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20 July 2012

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Walrus

Excellent post.

Pardon my Schadenfreude, but it gets worse.

There is now an allegation, apparently backed by written email evidence, that at least one hedge fund was in a position to influence and profit from LIBOR. (at zerohedge)

This sort of behavior is what happens when one only hires and promotes "The right people". Collusion is a disease of belonging to a particular social class. Similar observations are already being made in America. I have posted Ad Nauseam about this.

To put that another way, the concept of "Chinese Walls" between men in Britain who almost all went to the same schools and universities is risible. Physical and regulatory walls are required.

par4

www.nomiprins.com/thoughts/2012/7/15/the-real-libor-scandal-by-paul-craig-robert-nomi-prins.html Another interesting take is this article that postulates the rates were rigged to help government bond markets.

MRW

@Habakkuk,

Excellent post. (Next time, add more subheads for those of us reading on iPads that scroll too quickly. Thanks.)

Thanks for mentioning nakedcapitalism.com. Yves Smith has one of the best financial blogs out there. Ditto the people at neweconomicperspectives.com, many contributors of whom DID warn about the coming financial crisis a decade ago but were termed 'fringe' for calling it. Another great finance blog is billyblog.

The question every American should be asking themselves is why are US loans and mortgages tied to LIBOR, a consortium of European banks on foreign soil with foreign jurisdiction? We have a perfectly good interbank rate here: the Fed Fund Rate. We can create our own fed fund index of banks and that would have been sufficient in 2008 for the Fed to move up or down to have helped the massive number of homeowners who lost their houses before they had to.

This is a massive scandal--far in excess of 2008 but absolutely part and parcel of it, which is still uninvestigated--and will only be apparent to everyone if they get educated. The traders manipulated the rates for their own private gain and to save their bacon on private or business-related trades. The emails show that.

Alba Etie

This makes my head hurt trying to understand it . At least when Pappy Bush was President a big thundering herd of banksters went to jail -starting with Keating .
Its against this back drop of my throbbing head ache that the presumptive nominee of my party of record refuses to release all of his tax returns -or talk about his Bermuda tax shelter . Oh how I miss Pappy Bush .
Man some of theses banksters should be in jail ,,,

MRW

This is what happens when you get rid of the regulators, and fail to supply enough FBI agents for the regulators to make criminal referrals to. Right now we have 10 FBI agents available to do this kind of work. Ten!

In the S&L crisis there were 1,000 FBI agents on the task force. (Regulators pass their findings to the FBI as "criminal referrals." The FBI and the Justice Dept take it from there.)

MRW

For example in April 2008, the Fed Fund Rate was 2%. What was LIBOR? My friend got dinged with a (raised from 8%) 13.5% ARM rate and lost this house as a result.

He could have paid 2%.

Right now the Fed Fund rate is either 0% or close to 0%. All those banks who took Fed money would have to eat it until homeowners got out of their mess.

Jose

This gets even more complicated:

http://www.huffingtonpost.com/2012/07/20/sheila-bair-libor-new-york-federal-reserve_n_1689720.html

David Habakkuk

Walrus,

Thanks for the reference to the Zero Hedge piece.

The case brought by Tan Chi Min in Singapore promises to be extremely interesting. Apparently in addition to the request from the hedge fund Brevan Howard, he claims that RBS took requests from other clients.

In any case, this would be explosive. However, what remains to be clarified is the nature of the corruption involved.

Apparently the Brevan Howard request was made on 20 August 2007. As this was precisely the period when the financial crisis was getting worse, this could have been a panic request, resulting from the fact that major positions were threatening to blow up.

Alternatively, it could have been a continuation of the kind of pattern of routine corruption practised by Barclays prior to the onset of the crisis. The question of whether this is, or is not, the tip of a very large iceberg going back a long way is a matter which very badly needs clarifying.

David Habakkuk

I have always been sceptical about 'Chinese walls'. They would only have any realistic prospect of working, in any case, if one had a tough regulatory regime, and also law enforcement agencies able to root out abuse and inflict serious punishments. These have been conspicuous by their absence, on both sides of the Atlantic.

