Libor was a criminal conspiracy from the start

Barclays poster, Britain

So far, everybody who's said anything about the Libor rigging affair appears to have been lying. And if Nouriel Roubini can call for "somebody hanging in the streets", I can at least call for all the Libor liars to go to jail for it. AND lose all their money, benefits, pensions, everything.

And while we’re at it, why not also throw in jail anyone who suggests that Barclays "might not" have been the only bank rigging the rates. Might not? As if Barclays could have manipulated Libor significantly all on its own?! Against scores of other major banks reporting their daily rates?!

Look, when calculating Libor rates, the British Bankers Association (BBA) throws out the 4 highest and 4 lowest of rates reported by 18 banks. Hence, one single bank cannot possibly manipulate rates down; that is, not on its own. The only way this could have worked, it's pure and simple math, is if a substantial number of banks were involved. A majority of them, to be precise.

Indeed, it is worse than that: all the evidence over the past week, if not long before, suggests that Libor was set up the way it was, BECAUSE the idea was to make it prone to manipulation. It was a criminal conspiracy from the start, and a whole slew of regulators and politicians were in on it. And still are.

Bankers were left free, legally, to call each other every morning and set Libor rates where it suited them. There was no outside control. None.

Why, and why did it happen when it did? You could make a solid case that the 1986 beginnings of Libor fall seamlessly in line with the – true – advent of the derivatives markets, where Libor manipulation is the most lucrative for the banking industry. And all politicians and regulators at the very least looked the other way, deliberately. They will continue to do so, if given half a chance. Let's not give it to them.

Here's a little timeline:

Exhibit no. 1: The Financial Times' Gillian Tett says she first looked into Libor manipulation 5 years ago:

Libor affair shows banking’s big conceit

Sometimes in life it feels sweet to say “I told you so”. This week is one such moment. Five long years ago, I first started trying to expose the darker underbelly of the Libor market, together with Financial Times colleagues such as Michael Mackenzie.

At the time, this sparked furious criticism from the British Bankers’ Association, as well as big banks such as Barclays; the word “scaremongering” was used. But now we know that, amid the blustering from the BBA, the reality was worse than we thought. As emails released by the UK Financial Services Authority show, some Barclays traders were engaged in a constant and pervasive attempt to rig the Libor market from 2006 on, with the encouragement of more senior managers. And the British bank may not have been alone.

Emails released by the UK Financial Services Authority show that Barclays traders were rigging Libor in 2006. And by the way, Gillian Tett, I don't think the horn-tooting is all that appropriate. If the best connected and best paid financial journalists don't have the guts and wherewithal to stand up to pressure, they become accomplices to the fraud they are trusted to bring to light. Sometimes you have to stand up for yourself, and if you choose not to do so, it's somewhat less than genuine, to say the least, to want accolades five years after you do.

As far as "And the British bank may not have been alone." is concerned, see above. Unworthy of any journalist, let alone one for the FT.

Exhibit no. 2:

Nils Pratley at the Guardian reports on Bank of England crown prince Paul Tucker's testimony before a British parliamentary committee on Monday:

Paul Tucker is innocent – all too innocent

This doesn't look good, Mr Tucker," said committee chairman Andrew Tyrie half way through proceedings. Indeed it didn't. The deputy governor of the Bank of England had just confessed that it came as news to him only a few weeks ago that the Libor market was a "cesspit" of dishonesty.

This was despite discussions taking place within the Bank in November 2007 that Libor readings might not be all they seemed. Tucker sounded unworldly. "We thought it was a malfunctioning market, not a dishonest market," he argued. Banks exploiting loopholes to suit their own ends? The notion such wickedness could happen seemed not to have crossed his mind.

That was November 2007. There were already discussions about Libor inside the BOE by then, at the latest. They knew what was going on. They simply knew.

Exhibit no. 3:

In the British parliamentary questioning of Bob Diamond last week, MPs cited 4-year old Bloomberg news articles in which Barclays' employees referred to Libor manipulation. Why did it take 4 years to bring that up in Parliament? Asleep at the wheel? Or more accomplices?

Exhibit no. 4:

The Wall Street Journal's Carrick Mollenkamp and Mark Whitehouse were reporting on Libor rigging by May 2008. Here are some longer snippets from their May 30 2008 WSJ piece, lest everyone who may have been confused to date can once and for all understand what this whole Libor thing is all about:

Study casts doubt on key lending rate: Banks may have filed flawed interest data for Libor benchmark

Major banks are contributing to the erratic behaviour of a crucial global lending benchmark, a Wall Street Journal analysis shows.

The Journal analysis indicates that Citigroup, WestLB, HBOS, JP Morgan Chase & Co and UBS are among the banks that have been reporting significantly lower borrowing costs for the London interbank offered rate, or Libor, than what another market measure suggests they should be. Those five banks are members of a 16-bank panel that reports rates used to calculate Libor in US dollars.

That has led Libor, which is supposed to reflect the average rate at which banks lend to each other, to act as if the banking system were doing better than it was at critical junctures in the financial crisis. [..]

Until recently, the cost of insuring against banks defaulting on their debts moved largely in tandem with Libor – both rose when the market thought banks were in trouble.

