Libor manipulation scandal
One thing's for sure: Regulators are on the hunt.
The New York Federal Reserve last week confirmed that U.S. Treasury Secretary Timothy Geithner sent a memo to British regulators in 2008 over concerns of banks manipulating Libor.
Geithner maintained that he and the Fed sent a long list of recommendations to the Bank of England and the British Bankers' Association, which oversees the Libor-setting process.
In light of the scandal, U.S. Federal Reserve chairman Ben Bernanke was questioned about the Fed's inaction regarding Libor manipulation at his testimony before Congress on Tuesday.
Bernanke also made clear that the Fed was not aware that Barclays was manipulating the rates for its own profit. Instead the Fed believed the bank was simply manipulating rates to maintain the appearance that everything was fine with the company (which surely wouldn't affect a bank's profit...).
Bernanke insisted the Fed followed up on the disclosures and that in cases like this there is not much more U.S. regulators can do than make suggestions.
And that's the good news...
Not only are at least 20 more big banks under investigation as part of a massive fraud to manipulate interbank lending rates that affect some $800 trillion in loans and derivatives, but the Bank of England is about to take center stage in the scandal.
And that's bad news for central banks around the world.
Well, actually, it could be good news, as in really good news, if it's the beginning of the end of what central banks do to manipulate free markets to the benefit of their only real constituents, the world's big banks.
First the good news.
It's already come out that traders at Barclays with huge derivatives positions leaned on co-workers who sit on "panels" that submit internal bank borrowing cost data to Thompson Reuters. And Reuters averages the middle lot of submissions to determine Libor (London Interbank Offered Rate) "fixings" (not my word, but actually the established nomenclature for what it apparently is that they do... as in "fix" rates). And it's all under the auspices of the British Banking Association.
What's good is that we now know for a fact that the traders (crooks?) were aided and abetted by their co-workers, the submitters (crooks?), who were overseen by managers and top executives who design most of these schemes (crooks?), and were all blessed by the British Banking Association, an illustrious association of 200 some-odd banks, whose many members (crooks?) are panel members submitting crooked (no question mark necessary) data.
Still don't get why that's good news?
Because it's proof there are crooks out there.
You see, Libor rates are incredibly important. They're the benchmark, or "reference," rates for hundreds of trillions of dollars in loans.
They are so important that even a 0.10% error or "manipulation" in calculations could impact billions of dollars.
That's why Gilani has been warning Money Morning readers of the risks of Libor manipulation since 2008.
"Gilani was among the earliest proponents of the theory that the contributing banks may have rigged the calculation of LIBOR," wrote Securities industry lawyer and Wall Street regulation critic Bill Singer in 2011. "Gilani warned that such activities were likely antitrust violations and were exposing major international banks to legal liability."
How Libor Manipulation Began
As Gilani explained in October 2008, how banks manipulate Libor isn't an incredibly complex event. That's because loan rate reporting is based on the honor system.
Or dishonor, in some cases.