Opening Bell: Lying About Libor

Journal calls out banks on distortion; free wireless for all?; the back story of $2 a share for Bear; etc.

The Wall Street Journal uses an interesting bit of enterprise reporting to suggest on A1 which banks are lying about their borrowing costs in order to make themselves appear healthier than they really are.

The story follows the Journal’s report last month that questions were being raised about Libor—the London interbank-offered rate—which measures how much banks charge to lend to one another.

It’s not much of a surprise that Citigroup comes out worst of all, with the Journal’s analysis suggesting it’s low-balling its borrowing costs by 0.83 percentage points. Why do we care?

Confidence in Libor matters, because the rate system plays a vital role in the global economy. Central bankers follow it closely as a barometer of the banking system’s health, and to decide how much to adjust interest rates to keep their economies growing. Payments on nearly $90 trillion in dollar-denominated mortgage loans, corporate debt and financial contracts rise and fall according to Libor’s movements….

At times of market turmoil, banks face a dilemma. If any bank submits a much higher rate than its peers, it risks looking like it’s in financial trouble. So banks have an incentive to play it safe by reporting something similar—which would cause the reported rates to cluster together.

The WSJ drops a couple of paragraphs of caveats about its analysis, which used default-insurance prices to project what Libor costs should be, but it says it had three different academics review its methods. One bank, WestLB, reported borrowing costs that were the same as Credit Suisse, even though the default-insurance market was pricing its risk of default as twice that of the Swiss giant. That doesn’t make any sense.

And the Journal scoops that another more troubled Swiss bank, UBS, underreported its borrowing rate by 0.12 percentage points last month to put it “in line with all the other panel banks.” UBS couldn’t even come up with a comment.

Interestingly, after the Journal’s report last month about Libor, rates jumped substantially. Its analysis reflects that, too, showing that rates were too low by about 0.25 percentage points before last month’s article, but 0.15 after it.

Sugar deal not so sweet

The New York Times reports on A1 that employees of U.S. Sugar say the company is cheating them out of money by selling company shares in their retirement plans for “a much lower price than they could have received.” To top it off, they say U.S. Sugar execs made out like bandits in the deal.

U.S. Sugar has a private employee stock ownership plan similar to the structure Sam Zell used to take Tribune Company private, and the Times says the problems at U.S. Sugar could occur at the other ESOPS around the country—which number some 10,000.

Basically, the suit accuses the Mott family, which founded U.S. Sugar and still exerts control over the company through the chairmanship, of “scheming to enrich themselves by buying back workers’ shares on the cheap.” At one point retiring workers’ shares were being cashed out at $194 a share while the company had two outside offers to buy shares at $293 apiece, which the board rejected. This year, it suspended its dividend, too.

The Times reports that the company used to be known for its paternalistic culture.

But that homey culture did not survive the tide of globalization. The North American Free Trade Agreement raised the prospect of a flood of cheap sugar from Mexico and other countries with low wages. U.S. Sugar scrambled to lower its costs.

Ellen Simms, U.S. Sugar’s former comptroller, said that when the company had to trim its payroll, it seemed to choose people with many years at the company.

“It was very obvious, with few exceptions, that they were targeting the employees who had been there the most time and who had the most ESOP shares,” she said. She resigned in protest in 2004.

Meanwhile, the falling stock price reported in the appraisals was a boon to the company, she said, because it made it cheaper to buy out the workers.

This year, U.S. Sugar banned its employee shareholders from its annual meeting because their shares are technically held by the ESOP.



Dow Chemical is raising its prices 20 percent because of higher energy costs, the Journal and the Financial Times report.

The Journal says on A1 that the “move may fuel inflation in consumer goods from plastic wrap to diapers to food.” Dow Chemical says its energy costs were up 42 percent in the first quarter, and the FT says analysts expect that number to be up even more this quarter.

But now there are signs that rising oil prices, as they make their way through the economy, will drive up inflation, at least in the short run. The consumer price index will be up 5.1% in August, J.P. Morgan economist Michael Feroli predicts. That would be the biggest year-over-year increase since 1991.