But beginning in late January, as fears grew about possible bank failures, the two measures began to diverge, with reported Libor failing to reflect rising default-insurance costs, the Journal analysis shows. The gap between the two measures was wider for Citigroup, Germany's WestLB, the UK's HBOS, JP Morgan Chase and Switzerland's UBS than for the other 11 banks. One possible explanation for the gap is that banks understated their borrowing rates. [..]

Confidence in Libor matters, because the rate system plays a vital role in the global economy. Central bankers follow it closely as a barometer of the banking system's health, and to decide how much to adjust interest rates to keep their economies growing. Payments on nearly $90 trillion in dollar-denominated mortgage loans, corporate debt and financial contracts rise and fall according to Libor's movements.

If dollar Libor is understated as much as the Journal's analysis suggests, it would represent a roughly $45 billion break on interest payments for homeowners, companies and investors over the first four months of this year. That is good for them, but a loss for others in the market, such as mutual funds that invest in mortgages and certain hedge funds that use derivative contracts tied to Libor.

At about 11 each morning in London, traders at the 16 banks on the Libor panel report what it would cost them to borrow money for lengths of time ranging from overnight to a year. Thomson Reuters, a news and information provider, makes those rates public, and uses them to calculate the day's Libor.

When posting rates to the BBA, the 16 panel banks don't operate in a vacuum. In the hours before the banks report their rates, their traders can phone brokers at firms such as Tullett Prebon, Icap and Cie Financiere Tradition to get estimates of where the brokers perceive the loan market to be. (The bank traders also factor in other data when estimating borrowing rates.)

At times of market turmoil, banks face a dilemma. If any bank submits a much higher rate than its peers, it risks appearing to be in financial trouble. So banks have an incentive to play it safe by reporting something similar — which would cause the reported rates to cluster together.

In fact, the Journal analysis shows that during the first four months of this year, the three-month borrowing rates reported by the 16 banks on the Libor panel remained, on average, within a range of only 0.06 percentage point — tiny in relation to the average dollar Libor of 3.18%.

Those reported rates "are far too similar to be believed," says Darrell Duffie, a Stanford University finance professor. Duffie was one of three independent academics who reviewed the Journal's methodology and findings at the paper's request. All three said the approach was a reasonable way to analyse Libor.

At times, banks reported similar borrowing rates even when the default-insurance market was drawing big distinctions about their financial health. On the afternoon of March 10, for example, investors in the default-insurance market were betting that WestLB, which was hit especially hard by the credit crisis, was nearly twice as likely to renege on its debts as Credit Suisse Group, a Swiss bank that was perceived to be in better shape. Yet the next morning, for Libor purposes, WestLB reported the same borrowing rate as Credit Suisse. [..]

To gauge how much the borrowing rates reported by the 16 banks on the Libor panel might be out of whack, the Journal calculated an alternate "borrowing rate" for each bank using information from the default-insurance market.

In mid-March, the bank borrowing rates calculated using default-insurance data rose sharply amid growing fears about the financial health of banks, which culminated in the collapse of Bear Stearns. But Libor actually declined.

Between late January and April 16, when the Journal first reported concerns about Libor's accuracy, Citigroup's reported rates differed the most from what the default-insurance market suggested. On average, the rates at which Citigroup said it could borrow dollars for three months were about 0.87 percentage point lower than the rate calculated using default-insurance data, the Journal's analysis shows. A Citigroup spokesman says, "We continue to submit our Libor rates at levels that accurately reflect our perception of the market."

The difference was 0.7 percentage point for WestLB, 0.57 point for HBOS, 0.43 for JP Morgan and 0.42 for UBS. Royal Bank of Canada's reported rates came closest to the market-based calculation – there was no significant difference. An HBOS spokesman says the bank's Libor quotes are a "genuine and realistic" indication of its borrowing costs. JP Morgan and UBS declined to comment.

Overall, in the first four months of this year, the three-month and six-month dollar Libor rates were about a quarter percentage point lower than the borrowing rates suggested by the default-insurance market, the analysis shows. After banks adjusted their Libor rates following news of the BBA review in mid-April, the difference shrunk to about 0.15 percentage point. [..]

Beginning late last year, some bankers began to suspect Libor wasn't high enough. Questions about the rate arose at meetings held in November and April by a Bank of England money-market committee that includes banks and the BBA. The minutes of the committee's April 3 discussions say that "US dollar Libor rates had at times appeared lower than actual traded interbank rates."

Citigroup interest-rate strategist Scott Peng raised similar questions in an April 10 report, writing that "Libor at times no longer represents the level at which banks extend loans to others."

The BBA complained to the bank and asked about having the report withdrawn, according to people familiar with the situation. Citigroup declined. A BBA spokeswoman says reports published by member banks are not a matter for the BBA.

Please note, this WSJ article is over 4 years old. It was there for everyone to see, for all regulators, for all politicians, and for the British Bankers Association. Not only did nobody act on it, the BBA actively intervened to have negative reports thrown out. It threatened Scott Peng at Citigroup, Gillian Tett at the Financial Times, and who knows who else. That's a good job for British parliament: find out where the BBA intervened to let the fraud persist. Don't count on the MPs doing it, though. They're too busy, as we speak, covering their own asses.

