LIBOR Manipulating Banksters Get a Slap on the Wrist

Shah Gilani

Heaven can wait.

There's a passage in the Bible that says, "The Kingdom of the Father is spread out upon the earth and men do not see it."

Bankers see it.

The whole earth is heaven for the big banks. They rule over it like petty, greedy gods.

And that's not because they're too-big-to-fail; it's because they're too-big-to-control and have it too-good-to-ever-change their sleazy, self-serving, corrupt ways.

The latest proof of big bank's criminal ways, that they've been manipulating Libor – which isn't news, I was writing about this four years ago – isn't an indictment. It's a signed, sealed, and delivered verdict of "guilty."

(Check this out, I get credit from a group of fraud lawyers for being first to call this out right here.)

Barclays, a monster British bank, is under criminal investigation for its role in fraudulently manipulating the London InterBank Offered Rate (Libor). It settled charges late on Tuesday with Britain's Financial Services Authority (FSA), the U.S. Commodity Futures Trading Commission (CFTC), and the U.S. Department of Justice.

Yeah, about that "justice" thing…

Barclays "settled" by paying $92.8 million to the FSA (a record fine), $200 million to the CFTC (another record), and $160 million to the DOJ (a piddling amount).

But, hey, you know, they're sorry and all that. Sorry they got caught, that is. And they're not alone.

There will be a bunch of other big banks paying for this gross game of manipulation. And all of them are household names.

I'm not going to get all worked up over the insanity of how little the fines were on any relative basis, compared to how much Barclays made or saved (including possibly saving itself from implosion, worse than it fared in 2008).

Or how insane the "deferred prosecution" garbage is that accompanies these "settlements," on account of the fact that they don't really admit guilt; they just pay the pipers (regulatory extortionists who'd rather collect potty money than put criminals behind bars… oh, don't get me started).

And I'm not going to get all over the fact that a few bigwigs at Barclays are going to forsake some compensation this year, because although they're not guilty of anything, you know, they're just going to take one for the team, you know.

No, I'm not going to preach. It's not Sunday, and this ain't Sunday school.

This is Heaven, folks… for the big banks, anyway… and here's how it works.

How Barclays Manipulated LIBOR (and Why It Stinks)

Libor is really, really, really important.

It's a bunch of interest rates that range from overnight rates to one-year rates. These rates are important because they are the benchmark, or "reference," rates for some $350 trillion in OTC (over the counter) swaps, $10 trillion in loans, and $437 trillion in CME (Chicago Mercantile Exchange) Eurodollar contracts (those numbers are according to the CFTC), and trillions of dollars in derivatives contracts worldwide.

In other words, the cost of borrowing for all these loans and financial instruments is based on Libor.

Libor rates – there are 250 of them across different maturities and in different currencies – are calculated daily out of London. Generally, 18 big banks (the "panel") post, in interest rate terms, what it would cost them to borrow (on unsecured terms) from other banks. They submit their numbers between 11:00 am and 11:10 am (London time) to Thomson Reuters. Reuters calculates the official number by throwing out the highest four entries and the lowest four entries and averaging the middle 10 posts.

What's been going on is that Barclays and the other big banks responsible for honestly submitting their cost of money for all those maturities in the different currencies have been submitting rates that are self-serving – as in lying to make or save money for themselves.

Traders at the banks have been leaning on the designated "submitters," who often sit within earshot of their screaming cohorts, to submit very high or very low rates because their billions of dollars of trading positions are affected by those rates.

But not only were traders trying to influence rates, senior managers were in the game in an even bigger way.

You see, when banks submit their interest rates, they're supposed to be saying, this is what I'd have to pay to borrow based on who will lend to me at what prices. If they post really high numbers, they're in effect saying, we have to pay more to borrow, because the other banks are charging us a higher rate, because they think we're a higher risk to lend to.

During the 2008 credit crisis, banks weren't lending to each other, but they still posted artificially low Libor rates. Why? Because they didn't want to be seen as essentially illiquid or insolvent. Because if they couldn't borrow cheaply enough, it would be game over for them.

So management was in on the manipulation. They were all in on saving their own asses and manipulating rates to enhance their trading books.

What's the big deal?

There are tons of ramifications. Some real and some theoretical. "Theoretical" meaning they can't be proven.

Here's one. By artificially keeping rates low, did the manipulation game create more cheap lending across all mortgages and loans during the run-up to disaster? Did these banks facilitate the lending by which they all prospered across the board (until the music stopped and there weren't enough chairs; actually there weren't any chairs) by manipulating rates? You bet they did.

That ain't theory, I'll argue it all day long with any takers.

Lying, cheating, and, to put it politely, manipulating banks rule the earth. They've created their own Heaven. And we're all facing Hell because of it.

It's criminal; no, not what they do (that's business as usual, folks). It's criminal that regulators and governments haven't put the guilty in jail, but let them pay fines and go back to their dirty business as usual.

That's why Heaven can wait. But we can't.

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Shah Gilani

About the Author

Browse Shah's articles | View Shah's research services

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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