However, it is not clear to how far common social background is relevant to collusion. The financial services industry is very globalised, for one thing. Bob Diamond is the son of teachers from Concord, Mass, Jerry del Missier is a Canadian whose first degree was in chemical engineering. The Barclays trader who it is suggested was involved in the collusive Euribor manipulation has been named as Philippe Moryoussef. I doubt whether either he or Tan Chi Min come from an English public school. By the same token, however, I would deeply unsurprised to find English public schoolboys surfacing in these ongoing worldwide investigations.

I wonder whether part of the problem may be that trading cultures are gambling cultures, and encourage the type of people who naturally cut corners. Another element may be general trends which encourage narcissistic leaders, of the kind you have described frequently in discussions on SST.

johnf

Thank you very much for that piece,, David Habbakkuk. A couple of loose thoughts - to a very tight article.

I'd point out that society constantly fluctuates between order and anarchy, over-regulation and under-regulation, selflessness and selfishness. (See The Bible). We are at a cusp where the sins of the baby boomer generation are going to have to be redeemed - lets hope not too bloodily - by its succeeding generations - just as those of the 10's and 20's had to be sorted out by those of the 30's and 40's.

Secondly, you refer to the anger of the masses. This is good. As Sun Tzu pointed out you can't win a war without morale and morality. The elites have power but no morality. But it could take some time.

Thirdly, what of the old system? What's salvagable? Not the financial elites. The traditional media no, but there is the internet. Traditional politics, probably not, though in Britain our two main parties have interesting anti-elitist thinkers close to the leadership - Maurice Glasman for Labour, Philip Blond for the Tories.

In Britain the common law is holding up well with Leveson and the police set to ride Murdoch out of town. Our financial laws are a joke, but we and the States have the chance of American law makers (where you have much more stringent and proactive enforcement) bringing some sort of justice to both countries.

I think the traditional churches are still pretty much intact. So are the armed forces (as opposed to their civilian bosses). So are the trade unions - but they are weak. The current arts scene is pretty screwed (Hollywood deeply) but who knows what is bubbling away?

Our children and grandchildren are going to have to be much more sober-eyed and serious and responsible. But those are some of the finest things human beings can be. There's more to life than being a Rolling Stone.

David Habakkuk

MRW

A crazy situation. Here, the Serious Fraud Office is supposed to be opening a criminal investigation, but its budget has been cut repeatedly.

The problem is that few believed criminal investigation was likely to be necessary, to keep the system healthy. The Telegraph recently published selected extracts from political leaders of both parties, lauding the City's 'light touch' regulatory regime.

The extracts make clear that Gordon Brown swallowed Alan Greenspan's belief that concern for reputation automatically keeps the financial sector honest. From a 2005 speech:

'Reputation with customers and investors is more important to behaviour than regulation, and transparency - backed up by the light touch - can be more effective than the heavy hand.'

(See http://www.telegraph.co.uk/news/politics/9376534/Regulating-the-banks-what-politicians-used-to-say-about-the-City.html )

Fred

Thank you very much for the piece David. Very well thought out. I'll have to give it a second read and allot more thought over the weekend.

MRW

@David Habakkuk,

David, thanks for those quotes. How blind they were a year before the crisis.

As Adam Curtis showed in Part 2 of The Trap--which everyone should watch--according to an on-screen statement by Robert Rubin, he and Alan Greenspan told Clinton that if he borrowed any more money to pay for his campaign promises that interest rates would rise and people would stop borrowing and spending and there would be an economic disaster. Watch 11:52-16:12 min
https://www.youtube.com/watch?v=WbRApO3k_Jo

