Tuesday, July 03, 2012

Not Just Clowns, But Criminals

It turns out my April post Clowns Base Key Financial Rate on Feelings, Not Data was too generous. I cited an Economist story which outlined how LIBOR rates — and the returns on $360 trillion of financial contracts related to them, five times global GDP — are based on best guesses rather than hard data.

I continue to cover this story because the financial industry routinely scoffs at the "risk management" practices of non-financials, as I wrote in 2007.

It turns out that these clowns are actually malicious, as reported in Lies, damn lies, and LIBOR: Barclays, Diamond, and a devalued benchmark:

A pattern of deception extending over a period of years. A flouting of the law to profit at the expense of others on three different continents. And a belief that the rules did not apply to them.

No, not the latest mafia family to be taken down by a special prosecutor. But Barclays PLC, the sprawling British banking group that recently paid a $450 million fine for seeking to rig LIBOR, a benchmark interest rate used to value trillions of dollars of investments...

In simple English, that's an assertion that Barclay's employees on at least three continents spent years lying in order to fix benchmark interest rates that help determine the value of about $10 trillion of global debt and $350 trillion in derivatives, mostly swap contracts.

For instance "Barclays based its LIBOR submissions for US Dollar... on the requests of Barclay's swaps traders, including former Barclays swaps traders, who were attempting to affect the official published LIBOR, in order to benefit Barclays' derivatives trading positions."

The daily LIBOR fixing by the BBA is based on self-reporting from major financial institutions on the cost of short-term unsecured borrowing. Though it's based on the honor system (a regulatory failure if ever there was one) that daily fixing is used as a benchmark that effects the prices of swaps and debt instruments in dollars, pounds, yen, and euros. So if you can fiddle the LIBOR number, you can manipulate markets to your advantage.

I expect more banks to be named in the coming days and weeks.

It's easy to win at "risk management" if you cheat.

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