Jenkins seems perplexed by this (emphasis mine):
Some Barclays emails imply that traders, even before the crisis, sought to influence the bank’s Libor submissions for profit-seeking reasons. This is puzzling and may amount to empty chest thumping. Barclays’s “submitters” wouldn’t seem in a position to move Libor in ways of great use to traders. Sixteen banks are polled to set Libor and any outlying results are thrown out. Plus each bank’s name and submission are published daily.
It’s only puzzling if you didn’t read that Barclays traders wanted the bank to be an outlier—“preferably we get kicked out.” Why would they want to get kicked out of the measurement? Dealbreaker’s Matt Levine:
…if everyone else says 0.50, 0.51, 0.52, 0.53, 0.54, and Barclays was honestly going to be 0.52 and you throw out the high and low, then you get an average of 0.52 if they submit honestly, whereas if they submit 0.55 then you kick them out and get an average of 0.525.
Last week, the Journal edit page continued to minimize the banks’ Libor fiasco, calling it “a minor scandal” in the subhead, reiterating Jenkins’s “fudge” line, and writing that the “political circus” is “largely an excuse for politicians to beat up on ‘greedy bankers.’”
This is just a cynical defense of fraud:
The bipartisan outbreak of market purism in Parliament and the media is refreshing in one sense—never have so many, of such different political persuasions, argued so eloquently for the virtue of unadulterated price signals.
In defending banker con-artistry, the Journal forgets that marketplace corruption, among other things, wrecks the market itself.
The Journal ran an op-ed the same day by former Bear Stearns economist David Malpass—last seen here downplaying the possibility of a deep recession, that deftly shifts the focus to lawyers—on how the “world can’t afford endless litigation against the financial system.”
This morning, the paper runs another editorial shifting attention away from the banks and on to regulators. At least we can agree on its kicker:
If heads are going to continue to roll over Libor, they should also include those of Mr. Geithner and the rest of the regulators who let this slide.
No kidding.
Wow, all I can say about these wsj editorials is how I feel like a kubrick movie astronaut upon reading them.
'My god. It's full of padikillers."
Bloomberg seems to be taking a different approach:
http://mobile.bloomberg.com/news/2012-07-17/roll-call-of-unscrupulous-bankers-is-unacceptably-long.html
#1 Posted by Thimbles, CJR on Wed 18 Jul 2012 at 02:38 PM
Holman Jenkins column title on the repeal of Glass Steagal: "Hooray for Special Interests".
#2 Posted by Edward Ericson Jr., CJR on Wed 18 Jul 2012 at 03:31 PM
Mr. Pierce puts up a post:
http://www.esquire.com/blogs/politics/ben-bernanke-house-testimony-10785939
"Let us, for the moment, accept as something at least semi-gospelish the notion that the problem with the current system of international finance, the eight-gozillion-horsepower engine that is pulling the caboose of political democracy toward the cliff at 200 miles an hour, is not that there is corruption in the system. It is that the corruption is the system. The system cannot function without systemic corruption. This puts everyone in a bind...
If you want an illustration of the basic conservative conundrum, here's a piece from The Weekly Standard, suggesting that Willard Romney be born-again as a Wall Street reform superhero. (I'll pause here while you retrieve your jaw from the bowl of Wheatena into which it just fell. There you are. We continue.) The author is admirably outraged at the perfidy of the big banks and the inherently catastrophic phenomenon of Too Big To Fail. He even sticks up for the Consumer Financial Protection Bureau, which guarantees that he'll be the pinata at the next Objectivist's Picnic in Galt's Gulch. However, you will note that he also proposes that Romney come out for rigid financial reforms without the benefit of strict government regulation, which is always, and in every case, bad. I don't know how he plans for Romney to enforce those reforms in a deregulated environment. His inherent charisma? His dark powers to shape men's minds?
