Geithner's LIBOR Pain - Part I
Board: Macro Economics
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Henry Ford, 1922
Because of the scope of the topic I have decided to split it into two parts. Here is part I.
For more than six months I have been following the London InterBank Offered Rate (LIBOR) scandal with suspicious eyes. Only slowly did I realize the magnitude of this newest version of financial fraud and the extent to which it affects all of us. When on July 25, 2012, the Financial Times referred to a House Financial Service Committee hearing of the same date under the heading: “Geithner grilled over Libor revelation,” I decided to listen in on our legislators at work. Unable to be productive during the oppressive Saharan heat wave this past weekend (no air-conditioning in our home), I finally took the time to sit through the 2 h 39 min.
The hearing itself was not on LIBOR but a presentation of the “The Annual Report of the Financial Stability Oversight Council” (FSOC). Perusal of the report is recommended for all METARites following the banking-financial-monetary system. Like the annual report, U.S. Treasury Secretary Timothy Franz Geithner’s written statement submitted to the committee does not address the LIBOR issue. That did not prevent committee members to aggressively interrogate Treasury Secretary Geithner about his handling of the LIBOR scandal while he was chief of the Federal Reserve Board (FRB) New York in 2007-2008. Many viewed his alleged inactions as indifference to fraud. “The gentleman from New Jersey,” the most bellicose of the lawmakers, pounced on Mr. Geithner and pointing fingers repeatedly accused the Secretary Treasurer of “never once” publicly raising LIBOR concerns, neither as chief of the FRBNY nor later as Treasury Secretary, thereby condoning the “crime of the century.” He also demanded to know if regulators will be fired, looking quite ready to follow through on the request right here: http://www.flickr.com/photos/expd/7644281204/lightbox.
“The gentleman from New Jersey’s” performance, I suspect, was for the benefit of the downtrodden masses at home since Mr. Geithner, in response to the Chairman’s questions earlier during the hearing, clearly stated that in early May of 2008 he had briefed the President’s Working Group on Financial Markets, colloquially the Plunge Protection Team, created in response to Black Friday, October 19, 1987. The members of the Plunge Protection Team include the Secretary of the Treasury (in the spring of 2008 it was Henry Paulson) as Chairperson, the Chairpersons of the Board of Governors of the Federal Reserve System, the Chairpersons of the Security and Exchange Commission, the Chairpersons of the Commodity Futures Trading Commission or each of their designees. With all these powerful people involved, it is highly unlikely that Mr. Geithner, the most junior of them all whose appointment had been vehemently opposed and who had never belonged to the circle of Goldmanites, had the power to act on his own.
The Justice Department was not notified in 2008 since it is not part of the Working Group, said Mr. Geithner who, by May 27, 2008, had composed the “Recommendations for Enhancing the Credibility of Libor,” emailed on June 1, 2008, to Mervyn King, Governor of the Bank of England, copy to Paul Tucker, his Deputy Governor and head of Financial Stability. The delay between the recommendations and the final mailing suggests that they were read and approved by the entire Plunge Protection Team.
The U.S. supervisory agencies left it to British regulators to follow up on the six recommendations. It must have been obvious to the gentleman from New Jersey and other lawmakers that whatever LIBOR decisions were made were not Mr. Geithner’s alone and, as Mr. Geithner pointed out, were made during a time when the financial crisis intensified and “there were broader concerns about the financial strength of banks.” According to some non-banking executives, regulators as well as central banks on both sides of the Atlantic purposely looked the other way to prevent a general market panic and the possible collapse of entire global financial house of cards.
The hearing’s LIBOR discussions are interspersed with general questions on the “progress of financial oversight” and the economy. For those who don’t have the time to listen to two and a half hours worth of recordings, I have marked the three most interesting interrogations on LIBOR and have linked the FSOC report and Mr. Geithner’s statement for inquiring minds who want to know. On July 13, 2012, the New York Fed, the Wall Street watchdog, responded, to Congressional request for information on the Barclay–LIBOR matter. At the end of their response they list pertinent 2008 FRB documents, transcripts of phone calls and documents provided by Barclays: emails and transcripts between August 2007 and October 2008. Some of the Barclay material is simply outrageous. It has recently appeared in the U.S. media.
