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The Eerie Silence Surrounding Wall Street Price Fixing

Posted by Larry Doyle on March 6, 2012 8:48 AM |


What is that eerie silence emanating from Wall Street lately? No, it’s not the quiet on the floors of the equity exchanges in the midst of anemic trading volumes. It is also not the empty echoes emanating from trading desks once bursting with activity.

The eerie silence to which I allude goes to the price fixing at the very core of how our Wall Street banks fund themselves in the overnight market. Sounds ominous, no? Let’s navigate and enter the world of Libor based funding. What is Libor? ………………..

An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers’ Association. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.

When our friendly Investing primer used the word “fixed” in its definition of Libor, I do not believe they thought of that term in such a literal fashion, but that is supposedly the type of organized activity that transpired within this arcane little corner of our financial markets. Did I say “little”? I misspoke.

Libor is the rate utilized for hundreds of trillions of dollars of investments and transactions. Think the major banks involved in this market have an enormous interest in seeing how that rate was set? Oh yeah!!

Recall that back in 2008, every major bank was on the precipice of failing. These banks were increasingly strapped for funding even in 2007 and in an attempt to keep their funding costs down we now learn that they were seemingly engaged in collusive behaviors, aka price fixing. Reports indicate the collusive behaviors continued into 2010.

I should have addressed this story earlier, but let’s catch up in reviewing a recent Wall Street Journal story highlighting how Traders Manipulated Key Rate, Banks Say:

A group of traders and brokers successfully managed to manipulate an interest rate that affects loans around the world, one of the banks being investigated has told regulators.

I believe it defies logic to think a handful of traders within these banks operated this ring independent of senior management. The treasurers of these large banks are ultimately responsible for the funding of operations and all related costs. To think these treasurers were not aware of this market manipulation is beyond ridiculous.

In a court filing in Ottawa, Canada’s Competition Bureau said a bank it didn’t identify has told the agency’s investigators that people involved in the alleged scheme “were able to move” interest rates.

People familiar with the situation said the “cooperating party” is UBS AG.

The Swiss bank has said it is assisting regulators in a sprawling interest-rate probe in North America, Europe and Asia, which has led to a score of individuals being fired or suspended by major U.S. and European banks and leading brokers.

No banks or individuals have been charged with wrongdoing.

Is this for real? Isn’t collusion supposed to be illegal? YES, it is.

We have what appears to be a major ring of banks engaged in a massive form of collusion, but no banks or individuals are charged? Do you think if the traders were charged they may be motivated to expose the treasurers and others within our central banking system (Federal Reserve and US Treasury) who were aware of this activity? You think?

Where are Ben Bernanke and Tim Geithner on this?

The benchmark interest rates at the center of the probe are used to price home and auto loans, corporate debt and derivatives totaling more than $350 trillion.

The Canadian court documents, which were reviewed by The Wall Street Journal, name several alleged participants of the scheme, which involved the yen London interbank offered rate, known as yen Libor, between 2007 and June 2010.

The documents said regulators also are looking at alleged attempts to fix the prices of certain derivative financial products linked to Libor.

Why haven’t we heard from individuals who were fired? The Wall Street code of silence clearly comes into play here. How does that work? When employees leave these large banks, they are typically compelled to sign a release in which they effectively agree to “shut up”. What is the result? No transparency and little public knowledge or accounting of what happens in situations such as these.

Anybody out there want to talk or leave a comment here?

What is that sound we hear?

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

Larry Doyle

  • British Bankers’ Association here. We need to make an important factual correction right away: the BBA does not set LIBOR. The LIBOR benchmarks are calculated daily from submissions made to Thomson Reuters: it publishes the benchmarks daily, along with all of the submissions from individual banks which are used to calculate it.

    • LD

      Thanks for highlighting that. Would think you may care to make the crowd at Investopedia aware of that as well.

      Visit often!

    • fred

      British Banker,

      Pardon my ignorance, certainly your not saying that Thomson Reuters (TR) sets the Libor Rate? Is there a formula that BBA has approved, that TR then uses to calculate and report?

      If so, I would think the formula is based upon the submissions of member banks?

      How then did ‘traders’ manipulated Libor, via an arcane arbitrage strategy utilizing the leverage of Yen carry and derivatives or via manipulation of reported member bank submission rates? I would think the formula for the Libor calculation would remain fixed, wouldn’t it?

  • Ben Wolf

    Interest rates in Britain and the U.S. can’t be manipulated without the passive approval of the Bank of England or the Federal Reserve. So the reason you hear crickets is because of . . . complicity!

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