ of what conditions were in the market that day. Now we have learned that some of the biggest banks in the world have been heavily involved in distorting this ‘neutral’ reading of the market.

Every morning by 11.30 a.m.  in London a panel of international banks including UBS, Societété Generale, Deutsche Bank, Barclays, the Royal Bank of Scotland is asked “OK how much interest are you willing to pay on overnight deposits, one week deposits, one month deposits and so on. ”   This is the price of money today in London at lunchtime.  I cannot overestimate the significance of this interest rate – every interest payment that each one of us makes on the mortgage that you pay, ever car loan – is determined by this rate.

LIBOR  ( the London Inter Bank Offered Rate)  has been in the headlines far less that it should be.  The Libor fixing scandal is by far the biggest and most far reaching scandal to have occurred in the world of finance. Why is it not getting the attention it deserves in the name of public interest?!? simply because the companies involved in fixing this price are the most respectable and distinguished of the banking world – HSBC & Barclays of the UK, Deutsche Bank of Germany, UBS of Switzerland.

LIBOR rates form the basis for the determination of amounts to be received and paid on contracts amounting to hundreds of trillions of dollars. Just to put this figure into perspective – Ireland’s bailout was ‘only’ 85 billion Euro. So while Christine Lagarde of the IMF keeps reminding the Greeks that they should pay their taxes, she is remaining very silent about the fact the bankers whom she wines & dines with at Davos are being accused of breaking the law at a much larger scale.

Barclays has ‘agreed’ to pay a fine of 290 million pounds for its role in fixing the LIBOR. RBS, now 82% owned by the British public has also been negotiating how much is feels like paying the British public for being caught red handed. We now have a state-owned body negotiating with with a state authority about how much it feels like paying for breaking the law. Try negotiating your legally-declared tax bill with the Revenue office and see how far you get…

Some choice quotes from the press on the Libor rate-fixing scandal….

From Libor Manipulation Well Known in London by 1991 – Naked capitalism

A comment in today’s Financial Times is by a former Morgan Stanley trader, Douglas Keenan, confirms a passing comment in the Economist, that Libor manipulation goes back for more than 15 years. In fact, this piece makes it clear that is the time frame exceeds 20 years. From the Financial Times:

In 1991, I had live trading screens that showed the Libor rates. In September of that year, on the third Wednesday, at 11 o’clock, I watched those screens to see where the futures contract [on three month Libor] should settle. Shortly afterwards, Liffe announced the contract settlement rate. Its rate was different from what had been shown on my screens, by a few hundredths of a per cent.

As a result, I lost money. The amount was insignificant for me, but I believed that I had been defrauded and I complained to Liffe [ London International Financial Futures Exchange, which is where the contract traded]. Liffe explained that the settlement rate was not determined by what rates were actually in the market. Instead, the British Banker’s Association polled banks, asking them what the rates were. The highest and lowest quoted rates were discarded and the rest were averaged, giving the settlement rate. Liffe explained that, in doing this, they were adhering to the terms of the contract.

I talked with some of my more experienced colleagues about this. They told me banks misreported the Libor rates in a way that would generally bring them profits. I had been unaware of that, as I was relatively new to financial trading. My naivety seemed to be humorous to my colleagues.

So consider what this tells us:

1. Libor manipulation was already recognized by market participants in 1991 as a common phenomenon. That implies it had been going on at least a few years before that

2. The manipulation appears to have more than occasionally been more than a single basis point (Keenan says here the effect was “several” basis points, which I take to be three or more)

Oh, an an additional tidbit: Bob Diamond was in Morgan Stanley London as of then, in charge of interest rate trading, which means his claim that he had found out about Libor manipulation at Barclays mere weeks before his Treasury Select testimony was bollocks.

And from The Guardian

External trader to a Barclay’s trader, asking for a lower Libor submission: “If it comes in unchanged I’m a dead man.”

Barclay’s trader promises to “have a chat”.