In a closely related side note, there's a nice and very illustrative piece in the Telegraph on why Gordon Brown sold Britain's gold for as cheap as he could sell it for.

The answer is banks, again. Banks that were shorting gold to such an extent in 1999, entangled in the gold-yen carry trade, that they would have gone under if Brown hadn't squandered away the British people's legal assets from under their very noses. Gordon complied. He even made a pre-announcement, making sure the price would drop further before the gold was auctioned off.

The underlying idea: Letting banks go belly up would have been disastrous. Stealing from the people who voted him in office would, apparently, not. A decade and change on, that is still what obviously drives any and all meaningful political decisions. Nothing has changed. And we are to believe this time is different? Can we at least put Gordon Brown on trial, so he can justify robbing the British people of many billions of pounds so he could please his banker friends?

In Britain the Serious Fraud Office has announced it will start a criminal probe into the Libor shame. The first question that popped into my mind was if it announced that just to hinder a parliamentary investigation – and/or other probes – , over which it has preference. You see, the SFO has a very bad reputation in Britain, where it's nicknamed the Serious Farce Office, for the same reasons many US regulators do stateside: they never achieve anything, no-one ever goes to jail for their shenanigans. The SFO and SEC and all those institutions are sort of like the drivers of the get-away car, dressed in police uniforms: their function is to make sure the perpetrators clear the scene in time.

Probably the best chance of this going anywhere is in the private corner: Bloomberg reports that Barclays is being sued by a private investor over manipulation of Euribor rates. Perhaps that will bring things to the table that regulators would have tried to keep hidden.

It‘s always hard to see exactly how far the power of the banks goes, and how many politicians there are with a shred of integrity left. But it's obvious that we can't rely on governments and regulators, or even police or FBI-like bureaus, to make sure justice is done. After all, what constitutes justice is defined by our morals, more than by our written laws. When morals are decaying, laws are routinely misinterpreted at random or ignored altogether.

Maybe we should just simply let only the bankers vote in the next elections, on both sides of the pond. That would be much more in line with our modern day moral choices and preferences. And it would provide a much clearer picture of why lawmakers at large act the way they do.

Exhibit no. 5:

One last one: David Enrich and Max Colchester at WSJ a few days ago, showing that the UK's government regulator Financial Services Authority (FSA) is as complicit as anyone:

Embattled FSA Is Under Fire for Libor Policing

One major but basic problem: The FSA never established a rule that the data banks submit to Libor should be accurate and fair, said Steven Francis, a regulatory expert at law firm Reynolds Porter Chamberlain. "This is a major regulatory failing," he said. "It's frankly ridiculous that there wasn't one in place."

Former FSA officials say they never viewed monitoring Libor as the agency's responsibility. Until recently, the FSA didn't see Libor as posing a threat to market integrity, they said.

As early as 2007, however, at least some FSA officials had heard industry complaints about Libor's reliability. That December, a senior Barclays compliance executive told FSA officials that Barclays believed that Libor levels were becoming unreliable, according to documents released last week by the CFTC.

In April 2008, after The Wall Street Journal reported concerns about Libor's reliability, a senior Barclays executive told FSA officials in a conference call that the bank hadn't been accurately reporting its Libor readings, but that Barclays wasn't the worst offender, according to the CFTC.

That summer, the BBA opened a review into how Libor was calculated, concluding that there weren't major problems. Ms. Knight, the group's CEO, said British authorities didn't question that finding.

The FSA didn't start formally investigating Libor until 2010, some two years after the CFTC began its probe, said former regulators and industry officials. The U.S. regulator is pleased with the FSA's close cooperation, according to people close to the investigation. But that didn't stop the CFTC from spelling out in its public order several instances where it said the FSA had been warned of concerns about Libor submissions seeming too high.

The FSA review found that Mr. del Missier, then a top Barclays investment-banking executive, in October 2008 had instructed subordinates to understate the bank's borrowing costs. FSA officials considered taking action against Mr. del Missier. But they concluded his instructions were based on an innocent misunderstanding, the belief that the Bank of England wanted the bank to report lower costs. As a result, the FSA didn't take any action.

Last month, with settlement talks with Barclays nearly complete, Barclays announced that Mr. del Missier was being promoted to the role of chief operating officer. The FSA signed off on the promotion, confirming that Mr. del Missier was "fit and proper" to hold the position , according to a Barclays official.

Days later, when the Barclays settlement was announced, regulators pointed to Mr. del Missier's 2008 instruction as an example of Barclays's misdeeds.

OK, maybe a few regulators at institutions like the FSA can be spared jail time. We will need all the available space for bankers and politicians, after all. But at least those regulators, like the bankers and politicians, should be separated from every single penny they have to their name. We can then use that money to compensate the victims of this institutionalized fraud. Hey, what’s RICO for, after all?

Incoming: Bob Diamond just "volunteered" to forgo $30 million in deferred bonuses. Let's volunteer the rest of his assets for him too.

It would be a start. And it's the least we can do.