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Libor Scandal: Trader Highlights Manipulation in 1991

Posted by Larry Doyle on July 27, 2012 10:03 AM |

When did the scandalous manipulation of the London Interbank Overnight Rate, that is Libor, really begin?

I have posed that question often over the course of the last month. E-mails emanating from Barclays point to manipulation of Libor back in 2005.

The industry and regulators would clearly like to keep the focus of this scandal to the crisis period of 2008. Why is that? The excuse of, “We were trying to save the system” would seem to provide a very wide cover for all parties involved. But, again I ask, when did it really begin? 

Is there any reason why we should believe the manipulation of this rate only began in 2005? No reason whatsoever. Could it have begun in 2003? 2001? 1998? 1995? Well, how about 1991? Why not 1991? Yes, 1991. Really? Yep, the year 1991, a full 21 years ago.

The Financial Times provides a bombshell today indicating that there was manipulation of Libor back when the Dow crossed 3,000 for the first time and Jody Reed was playing shortstop for the Boston Red Sox. You remember Jody, right? 1991 is a long time ago. If  the manipulation was ongoing back then, it only goes to show just how long our financial regulators have been in the tank. Let’s navigate as former Morgan Stanley trader Douglas Keenan writes in the FT, My Thwarted Attempt to Tell of Libor Shenanigans:

In 1991, I had live trading screens that showed the Libor rates. In September of that year, on the third Wednesday, at 11 o’clock, I watched those screens to see where the futures contract should settle. Shortly afterwards, Liffe announced the contract settlement rate. Its rate was different from what had been shown on my screens, by a few hundredths of a per cent.

As a result, I lost money. The amount was insignificant for me, but I believed that I had been defrauded and I complained to Liffe. Liffe explained that the settlement rate was not determined by what rates were actually in the market. Instead, the British Banker’s Association polled banks, asking them what the rates were. The highest and lowest quoted rates were discarded and the rest were averaged, giving the settlement rate. Liffe explained that, in doing this, they were adhering to the terms of the contract.

I talked with some of my more experienced colleagues about this. They told me banks misreported the Libor rates in a way that would generally bring them profits. I had been unaware of that, as I was relatively new to financial trading. My naivety seemed to be humorous to my colleagues.

Simply put, then, it seems the misreporting of Libor rates may have been common practice since at least 1991. Although the difference between the reported rate and the actual rate might seem small, the total amount of money involved is material, given that Libor rates affect contracts worth hundreds of trillions. Also important is what such misreporting says about the culture of finance.

During 1991, at the London office of Morgan Stanley, the head of interest rate trading was a person who has been at the centre of the current scandal: Bob Diamond. I do not recall discussing Libor misreporting with Mr Diamond but since the misreporting was common knowledge among traders, I presume he was aware. (That, however, is not a criticism of Mr Diamond: what could he have done about this?)

There have been two distinct motivations for banks to misreport Libor rates. One motivation is discussed above: to directly increase profits. The other motivation arose during the 2008 financial crisis: to mask liquidity problems.

Libor misreporting has been going on for decades. Why have investigations only recently begun? It seems highly implausible that all the investigating agencies could have been unaware for decades. Indeed, the regulators have a reputation among traders of being like Potemkin villages. I suspect what has happened is that, after the financial crises of 2008, the agencies decided they ought to perform more of their stated duties. That would also explain why the investigations appear to be ignoring any misreporting in years before 2005: to cover up the illusoriness of their earlier work.

One of the investigations is being undertaken by the House of Commons Treasury Committee. I telephoned the Committee on July 3 and spoke with a Committee specialist. I told the specialist about the foregoing and said that I was willing to testify under oath. The specialist seemed extremely interested. They said they were to have a meeting about the Libor scandal and would call me back afterwards. I did not hear back, however, so I telephoned to ask what was happening. My testimony was not wanted, the specialist told me.

Major props to Mr. Keenan for having the courage and character to speak his mind. His words speak volumes and only one other thing need be said. Can you say, “racket?”

Related Sense on Cents Commentary
Barclays Libor Scandal: Naming Names
Barclays Libor Scandal: Wake Up, America!!
Barclays Libor Scandal: The Complicit Regulators
Barclays Libor Scandal: The Precedent
Barclays Libor Scandal: Holding Regulators to Account
Barclays Libor Scandal: “Diamond Lied”
Barclays Libor Scandal: Who’s Really to Blame? 
Barclays Libor Scandal: When Did Manipulation Start?
Barclays Libor Scandal: How Big Will This Get?
Barclays Libor Scandal: Reports Regulators Knew; Time for Independent Investigation and Eliot Spitzer
Barclays Libor “Price Fixing”: Collusion Is Illegal. . .
Barclays Libor Scandal: Prison Will Remedy

Larry Doyle

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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 so that investor confidence and investor protection can be achieved.

  • fred

    Mr Keenan has provided clear evidence that the LIBOR scandal predates 2005, however, I do not agree with his assessment that the reason for the recent regulatory scrutiny is a result of regulators deciding to perform more of their duties, (Yah Right!).

    Instead a better explanation may be found within the information about UBS that has come out after the scandal came public.

    1. A major fund raiser for Obama on Wall St, Mr Robert Wolf, a powerful exec for UBS, recently resigned under pressure.

    2. The UBS board wants to change direction away from trading as a major profit driver back toward a more traditional banking business model with an “Englishman” as CEO.

    I also find it interesting that Mr. Diamond, later to ascend to CEO of UBS, was the head of interest rate trading back in 1991 at the London office of Morgan Stanley.

    LD, two questions, 1) Just how much profit did LIBOR manipulation generate for UBS? 2) Is/was there a similar opportunity for ‘unfair’ profit for primary dealers within the Treasury auction mechanism?

    My personal opinion is that the incestuous relationship between Washington and Wall St was/is symbiotic, Washington wanted/needed ways to influence/manipulate markets, “to save the world”. The ends justify the means, right. It probably began as far back as the S&L crisis, the Latin American debt crisis, or LTCM.






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