External trader to Barclay’s

trader later that day: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”

As in the case of the Irish Financial Regulator’s window-dressing exercise in introducing more laws & regulations for the banks, this means absolutely nothing if the appetite to enforce the law is nil. As a banker of many years I can safely say that the problem has never been the lack of legislation, but rather the complete lack of proper law enforcement when it comes to the conduct of banks. Fred the Shred of RBS (owners of Ulster Banks) lost his knighthood, but is he in jail? Can the FSA say that RBS never broke any laws & regulations while Fred drove it into the ground and onto the lap of the British tax payer?

Five years ago I resigned from my position at the risk manager of UniCredit Bank Ireland – the Irish subsidiary of Italy’s biggest bank. I had officially notified the regulator’s office  that we were ‘cooking the books’ by BILLIONS of Euros. Brian Hillery, the chairman of UniCredit Ireland at the time, now sits on the board of directors of the Central Bank of Ireland.  The Irish bank guarantee and the subsequent bail out were a result of Ireland’s banks running completely dry of liquidity. The Financial Regulator’s own documents stipulate a possible prison sentence of up to 5 years for breaching liquidity requirements.  I resigned from UniCredit Bank Ireland specifically over this issue. How many Irish bank executives are in prison for running their banks into the ground?

This post originally appeared on the Irish Web site Politicalworld.org Jonathan asked me to repost it here.

http://itsapoliticalworld.wordpress.com/2012/10/02/fixing-the-libor-rates-by-far-the-greatest-financial-scandal-yet/

27 thoughts on “Fixing the Libor Rates – By Far the Greatest Financial Scandal Yet – Guest Post by Jonathan Sugarman.”

  1. Fairplay Jonathan, great to see you still speaking truth to power, that unholy alliance of the too big to jail, lapdog politicians, fawning media & corrupt regulators.

    Will watch the vid this evening.

    Take care.

  2. Thanks for reposting this Golem. If only we had someone like Eliot Spitzer at any of the various public offices (FSA, CPS etc) in the UK or beyond with the power to do something about it.

    Hope you find time to write a post of your own soon – you’re sorely missed.

  3. One doesn’t know whether to laugh or cry about the issues raised in this post. That the richest and most powerful people on the planet have so rigged the systems of checks and balances that the prisons fill with the poor and the powerless while our felonious failed leaders of every stripe walk free. So far, they not only continue their predations but they intimidate and punish their opponents, mostly through their majority ownership of main stream media which, at most, tut-tuts the problem or misdirects the blame to innocent parties – teachers, public schools, workers, unions, poor people, welfare. Their success at this tactic has rendered their mis-rule virtually permanent.
    LIBOR manipulation as a criminal concept is even more arcane to the average person than the complex interwoven frauds committed by the bankers, brokers, insurers, bond raters, accountants, lobbyists and ultimately the politicians of the last two or three decades who will see to it that everyone responsible for our present crisis gets off scot free. It takes a rare commitment on the part of law enforcement to investigate such behaviour; and apparently even more rarely, on the part of sitting politicians to bring transgressors to courts for public exposure and trial.
    The worst aspect of the whole matter is that the situation grows worse rather than better. One country after another is adopting the same damaging public policies that have so often ended in revolts or in extreme circumstances, war, civil and general.
    The Europeans have made no move to find a way out of their messes. The Africans are going down the drain. The Middle East is on fire, again… China, not much good new there beyond the same old existential threat.
    The Obama-Romney debate last night seemed to seal the deal. Nothing will change for the better for a long, long time.
    So I have decided, there will be no laughter here for a while. I will cry …..
    I hope that we will see other articles by Mr Sugarman in this vein.
    Michael Fish, Longueuil, Canada

    1. Yes, Michael, and I can tell you that Canadian banks are no better than the ones mentioned above, especially the Royal Bank of Canada. I have been reading Bruce Livesey’s book called The Thieves of Bay Street and except for TD all the chartered Canadian banks were buying ABCP made up of CDOs and other junk from the American subprime mortgage debacle. The Canadian investment banks sold junk to pensioners and savers too. The banks mentioned in Livesey’s book have been incriminated for other activities also. I am so ashamed of our banks especially when I consider how our politicians have misrepresented them as some of the best banks in the world—not!