The firm’s CEO lashed out at the U.S. government for its failed energy policies.

Oil prices are changing our lives…finally

The soaring price of oil is beginning to change the way we live. The WSJ says that high oil prices are pushing some small towns and community colleges to four-day weeks. The move could be joined by local governments soon, it says on A3. The report comes after news that driving is down significantly from a year ago.

The paper says Hewlett-Packard is trying to slash 20,000 plane trips a year by increasing its videoconferencing.

The Journal on A8 says the biggest oil exporters aren’t able to pump out more oil—despite ever higher prices. Exports from them fell 2.5 percent last year even though prices soared 57 percent.

Mixed bag of economic tea leaves

In economic news, durable-goods order fell 0.5 percent in April—the fourth decline in six months—but another gauge indicated health. Orders for nondefense capital goods excluding aircraft were up 4.2 percent.

The FT says on page one that investors are betting that interest rates are more likely to rise by October than not. That is a signal of some economic confidence, but it’s also driven by oil costs. Higher interest rates will delay any recovery in housing.

But the WSJ in its C1 Ahead of the Tape column notices some warning signs among the Wall Street banks that it says may show the credit-crunch fun isn’t done. Their falling stocks and rising cost of credit protection aren’t good signs.

The story behind $2 a share for Bear

The Journal concludes its “Fall of Bear Stearns” mini-series by looking at the firm’s final days, when the paper says it nearly collapsed twice, hours after it thought it had gotten a month-long reprieve.

JPMorgan Chase yanked back its offer at one point on the morning the deal was signed after it got “cold feet” from looking at Bear’s books. It came back with an offer of $4 a share, but Treasury Secretary Paulson told CEO Jamie Dimon it was too high. That’s where the famous $2 a share offer came from, just hours before what would have been a devastating opening bell in Asia.

Bear Stearns investors took their lumps, if not as painful as Mr. Paulson had envisioned. The Fed got stability in the markets, but at a risk of tens of billions of dollars and by setting an uncomfortable precedent. And J.P. Morgan picked up prized clients, talented Bear Stearns employees and a sleek new building at a bargain price, but now faces at least $9 billion in liabilities and the chore of integrating two wildly different cultures.

But the Dow did not plunge 2,000 points, other trading houses did not fail and the global financial system, while wheezing, did not collapse.

Free wireless for all!

The Federal Communications Commission is proposing that whoever wins its big auction of airwaves be required to give free wireless Internet to the entire country, the WSJ says on A4. Wireless companies oppose the plan, of course, but it also has other doubters.

Early skeptics of the plan note that the FCC’s last attempt to place strict conditions on an auction didn’t work out very well. Earlier this year, wireless companies spent upward of $20 billion to buy airwaves that will be left vacant in 2009, when the U.S. transitions to digital-only television broadcasts. But bidders stayed away from one block of airwaves, which the FCC had set aside to be shared with police and firefighters.

Bellwether bid for Weather Channel

The FT says a buyout bid for the Weather Channel shows how much has changed in deal-land in the last year. The bid by NBC Universal, Bain Capital, and Blackstone Group, will be somewhere between $3 billion and $4 billion, but more than half of that will be equity.

During the credit bubble, companies often put up about 15 percent in equity, it says, though some real estate deals were at 5 percent or less.

Time Warner is also bidding for the weather station.

Countrywide prez gets canned

Bank of America—finally—said it won’t keep Countrywide’s president after it acquires the sloppy lender, the Los Angeles Times and WSJ report. The exec, David Sambol, will get $28 million for getting pushed out the door.

The LAT has our What Is a Bottle Washer? Quote of the Day, from Senator Chuck Schumer:

“Countrywide did more to contribute to the sub-prime mortgage crisis than anyone else,” Schumer said. “It always amazed me that Bank of America, which has a fine reputation, would want to keep someone who was in effect Countrywide’s chief cook and bottle washer on the scene.”

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.