Why I disagree with yodaorange’s take on LIBOR
From the intense questioning of Mr. Geithner by some of our legislators, one can deduce that they view the LIBOR scandal not just as a small parochial affair involving a 300-year-old British bank rigging some obscure little number but as a crime seriously affecting us, their clueless constituents. How LIBOR affects us was outlined in TMFSinchiruna’s (aka Christopher Barker) excellent post of July 9, 2012 when most of the U.S. media were still silent on the matter. Prolific poster yodaorange, however, seemed somewhat dismissive of TMFSinchiruna’s view, opining in his most highly recommended July post: “The REAL LIBOR scandal...has NOTHING to do with what Barclay’s did IMO. With all due respect to TMFSinchiruna’s excellent article, I have an entirely different view of the situation.” After briefly listing the possible extent of the LIBOR scandal and Barclays’ crime and punishment, yodaorange then rises to righteous indignation about Goldman Sachs’ malfeasance in the Abacus affair where the company peddled mortgage backed CDOs to its clients, at the same time betting against them and making a bundle. While I agree that Goldman Sachs (GS) was not “doing God’s work” and should have been punished in Biblical proportion to its sins, I don’t understand at all how the Abacus matter can be classified as the REAL LIBOR scandal.
-- First, ‘only’ GS’ undoubtedly wealthy clients were cheated, not the entire global financial system where an estimated $800 trillion of securities are affected by the LIBOR index.
-- Second, GS was elevated to full bank status only in 2008 and has never been a contributing panel member of the US dollar LIBOR index. Therefore, it could not have influenced LIBOR interest rates, at least not directly.
-- Third, the losses sustained by the wealthy clients of Goldman Sachs in the Abacus affair will most likely be peanuts compared to potential losses suffered globally by all potential victims of a manipulated LIBOR index.
-- Fourth, Barclays, fined in the U.K. and U.S. for having fiddled with both, LIBOR as well as the EURO Interbank Offered Rate (EURIBOR), is just the tip of the iceberg as the Financial Times reported back in February and the Economist in April of this year after viewing Canadian and U.S. legal documents.
What’s in a Number?
A huge amount of money, several hundred trillion USD, is directly dependent on the LIBOR index. It matters more than any other set of numbers in the world. When I first started looking at LIBOR, I imagined it to be a carefully computed number based on real short-term rates payed by banks. It isn’t. It is just a theoretical estimate, published under the auspices of the British Bankers’ Association (BBA) on every weekday that’s not a bank holiday. The BBA defines LIBOR as The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11:00 [a.m.] London time.
The calculation itself is coordinated by Thomson Reuters. Just two people operating out of a nondescript office in a London dock area feed the numbers into a computer, 16 in 2007-2008, 18 now. A simple computer program discards the tope 4 highest and the tail 4 lowest rates and calculates the average of the remainder. This process is repeated for ten currencies and 15 loan durations (from overnight to 12 months), i.e. a total of 150 LIBORs are published daily: overnight sterling LIBOR, one-month yen LIBOR, three-month US dollar LIBOR, and so on. LIBOR anchors contracts amounting to some $800 trillion, the equivalent of $114,286 per person on earth. Because the LIBOR calculations matter so much to so many and their unavailability would paralyze the global financial system, there is an elaborate back-up system in place with full-time staff hidden away at a secret location in the countryside about 150 miles away from London. It is ironic that the most important rate index is elaborately protected from terrorist and other threats but not from the most important threat of all, greedy, dishonest bankers.
The British agencies did not institute the changes recommended by Mr. Geithner. They only tweaked a bit here and there according to the Financial Times and the cheating continued. The 16 banks possibly involved in LIBOR rigging are now under investigation. Some of them have already confessed and ratted on other banks involved. Note that most of them belong to the august group of Systemically Important Financial Institutions (SIFIs) or Too Big To Fail (TBTF) and that some of them were also on the Determinations Committee of the International Swaps and Derivatives Association voting on whether a Greek default had occurred.