  4. Michael,

    I agree with you completely but I think that there may be potential for a “divided by a common language” transatlantic English translation error. In the UK “Public School” actually means private school. It’s something to do with the rich elites taking over what little school provision there was for their own purposes some centuries ago (plus ca change eh?). In the UK the mainstream media holds State Schools to blame and fawns all over the private “Public Schools”.

    1. I went to a private school. It was an exam factory which could get rid of ‘under-performing’ students much easier than a State school can. THAT’s the difference. It is the ‘social capital’ at home which counts.

  5. Good read, I have followed wbirl for a while now. The sad point is this, it is impossible to convey the sheer scale of the fraud without sounding like a bibbling lunatic. It is in trying to overcome the publics ignorance of what banks actually do that is the challenge.

    How many of your friends would know WTF LIBOR is, or indeed, even care? That is the challenge and why I come here for a little oasis of sanity.

  6. All that happens to those involved is they get a slap on the wrist and told to hide thier crimes better next time they do it. so long as the finacial markets continue to fund our politicians nothing will change

  7. The Dork of Cork

    The “Irish” central bank has “asked” the Irish goverment to cut wages and benefits again today.

    This is to increase the current account surplus of Ireland ……despite the record 3 billion + euro surplus in Q2

    Meanwhile the UK and especially London is posting record current account deficits……for every surplus there must be a deficit right ?

    When you strip away the services from the UK which adds to the current account but whose only real purpose is to control these absurd capital and trade flows its the UK that is in a mess.

    In 2011 they had a real goods trade balance of -£100 billion…………..and in 2012 it is set to shoot right past that number.
    Now the 2011 trade figures were unusual in that silver was in the top 30 products for the first time in a LONG time , with works of art & precious stones in the tope 30 also adding a few billion to the trade deficit.
    (Gold of course does not show on the offical books)

    After the big bang of 1986 the city could run North Sea and other oil through countries such as Ireland and Spain……current account deficits in Spain and Ireland were no problem when you could earn a yield off the waste production.

    But today things are a bit different…………..they cannot earn a yield off of us now as there is little oil to waste…..so they must push us into energy surplus so that they can remain in deficit.

    The real goods trade deficit (inc oil) of the UK was a record £100 billion in 2011.
    Trade of goods balance : – 88,505m
    Trade of oil Balance : – 11,509m

    Is Europe a victim of unsustainable international trade /energy connections which reduces rational internal / national demand and rational investment ?

    If you compare this to the year 2000 in the UK
    Trade of goods balance : -39,512 m

    Trade of oil balance :+6,536m (peak)

    And Y1991

    Trade of goods balance : -11,497m
    Trade of oil balance : + 1,274m

    Some records set during the UK Q2 period in its balance of trade and current account figures.

    Current account Net

    Trade in Goods : £ -28.1 Billion ( largest deficit ever recorded)
    Trade in Services : £+ 17.9
    Income : £ -5.2 Billion (largest deficit ever recorded)
    Transfers : £ -5.5 Billion

    Current balance £ -20.8 Billion (largest deficit ever recorded)

    meanwhile in Ireland………..
    The car regs tell much more then the offical figures
    A bunch of likely lads are buying luxury cars……probally the NAMA crew and other entropy enginners.

    Amazing fact !!!!!

    http://www.simi.ie/
    (see news at right of page ,NEW CAR SALES in September)

    The BMW 3 was the biggest selling Irish car in September (130 units sold) !
    781 units were sold (Jan – Sep) of which 770 were diesel and 11 petrol !

    Of the total BMWs sold in Ireland this year (Jan -Sep ) a amazing 3,236 were diesel and 38 petrol !

    This diesel thing is going too far as many people drive very very short distances in and around urban areas.

    The much more modest but practical small car Volks “UP” 1 litre petrol (launched in Feb 2012) is not selling very well in Ireland for some reason. (248 units)
    en.wikipedia.org/wiki/Volkswagen_Up
    A total of 9,700 Volks was sold in Ireland during 2012.
    There seems to be a much greater division between the haves whose sometimes large deposits is a product of the previous credit hyperinflation and the have nots who buy second hand cars if at all.
    The small cheap new petrol car market thus seems almost dead in Ireland.

    The Irish new Car market is showing all the signs of a Cash market with some holding much more cash then others and buying what they consider to be the best.

