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XMFSinchiruna (26.50)

The $800 Trillion Scandal: How Banks' LIBOR Lies Affected You



July 09, 2012 – Comments (7) | RELATED TICKERS: JPM , HSBC , C

My latest on LIBOR is an AOL feature:


Combining the penalties assessed by a trio of U.S. and British regulators, and the roughly $155 million that Barclays spent during the multiyear investigation, this one bank alone has incurred more than $600 million in charges. The bank's CEO, Bob Diamond, has resigned in disgrace, and the familiar Barclays name has been significantly tarnished.

By messing with the LIBOR benchmark rates that are tied to an estimated $800 trillion of securities, the offending banks essentially played with matches in the middle of the world's largest house of leveraged cards. The combined gross domestic product of all the nations of the world is only about $70 trillion, so the towering mountain of LIBOR-connected securities out there climbs into the realm of leveraged derivatives like those that nearly brought the global financial system to its knees at the height of the 2008 credit crisis. First by building that leveraged house of cards in the first place on a completely obscene scale, and then by shaking its very foundation by manipulating the interest rates on which all that paper is based, the rate-rigging banks took unthinkable risks with the fate of the entire global financial system.

I am utterly convinced, for example, that gold and silver prices have been routinely manipulated by certain banks to deflect attention from the weak condition of the major paper currencies. We know that a subsidiary of JPMorgan Chase is under investigation for alleged energy-market manipulation. And a slew of banks have been implicated in a municipal bond-rigging scandal that, in the words of Rolling Stone reporter Matt Taibbi, reveals "the astonishing inner workings of the reigning American crime syndicate."

I'm quite certain that plenty of good, honest people working in the banking industry are just as outraged as we are by these sorts of revelations. But unfortunately there is but one inescapable conclusion to draw from LIBOR-gate and the vast array of 21st-century banking scandals: Where opportunity and motive coincide for banks to pursue their own agenda through secretive and unsavory means, it seems far safer to presume that they will rather than to trust that they will not.

7 Comments – Post Your Own

#1) On July 09, 2012 at 1:42 PM, leohaas (29.25) wrote:

Indeed, "LIBOR-gate" is an enormous scandal. I strongly believe most of us (not you and a few other skeptics) underestimate how big this is. Using your estimate of LIBOR being tied to about $800 trillion of securities, let's see how big. I am making a few assumptions here, so feel free to challenge those.

Let us assume I have a $100,000 home equity line of credit, fully drawn. In the US, the rates on those are typically tied to the WSJ Prime Rate, but let us assume (just for my calculation) my HELOC was based on LIBOR. Let us also assume, that the large banks manipulating LIBOR meant that LIBOR was 0.1% lower than it would have been without manipulation. That means that my credit union (which supplied the HELOC) undercharged me $100 in interest per year.

If we extrapolate this to all securities impacted by LIBOR ($800T per your estimate), we can calculate similar  undercharges to amount to about $800B per year. That is a tremendous amount (although the comparison to worldwide GDP seems a bit unwarranted to me).

An interesting question would be who is liable in such a case. As noted earlier, I underpaid for my HELOC. But I paid what my credit union charged me: they quoted me a price, which I accepted. I don't see how I would be liable for this underpayment.

However, my credit union may have a legitimate claim against those who manipulated the LIBOR. Would any court find the manipulators liable? If so, the large banks may find themselves on the hook for $3.6T (my estimate of $800B per year, times 4.5--the duration of the manipulation), not counting any punitive damages. No doubt that would bring down the international banking community, and the entire global economy in its aftermath.

From an investment perspective: I would shun any bank or financial institution until the legal matter of liability is settled. Perhaps it is time again to stock up on PMs...

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#2) On July 09, 2012 at 3:14 PM, XMFSinchiruna (26.50) wrote:

Thanks for your thoughts, Leohaas. The comparison to global GDP was solely to provide a reference by which to comprehend the enormity of $800T, as we tend to gloss over big numbers since the financial crisis introduced a new range of numbers to ponder. And on a very basic level, the very existence of a derivatives market >10X global GDP raises structural warnings signs as to the leveraged nature of the entire global economy.

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#3) On July 09, 2012 at 4:26 PM, LongShortIndex (29.69) wrote:

Wow, great reading Sinch, it is a tremendous scale as both you and leohass bring up.  I admire you continually bringing up the topic and exposure of what the largest financials have been doing.

A scandal enabling this though, is YOU (the readers), that are enabling these banks.


A bank can only be in business and be solvent as long as there are depositors money to support their assets. YOU, your friends, family, coworkers are providing a LIFELINE to these banks with your $50 here, and $50 there in bank accounts. 

SOLVE this now by moving the funds into a community bank or credit union (and support the economy of your area instead of supporting these fraudsters playing with OtherPeoplesMoney in asia, europe, wall street, & Wash DC economies). This REMOVES that lifeline from the harmful institutions. This also effectively changes voting representation in the regional central bank offices. You should have $0 in deposits at Wells Fargo, JP Morgan Chase, BofA, Citi, Barclays, and HSBC! Don't be ignorant, learn that most community banks & credit union networks provide the same conveniences as the above mentioned entities.

Doing the above is simply more powerful than most people's votes.

As for the political process, well...

Bush = Obama = Romney = Pelosi = Gingrich

they all want bigger government

they all support central banking monopoly

they all push for keynesian policies

they all ensure mega corporate power with larger govt.

they all push for higher tax on middleclass (whether actual taxes or inflation tax)

they all support UN & wars

they all support the enabling of white collar crimes/loopholes (without real, pervasive penalties)

the policies set forth by these 'officials'/govt ppl are making the poor become poorer and destroying the middle class.

1) the solution is to recognize the corrupt two party system (and how the democrats and republicans have worked cohesively together in killing REAL debates in this country in over the past couple of decades)

2) after recognition of 1), you should identify the few in either party that has actually voted what they preach, & what they preach goes against the mainstream congress

3) support the few real representers of the american people in either side, and become involved yourself in the political races

4) educate others, talk to friends family, and engage strangers in public with identifying ppl who are wronging us (and also righting us)

5) understand we may not need more legislation today (and in the future), but instead, may need to massively undo most legislation of the past few decades to get to a better place 


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#4) On July 09, 2012 at 4:28 PM, LongShortIndex (29.69) wrote:

leohass, what are you referring to when you say stock up on PMs?

Sinch and other readers, sorry i dont know why my font went crazy on my last comment - my apologies.

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#5) On July 10, 2012 at 3:41 PM, ikkyu2 (98.39) wrote:

The bottom line, unfortunately, is that this is what comes along with fiat currency.  Every time in history that a civilization has decided to debase its currency, abuses have followed soon after.  I am mainly speaking of Bretton Woods, and in particular the inevitable dissolution of Bretton Woods in 1971.

I am sure that currencies need not actually be backed by specie, but the technological solution that creates a viable alternative has certainly not yet been adopted.

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#6) On July 10, 2012 at 3:42 PM, ikkyu2 (98.39) wrote:

PMs are precious metals, by the way.  There are real problems with precious metals as investments for the little guy; when their true value becomes apparent, anyone who holds them is a target for robbery.

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#7) On July 10, 2012 at 7:22 PM, Sturmudgeon (< 20) wrote:

ikkyu2:  presume your reference is to "physical"   probably a dumb statement on my part


Thanks Sinch  & y'all for the education 


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