The Latest Bank Disgrace: LIBOR Scam

The world of deceit has not ended, with the latest charges being LIBOR [London Interbank Offered Rate] price rigging.
The Latest Bank Disgrace: LIBOR Scam
A pedestrian walks by a Bank of America branch office on January 21, 2011 in San Francisco, California. During 2010, U.S. banks increased their lending, although most of the credit was extended to large- and medium-sized businesses. (Justin Sullivan/Getty Images)
4/5/2011
Updated:
10/1/2015

<a><img src="https://www.theepochtimes.com/assets/uploads/2015/09/108231346.jpg" alt="POSSIBLE COLLUSION: A pedestrian walks by a Bank of America branch office this past January in San Francisco, California. Bank of America was one of four of the world's largest banks which were served subpoenas for possible colluding over LIBOR rates be (Justin Sullivan/Getty Images)" title="POSSIBLE COLLUSION: A pedestrian walks by a Bank of America branch office this past January in San Francisco, California. Bank of America was one of four of the world's largest banks which were served subpoenas for possible colluding over LIBOR rates be (Justin Sullivan/Getty Images)" width="320" class="size-medium wp-image-1798798"/></a>
POSSIBLE COLLUSION: A pedestrian walks by a Bank of America branch office this past January in San Francisco, California. Bank of America was one of four of the world's largest banks which were served subpoenas for possible colluding over LIBOR rates be (Justin Sullivan/Getty Images)
The world of deceit has not ended, with the latest charges being LIBOR [London Interbank Offered Rate] price rigging.

“Today the Wall Street Journal reported that Fed officials have been in contact with the British Bankers Association regarding potential manipulation of the LIBOR rate,” said Mark Sunshine in a May 2008 Sunshine Report, which is geared toward educating senior executives and investors.

Apparently, four of the world’s largest banks, Barclays PLC, Bank of America Corp., Citigroup Inc., and UBS AG were served subpoenas for possible colluding over LIBOR rates between 2006 and 2008.

The first to spot this hot news was Ms. Brooke Masters, chief regulation correspondent of the Financial Times (FT), who reported on it on March 24. She had stumbled on a short entry about LIBOR rate manipulation in the UBS 2010 annual report.

“UBS has received subpoenas from the SEC, the US Commodity Futures Trading Commission and the US Department of Justice in connection with investigations regarding submissions to the British Bankers’ Association, which sets LIBOR rates,” said UBS in its 2010 annual report.

UBS states that it is being investigated for manipulating LIBOR rates by those mentioned above, as well as Japan’s Financial Supervisory Agency.

UBS is not whitewashing or denying the accusation and says that it is carrying out an internal investigation and will cooperate with the authorities.

An Internet search of the U. S. Department of Justice, U.S. Securities and Exchange Commission (SEC), as well as the British Bankers’ Association (BBA), which is responsible for announcing the LIBOR rates, yielded nothing about the LIBOR rate rigging activities.

In two sections in its 2010 annual report, Citigroup alludes to having been served subpoenas by a number of regulatory and other governmental agencies, but does not go into detail.

“Citigroup continues to cooperate fully in response to subpoenas and requests for information from the Securities and Exchange Commission (SEC), FINRA, the Federal Housing Finance Agency …,” according to Citigroup’s 2010 annual report.

It is not clear at this time if others, such as Credit Suisse Group, Deutsche Bank AG, HSBC Holdings PLC, JPMorgan Chase & Co., Lloyds TSB Bank PLC, and The Royal Bank of Scotland Group, have been contacted by regulatory agencies in regard to manipulation of the LIBOR rate, according to the FT article.

The inquiry, which has been ongoing for around six months, focuses on those 16 banks that are providing the BBA daily input for the LIBOR rate calculation.

“All the panel members are believed to have received at least an informal request for information—an earlier stage in an investigative process before a subpoena,” according to the FT article.

FT tried, but regulators and bank spokespersons have either declined to comment or were inaccessible for questions.

The BBA advised FT that it stands behind those involved in providing input for LIBOR rates and that its calculation and mathematical approaches are clear and transparent.

“The BBA LIBOR setting process is reviewed annually by the Foreign Exchange and Money Markets Committee, a group of 13 active market practitioners who determine the membership of each panel (one for each of the 10 currencies covered) and review whether changes might be required in the setting process,” published the BBA on its website.

After the above paragraph, the BBA states that the last review was in May 2008.

Read More . . . Regulating LIBOR

Regulating LIBOR

In 2008, because of the economic meltdown, voices from economists and financial experts suggested that the BBA revisit the LIBOR rate, claiming that LIBOR was undervalued, given that the banks reporting their borrowing costs to the BBA may understate them. Apparently, banks were afraid of admitting to being financially unsound should they report the actual borrowing cost.

“Some banks are understood to have lowballed their own borrowing costs in order to deceive investors and quell fears about their own creditworthiness as the crisis intensified in 2007-08,” according to an article published on the Ian Fraser blog.

The BBA revisited its LIBOR computations and opened for consultation from LIBOR rate users in June 2008 in an effort to put forward modifications and possible changes at the same time.

In a report issued after the consultation period of around two months, the BBA announced that no changes were forthcoming, as any changes should be left to market forces, that is, the market forces that are the basis for the LIBOR rate. Furthermore, any changes might bewilder the LIBOR user and result in legal battles.

“Any changes to BBA Libor should be in response to market evolution and not as a result of a knee-jerk reaction,” said the BBA in its report, as quoted on the Economist Online website.

The article on the Fraser blog suggests that conflict of interest has been an ongoing problem in the banking sector. In regard to the LIBOR issue, the conflict of interest might arise when banks provide false input to the LIBOR rate computation, because such numbers could be used to find out their true creditworthiness.

Expert discussions suggest that regulations are not forthcoming. The reasoning being that the BBA should be left to its own devices even though regulators were aware of the banks’ machinations but didn’t want to rock the boat.

Also, should banks be subject to clear and transparent regulations, their credit ratings might be adjusted downward, resulting in higher interbank borrowing rates. Should lending rates increase for many banks, some banks may experience a liquidity problem and slide toward bankruptcy.

Regulators have kept their head in the sand, as “they don’t relish the prospect of breaking up financial institutions which not only have they tolerated for years but which might one day offer them a job,” according to the Ian Fraser blog.

LIBOR in a Nutshell

“BBA LIBOR reflects the actual rate at which banks borrow money from each other,” according to the BBA website.

LIBOR is the one-month, three-month, six-month, and one-year interbank interest rate, that is, the cost of borrowing from another bank. In economic terms, this rate is the market price for banks when borrowing among each other.

The BBA sets LIBOR. It meets daily at 11 a.m. with representatives from 16 of the largest banks. These banks provide the interest rates at which they are willing to offer to their counterparts.

The LIBOR rate is the most prevalent tool used to calculate interest rates worldwide. The BBA suggests that around $150 trillion of the world’s debt is indexed to LIBOR.

In 2008, a Sunshine report disagreed that LIBOR is a market rate for interbank lending. “LIBOR is not a real market rate of interest and is instead set by a cartel of mostly foreign banks operating in London with little or no oversight and no transparency,” said Sunshine in a 2008 report.