The media are going ever further over the top in their coverage of the LIBOR "fixing" "scandal". For the last couple of days, Sky News has been running a live ticker of UK bank stock prices at the bottom of the screen throughout the trading day! Very informative it is, too. When I was watching a while ago we were told: "HSBC: 559.40"; then, "-7.0"; and finally, "-0.7%"! Guess they must be using an ex-Barclays LIBOR trader to do their calculations.
Bob Diamond has now fallen on his sword -- in the process, bizarrely, unimpaling his Chairman, Marcus Agius, from his -- but before he did so, he sent a letter to all Barclays employees. He noted, undoubtedly correctly, that the likely impact on the LIBOR setting of any finagling by Barclays would never have been much more than 0.001%, on the basis that said finagling was never by more than 1 basis point, and Barclays' submission was always averaged along with 7 others in compiling the published LIBOR figure.
That hasn't discouraged the media, who are still claiming that the impact of even that small piece of fiddling on Barclays' bottom line would amount to millions, because of the huge value of deals that are priced off the LIBOR benchmark. Well, maybe, but the added value of a tenth of a basis point on £1 million for a full year is only £100 -- and Barclays would only make even that if it was able to move LIBOR artificially higher every single day of the year. Given the way the LIBOR setting takes place, that would be very unlikely -- and in any case, for much of the time, Barclays was apparently entering artificially low figures, which would presumably erode its profits, not boost them. But that's no kind of story at all, is it?
It's hard to escape the suspicion that the media are not doing this story to death because of its importance, and still less because they understand it, but because it's finally knocked press standards off the front pages. When was the last time you saw anything about the Leveson Inquiry?
The media aren't the only ones losing their perspective here. The politicians are at it too, finger-pointing with shameless abandon. (George Osborne in the Commons, looking at Ed Balls: "Hands up if you were at the Treasury when Barclays was rigging LIBOR".) One idea getting a lot of play in political circles is that the problem with LIBOR is the very fact that it's set by the banks. So the power to do so should be taken away from them, and presumably vested in some scrupulously neutral LIBOR God who's been in the wings all along, just waiting for this opportunity. The Bank of England is apparently in favour of advocating the replacement of LIBOR with a new rate that reflects actual interbank transactions. That would surely be even easier to "game" than LIBOR, and not just by fractions of a basis point either.
The most popular single post on this blog is still "Shine on you crazy Barclays", which I wrote when Diamond was appointed CEO. I implied at the time that the firm was asking for trouble. I can't claim this was the kind of trouble I had in mind, but there's no question that the value of the firm's franchise has suffered serious damage, out of all proportion to any damage its LIBOR shenanigans have caused.
FOOTNOTE, 4 July: This is from the BBC report on Bob Diamond's Parliamentary testimony, which is now under way: "David Cameron said it was "outrageous" that homeowners and businesses paid higher interest rates as a result of the bank's rate-rigging." There appears to be no factual basis whatsoever for the PM's confected outrage, but that's not going to deter him.
6 comments:
Thanks for explanation. It is very hard to figure out what was going on. But I am still a bit puzzled.
I thought they had been doing 2 unrelated things.
Pre-2008 certain traders were trying to push Libor one way or the other to support specualtive positions ((surely more than £1m a pop)they had taken? Pure fraud surely.
After 2008 crash Barclays was trying to artificially inflate its own credit worthiness so it could get equity cash from Mideast instead of BoE, and carry on pretending it was making real profits,not living on free gov't loans.
I am trying to find out why this is not covered by "False accounting" in the 1968 Theft Act.
Peter
Peter: with 16 banks on the LIBOR panel and only 8 of the submissions being taken into account each day, it would have been all but impossible for Barclays to move the rate in such a way as to benefit its speculative positions to any meaningful extent. As for the idea that they were lying about their own creditworthiness, the impression Diamond and his gang seem to have had, which the Tucker call seems to have reinforced, is that other submitters were low-balling their own numbers in order to look good, and Barclays had to join in in order not to look bad! It may not be 100% true, but it's plausible.
Every bank's estimate of its funding cost will depend on its market position on the day in question. That's why the system was set up to weed out rogue bids before computing the published LIBOR figure. There will inevitably be changes to the system now, but they will be hard-pressed to come up with something that works better. There may also be huge grandfathering issues: LIBOR is the usual floating rate reference in swap transactions, and I am not sure if the standard ISDA agreement allows for a substitute rate if LIBOR vanishes.
I am not trying to defend Barclays -- I closed my account there over the Cabora Bassa dam project all those years ago! -- but the current witch hunt is quite bizarre.
But the blogosphere is arguing that Barclays and the others together manipulated Libor rates pre 2008 and that the resulting civil liabilities dwarf banks' capital. Why would they have bothered unless they thought there was something in it for them?
A small percentage on few trillion buys quite a few bonuses.
http://www.nakedcapitalism.com/2012/07/yes-virginia-the-real-action-in-the-libor-scandal-was-in-the-derivatives.html
http://www.nakedcapitalism.com/2012/06/quelle-surprise-barclays-settlement-on-liboreuribor-fixing-illustrates-bank-crime-pays-well.html
This is surely the the key and why the Candadian Com bureau has investigated - but there it was UBS that fessed up first
"Barclays also breached Principle 5 on numerous occasions between February 2006 and October 2007 by seeking to influence the EURIBOR (and to a much lesser extent the US dollar LIBOR) submissions of other banks contributing to the rate setting process."
http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf
If there is clear evidence of collusion, that would obviously be a much more serious matter. Given the way the LIBOR panel is set up, it would have to be a very large conspiracy indeed!
One thing I did not entirely pick up at the beginning is that almost all of the alleged fixing related to US dollar LIBOR or EURIBOR, rather than Sterling LIBOR. Unless David Cameron knows a lot of people with exotic mortgages (possible, I suppose!), I don't know why he is ranting about UK borrowers getting ripped off.
In fact, I am still a bit unclear about who the losers are here. It has become apparent that LIBOR doesn't reflect any bank's actual cost of funds, and it's your actual cost of funds that the accountants use when they try to measure profitability. LIBOR is used as a benchmark for things like the floating rate side of swaps, but artificially boosting LIBOR would actually benefit corporates using swaps to fix their borrowing rates, because the counterparty bank would have to pay a higher floating rate to the corporate. I'm not sure why the banks would collude to do that.
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