In other words, Greenspan lied to an incoming President about how federal accounting works! He only stopped the obfuscation on August 7, 2011 on Meet The Press when he admitted the truth of the matter that the USA can never go broke, no chance of default, that it can always pay its bills because it can "print money." This was in reaction to the stupid ratings downgrade last summer which everyone thought would put interest rates through the roof. Zippo happened. Just like Japan, which has had 0% interest rates for 20 years, a rating below Zulu Natal, and is still one of the strongest currencies in the world.
at :50 sec.
https://www.youtube.com/watch?v=8lStG2d50IQ
British reaction cackling about it.
https://www.youtube.com/watch?v=tvjP4nFFJQQ

The term "print money" is a holdover from the gold standard days when government did print money based on the store of gold in the vault. (Look at Greenspan's age.) However, the USA has been off the gold standard domestically since 1934, and off the gold standard completely and internationally since August 15, 1971. We now have a sovereign non-convertible (can't convert to a metal) currency with a floating exchange rate as a result. We are the captains of our own fate (unlike Greece, Spain, and Portugal who gave theirs up to use the Euro). So is England, Canada, Australia, and Japan, all of whom have sovereign currencies. Our only danger is inflation, which shows up when the population is fully employed and there are not enough goods and services to supply them. We're not at that stage right now. Our economy is ice-cold. We need to lower taxes and the government needs to start "spending" into the economy pronto, which is how the federal government, per the constitution, issues currency since the federal government is the only legal entity worldwide that *can* issue it.

Hey, David, you might enjoy these two talks. These two links include the transcript. The reason why they are speaking slowly is because the talks are being translated into Italian in the background for the audience. You won't be bored. Substitute the dollar for the Pound, and it's the same deal in England.
http://mediaroots.org/mr-transcript-italian-mmt-summit-2012.php
http://www.indybay.org/newsitems/2012/04/06/18710892.php

MRW

Nice post.

"Our children and grandchildren are going to have to be much more sober-eyed and serious and responsible."

First, they need to learn how our monetary system REALLY works operationally. Once that happens, they will roar.

Alba Etie

This probably does not relate directly to the LIBOR scandal - but I thought certain State's Attorney Generals as part of the foreclosure settlement had opened up big efforts to go after other bank fraud - it all appears to be one big, stinking & steaming pile of criminal wrong doing ..

MRW

Got that right. Listen to the talks I suggested to David H, specifically the second one . . . or skim the transcript.

MRW

Greenspan should be in jail. Congress ordered--ORDERED--him to regulate with respect to mortgages within 180 days of passage of the Home Ownership and Equity Protection Act of 1994, 15 USC 1601.

He refused to do it because he didn't believe in it, said Rep. Barney Frank.

MRW

David,

If you listened to the two talks I mentioned, this one (at the same conference) goes into more detail.
http://mediaroots.org/dr.-stephanie-kelton-modern-money-theory-explained.php

Slides for the countries mentioned are here:
http://static.slidesharecdn.com/swf/ssplayer2.swf?doc=italypresentationdraft1-120221154517-phpapp02&stripped_title=adding-the-domestic-private-sector-financial-balance&userName=MitchGreen

And another interesting set of slides:
http://www.slideshare.net/MitchGreen/money-is-no-object

Walrus

Dear David,

Thank you for your considered and gentle reply.

I must confess I am overly sensitive to the machinations of the British upper classes and you should rightly discount some of what I say because of it. I attended privates school where the Edwardian model of the English Gentleman, as exemplified by Raymond Asquith, was rammed down my throat every week. We were taught that it was our privilege to "serve the country", which was code for monopolizing the professions and political office, which many of us did - you know the drill. Subsequent collisions with the reality of the British upper classes over Thirty years disabused me of this concept, except in connection with that supreme and noble British institution: The Club.

Having said that, I believe what we have witnessed is "The Club" of very senior bankers both in governemnt and private, being exposed as having made a gross miscalculation. Yes, narcissists will have contributed. So too will foreigners, for clubs are generally inclusive bodies. The members will have wanted to protect the system. The narcissists will have wanted to protect their profits.

I personally believe that the good American Mr. Diamond may have very well been led astray by some British Banking "old hands" who took him aside after lunch one day, but of course I am merely speculating and biased.

I look forward to your future posts.

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