On Tuesday, while lecturing the Senate to get its act together, Ben Bernanke took some hits about the Fed's response to the mushrooming LIBOR scandal. In response, Bernanke said that the LIBOR system was "fundamentally flawed."... Bernanke spent a great deal of time warning the Senate that inaction this year would damage the fragile economy by undermining consumer and business "confidence" in the system. This is to laugh.
What confidence was he talking about, exactly? It's been four years since the crooks tanked the Wall Street casino, stealing most of the national wealth and leaving the rest in sticks and splinters. Everybody in the country knows what happened; there have been HBO movies and Oscar-winning theatrical features on the subject, and a whole passel of best-selling books. And yet, because the thievery happened in rough coincidence with the Supreme Court's deregulation of political bribery, and with the accelerating prion disease that is eating through the brain of the Republican party, everybody knows that nothing substantial is going to happen to anyone above a certain level of power and influence, and that nothing has really changed. Even the tepid Dodd-Frank reforms are back under assault...
People may have very little confidence in the government's competence, but they have absolutely none in the financial system's honesty. People may have very little hope that government can fix things to even out the losses, now that all the serious people agree that the national economy should be run as though at were one of Sheldon Adelson's casinos in Macao, but they have no hope at all that the financial system even has any intention at all of reforming itself."
Meanwhile, the beltway, much of the press, and the pundocracy are focused on other problems:
http://prospect.org/article/beltways-destructive-obsession-deficit
We are dooooomed.
#3 Posted by Thimbles, CJR on Wed 18 Jul 2012 at 04:00 PM
Gee, CJR. It took you only about 12 days to respond to any dissenting view on LIBOR. And you chose an oh-so difficult target: Wall Street editorial. Meanwhile, CNBC, EPJ, Reuters, et al. have chimed in with good reason to slow your roll. I provided you with links a week ago. Ignore them if it makes your job easier.
#4 Posted by Dan A., CJR on Wed 18 Jul 2012 at 07:54 PM
" Banks were downplaying their costs of funds, which means they set rates lower than they otherwise would have. They were likely doing so to appear stronger relative to market activity, during the financial crisis. Note: This action would have resulted in nothing more than giving the appearance that LIBOR was more in line with the Fed Funds rate and the T-Bill rate, which, again, means the move benefited borrowers at the expense of the bankers themselves. Some collusion. This appears to have been done at the height of the crisis when no loans were being made anyway and can be seen as little more than posturing. It would be hard to understand how this posturing could have occurred when markets were actually functional, since it would mean rates would be set lower than at market levels, which would mean supply not equaling demand, with less supply of funds but greater demand for funds, thus distorting the global loan markets. In active markets, something like this would have resulted in banks around the world adjusting their premiums relative to the LIBOR benchmark or not using the LIBOR as a benchmark at all." [bold added] - Robert Wenzel
#5 Posted by Dan A., CJR on Wed 18 Jul 2012 at 08:12 PM
"It is possible to manipulate this system. The submissions are fairly predictable from day to day, so a bank can easily anticipate what the other submissions are likely to be. A bank that has been within the pack used for the trimmed average could submit a low ball number that would knock it out. In that case, one of the submissions from a bank that would have been excluded as too low would be included in the final calculation. This could have the effect of lowering Libor. ...
"But this didn’t happen on March 13, 2006. On that day, Libor moved from Friday’s fix of 4.9 up to 4.91. According to data released by Thomson Reuters, fourteen of the banks submitted 4.91. Only Barclays and RBS submitted 4.9. There were no higher submissions.
"In other words, it made no difference whatsoever that Barclays shaved a point off its submission.
"The traders, however, seem to think they scored a spectacular victory.
"'When I retire and write a book about this business your name will be written in golden letters,' a trader writes to the submitter.
"Was he just deluded?" -John Carney, CNBC
#6 Posted by Dan A., CJR on Wed 18 Jul 2012 at 08:18 PM
Dan, Dan, Dan.