    Despite a 12 % drop in car regs from last year (Jan – Sep ) Audi is doing OK
    Y2010 : 2,796
    Y2011 : 3,317
    Y2012 : 3,577
    With a 50 % increase in the large prestige segment with 703 units sold in the Jan -sep 2011 period and 1,052 units sold in 2012.
    And 527 Jeep /SUV prestige Audis in Y2012 rather then the 203 units in Y2011

    There is no accounting for taste I guess , the very good design of the Toyota IQ seems to have been lost on the nouveau riche of Ireland who hold a huge amount of buying power in this Titanic Deflation.
    With only 14 units sold in Ireland so far this year.
    http://www.youtube.com/watch?v=lU_cYdfKjAc

    NAMA People want this (albeit the Diesel model)
    http://www.youtube.com/watch?v=_knUNb4VAc0

  8. The Dork of Cork

    PS
    The truely Absurd Nissan Qashqai
    http://en.wikipedia.org/wiki/Nissan_Qashqai

    is the number 2 top selling “car” model in Ireland so far this year with 3,256 units sold (2,611 Jan -Sep Y2011)
    Who the hell is buying these capital & fuel intensive cars ?
    Back in the early 80s depression people were buying cheap 1 litre petrol cars…..

    We are truely living withen a non optimum monetary envoirment where we import useless stuff which on a holistic level extracts from rational domestic demand.

    Given the circumstances half of the new car regs should be Iltre petrols…..but it is a tiny niche market with more Qashquis sold then the entire 1 litre segment !!!

    Toyota Yaris dominates the small Irish 1 litre petrol segment.
    http://en.wikipedia.org/wiki/Toyota_Vitz
    With 1,908 units sold out of a total of 3,175 units (Jan to Sep)
    Volks UP : 248
    Opel Corsa : 240
    Kia Picanto : 186
    Toyota AYGO :124
    Skoda citigo : 69

  9. This whole Euro scam has been just a smokescreen, another means of plundering and looting the citizens of Europe of their national assets and taxes, to pay the bankers.
    Timothy Geithner is the stooge for Wall St and Mario Draghi for Europe.
    When they retire from their positions in US Govt and Brussels respectively, they will ‘ascend into Heaven’ as the Japanese say. That is, they will have well paid positions awaiting in the private banking system
    . That is their ‘pay off’ for their assistance in the Mafia like collusion and assistance in pillaging the economies for their bankster colleagues. Much similar to ‘Teflon’Tony Blairs modus operandi with JP.Morgan.
    Check this for an update from Max Keiser and Prof. Michael Hudson

    http://michael-hudson.com/2012/10/the-inside-man/

  10. I disagree that this was or is a real problem.

    Truth in advertizing? Of course not! It is a market and anyone can offer more or less, but lazy people came to believe the hype about how official it was! It is simple: some or all banks/ money managers did not employ people after and before hours directly. Instead, they put funds onto others who then used them to make money, returning them with a pittance of interest, the following morning.

    The rate was too high or too low? According to whom? All sorts of factors determined the rate. Lazy people used it to determine all sorts of costs and penalties. So what?

    Markets people! If you have a massive amount of money out of hours, use it as you do during hours worked by setting up offices in other time zones! LIBOR disappears!

    This is just another distraction, to divert attention from the real problem, massive, MASSIVE amounts of capital created out of nothing that is slowly being isolated as real people flee to real, tangible assets!

    Golem, I know it is hard to write anything sensible that does not rhyme, if not repeat every few months, but this is just that: DISTRACTION!

    Where is all the fake capital going to be stuffed?

    Whose assets are revealed to be purely paper promises from defunct and insolvent shells?

    Answer these questions or even feel free merely to repeat the questions!!!!

  11. Phil,
    Thanks for the link. A fine interview with Mr.Potter,who is very circumspect with his language, but to be expected from a member of the BoE Court.
    The comments mainly leave a lot to be desired. These people live in a Mary Poppins world,they need to get out more often and smell the stench. Must be wonderful to live in a hazy world of perfection and probity.

  12. Very excellent post, i’m currently in the process of considering basic account because I need to save pennies
    Do you have a twitter account I can follow?

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