16 LIBOR banks currently under investigation.
These were the Contributor Panel for United States Dollar LIBOR from at least 2005 through 2010. Twelve (12) of 16 are classified as Systemically Important Financial Institutions (SIFIs), better known as TBTF banks. Three of them are U.S. corporations.
Bank of America - TBTF
Bankf of Tokyo-Mitsubishi UFJ Ltd - TBTF
Barclays Bank plc - TBTF
Citibank NA - TBTF
Credit Suisse - TBTF
Deutsche Bank AG - TBTF
HSBC - TBTF
JP Morgan Chase - TBTF
Lloyds TSB Bank plc - TBTF
Royal Bank of Canada
Société Générale - TBTF
The Norinchukin Bank
The Royal Bank of Scottland Group - TBTF
UBS AG - TBTF
West LB AG
TBTF = SIFI = Systemically Important Financial Institutions, Financial Stability Board, 4 November 2011, http://www.financialstabilityboard.org/publications/r_111104...
As I see it, the REAL LIBOR scandal or more correctly “crime” is not Goldman Sachs’ Abacus affair but the illegal rigging of the most important reference interest rate in the world. If LIBOR is manipulated, it will not just affect a few traders and banks dealing in esoteric derivatives. It will affect all of us, unless we have no savings in a money market or short term bond funds; carry no car, credit card, educational or mortgage debt; collect no pension; own no stocks, corporate bonds or mutual funds; live in no U.S. community that borrows money or hedges its debt. It will also affect widows and orphans as well as their funds.
In part two I will look at why we should care about the LIBOR affair.
 Timothy Geithner, FRBNY to Marvyn King, cc: Paul Tucker, both Bank of England, http://www.newyorkfed.org/newsevents/news/markets/2012/libor...
 House Committee Financial Services Hearing on Wednesday, July 25, 2012, “The Annual Report of the Financial Stability Oversight Council.” Witness: The Honorable Timothy Geithner, Secretary, U.S. Department of the Treasury
a) Full hearing, 2h 39min, LIBOR issues are interspersed, chair opens at 30:45, aggressive questioning by “the gentlemen from N.J. at 01:33:45, http://www.c-spanvideo.org/program/StabilityOv
b) Representative from Texas questioning Treasury Secretary Geithner, 5min 52secs, http://www.c-spanvideo.org/clip/3550006
c) The Honorable Timothy F. Geithner’s Statement, http://financialservices.house.gov/uploadedfiles/hhrg-112-ba...
d) U.S. Department of the Treasury, Financial Stability Oversight Council, 2012 “The Annual Report of the Financial Stability Oversight Council,” http://www.treasury.gov/initiatives/fsoc/Pages/annual-report...
 New York Fed Responds to Congressional Request for Information on Barclays - LIBOR Matter, July 13, 2012,
see also, New York Fed, Explanatory Note,
 Christopher Barker (TMFSinchiruna), The Motley Fool, 07/09/12, The $800 Trillion Scandal: How Banks' LIBOR Lies Affected You
 yodaorange, The REAL LIBOR scandal..., http://boards.fool.com/the-real-libor-scandal--30141469.aspx...
 Financial Times, Probe reveals scale of Libor
abuse, February 9, 2012, http://www.ft.com/intl/cms/s/0/5ae1f598-5264-11e1-a155-00144...
You’ll have to sign up for 8 free articles per months. (Google and Yahoo no longer subscribe to it).
 The Economist, The LIBOR probes: An expensive smoking gun, April 14, 2012, http://www.economist.com/node/21552586
 U.S. DOJ, APPENDIX A, STATEMENT OF FACTS
See also, British Bankers’ Association, BBA Libor – The Basics,
 Donald MacKenzie on the Importance of Libor, What’s in a Number? http://www.lrb.co.uk/v30/n18/donald-mackenzie/whats-in-a-num...