You just don't get it, do you. In order for free markets to be successful and efficient, information must be open(the information is available) and transparent (the information is true). The entire rationalization for the minimization of government involvement in markets is that government action prevents the market from operating on the basis of 'true' information since government distorts the 'true' inputs and the 'true' outcomes. Government prevents the honest functioning of market principles, right? That's bad, right?
Is it good then when market agents distort the information we rely upon to make our informed decisions and manipulate the outcomes? Doe the free market require honest market agents or not? Is it okay for market vendors to manipulate the weights on their scales so that one person gets short hanged on one day and another gets twice the product on the next (the market agent's cousin comes in that day. You do for family)
So some people won and some people lost.
Who won? Back in the day, we watchers were worried that option arm loan resets would be a problem comparable to the 2007 subprime defaults. If those loans exploded, you would have seen more bailouts, more banks underwater, more collapsed and depressed real estate etc.
What we got instead was a low Libor:
http://globaleconomicanalysis.blogspot.ca/2009/05/arms-reset-crisis-revisited.html
But what that did, while saving the banks from having to confront their balance sheet problem, was that is deprived securitized mortgages of their value. Remember, the banks sold many of these mortgages off to investors until they got too suspicious of the ratings and risk. These investors were robbed of their returns when banks manipulated the rates interest rates reset to so they were much lower.
Then there were the interest rate swap deals:
http://www.bostonglobe.com/opinion/editorials/2012/07/14/libor-interest-rate-scandal-did-massachusetts-suffer-from-barclays-misdeeds/wNX8dmN6awjULJDsBWcdKL/story.html
"[W]hile suppressed interest rates may have helped some borrowers, manipulation of the LIBOR could mean others overpaid for financial products. Regulators abroad and in the United States are now looking into whether other large banks misreported their rates, too.
Such manipulation would have a direct effect on Massachusetts, as parts of the Commonwealth’s $10 billion cash portfolio are linked to LIBOR, said state Treasurer Steven Grossman, who has started an investigation with Attorney General Martha Coakley. That’s why any probe should look comprehensively at the effects of interest-rate manipulation on the state.
Policymakers should focus in particular on one LIBOR-linked financial product that’s burdening public coffers: the interest-rate swap, a product that allows borrowers to lock in low rates when interest rates seem likely to rise. The downside is that if rates fall, borrowers end up paying much more — and the lower the rates, the more they pay. The Massachusetts Bay Transportation Authority entered into a dozen interest-rate swap deals. Other state agencies and Harvard University entered into such deals as well.
Because LIBOR and other interest rates plummeted during the financial crisis and have stayed low since, the lower-than-expected rates are costing swap holders millions annually — an estimated $26 million a year for the MBTA alone. Refinancing debt at current rates would make sense if not for the costly exit fees written into swap contracts.
Perhaps unknowingly, many banks sold swaps on a false premise — that interest rates would move independently, in
#7 Posted by Thimbles, CJR on Thu 19 Jul 2012 at 04:15 AM
Ooo. Cut me off, will you?
Anyways, if you support free markets except in cases where information must be kept secret and/or false, you might enjoy some Karl Smith.
He'll shoot you for talking about Libor:
http://neweconomicperspectives.org/2012/07/a-public-policy-school-professor-glorifies-lies-murder-and-crony-capitalism.html
"Smith: “If I was at the Bank [of England] … I would call [Barclays] and tell them to lie.”
“If I had the power I would demand that you do that. I would shoot you if you didn’t do that. I mean that there were peoples’ lives at stake.”
Hayes: “Just so we are clear; we’re on television. You wouldn’t literally should shoot people that didn’t do that?”
Smith: “I most certainly would.”
Smith: “[The Bank of England] did the right thing [by instructing the banks to lie about their Libor borrowings] – and you should kill people.”
I think he was auditioning for the WSJ.
#8 Posted by Thimbles, CJR on Thu 19 Jul 2012 at 04:29 AM
Riholtz has a good mash up of links on who got stung by the Libor manipulation:
http://www.ritholtz.com/blog/2012/07/the-big-losers-in-the-libor-rate-manipulation/
"In 2002 a little-known but powerful state agency in California and Wall Street titans Morgan Stanley, Citigroup, and Ambac consummated one of the biggest deals to date involving … an “interest rate swap"...
The MTC was forced to pay $104 million to cancel its interest rate swap with Ambac when the company went bankrupt in 2010. Whereas once the Commission’s swaps portfolio was saving it money, now it must pay millions yearly to a wolf pack of banks including Wells Fargo, JPMorgan Chase, Morgan Stanley, Citibank, Goldman Sachs, and the Bank of New York...
The MTC is only one example. Local governments and agencies across the United States have been caught in a perfect storm that has turned their “brilliant” hedging instruments into golden handcuffs. The result is something of a second bailout for the Wall Street banks on the other sides of these deals.
Perhaps worst of all has been the double standard set by the federal government. In 2008 when the world’s biggest banks stumbled toward insolvency, the U.S. Treasury stepped in to inject capital through the Troubled Asset Relief Program (TARP). TARP allowed the banks to offload or restructure their most toxic holdings, including many derivatives like interest rate swaps.
Four years later no such relief has been mobilized for cities, counties, and public agencies suffering from the toxic interest rate swaps they have been forced to hold...
So why did local governments in the United States jump on the swap-wagon?..
Many local governments have been stung by wild swings in variable interest rates on bond debt. Conversely, many public entities found themselves locked into high long-term rates, unable to refinance during periodic dips. In other words, they incorrectly guessed what the price of borrowing money would be over a given time frame, and they were forced to pay the difference."
Land he links to this handy graphic:
http://www.accountingdegree.net/numbers/libor.php
#9 Posted by Thimbles, CJR on Thu 19 Jul 2012 at 10:54 AM
But so far I've seen no stories on how Libor manipulation affected option arms.
This was a huge story at one time:
http://www.calculatedriskblog.com/2010/01/option-arm-recast-update.html
"This chart shows the expected payment shock coming in 2010 and 2011 from Option ARMs. This chart includes projected increases in LIBOR (if LIBOR stays low, the shock will not be as high), and the recast due to reamortizing the loan over the remaining period. "
http://money.cnn.com/2009/02/05/real_estate/ARM_reset_lower/
"The index that most hybrid ARMs are tied to is the London Interbank Offered Rate (Libor). So, homeowners whose loans are resetting will get new interest rates equal to their margins, which range from about three percentage points for the lowest risk borrowers to six percentage points for those who at higher risk, plus the current Libor rate.
In 2007 when Libor rates hovered near 6% there was a great deal of concern about so-called exploding ARMs that would jump from 7% to as high as 12%. But with Libor now at less than 2% - loans are resetting at under 8%."
This is a story an enterprising journo could really dig into. According to Ritholtz, from the looks of it, Citigroup was playing with its figures the most. Which banks had the most to lose by bumping up Libor?
#10 Posted by Thimbles, CJR on Thu 19 Jul 2012 at 11:07 AM
Yes, Thimbles. Artificial rates or misreported rates cause malinvestment and such, and should be shunned and prosecuted in cases of fraud. But the point I'm making is that when Barclays et al. do it, their collusion affects only those who volunteer to do business on those terms; meanwhile, when the FED and other central banks set non-market interest rates, it is not only arbitrary but also mandatory and its implications dwarf LIBOR's financial implications. Their collusion affects pretty much the "world economy." Yet, a precious few of these hand-wringers in the news-media are willing to shun the FED et al. for their collusion on price-fixing etc. It's a double standard and, frankly, the LIBOR "scandal" looks to be overblown.
#11 Posted by Dan A., CJR on Fri 20 Jul 2012 at 03:55 AM
Here's another article on why the LIBOR issue is not really much of a scandal at all.
http://www.garynorth.com/public/9806.cfm
It even has a few of those nice charts and graphs that Keynesian love so much, though Keynesians will not like the conclusions.
#12 Posted by Dan A., CJR on Fri 20 Jul 2012 at 04:08 AM