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Libor Scandal Update: The Real Cost

Posted by Larry Doyle on October 26, 2012 10:27 AM |

How quickly the scandals seem to come and go.

With barely enough time to fully digest and appropriately process each and every financial racket, Wall Street, Washington, and our financial media move right along as if very little had happened in the first place. Do you disagree? The American taxpayer, consumers, and investors everywhere are getting taken to the cleaners. You don’t think so?

What have we seen in terms of meaningful justice and proper remuneration in the institutional scandals encompassing the following: 

auction-rate securities, mortgage originations and securitizations, high-frequency trading and the Flash Crash, the manipulation of Libor, and money laundering by major banks?

While the SEC, FINRA, and Department of Justice would like to promote the success of “bringing to justice” a pack of insider trading hedge fund whores, the institutional rackets seemingly get mediated with little more than “cost of doing business” parking violations. On this note, let’s check in with current developments in the manipulation of Libor. Our friends at the Project on Government Oversight highlight, Interest Rate Manipulation Puts Taxpayers at Risk:

The manipulation of a global interest rate called LIBOR could be costing U.S. taxpayers money, according to a new federal watchdog report.

Taxpayers “continue to be at risk” from government bailout programs’ reliance on the interest rate, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) said in a report released today.

In June, U.S. and British authorities charged Barclays Bank with attempting to manipulate the London Interbank Offered Rate (LIBOR), a benchmark that affects the cost of borrowing money throughout the world. Even though Barclays agreed to take remedial action, government officials still have questions about the reliability and integrity of the interest rate, according to the SIGTARP.

“Aside from the Barclays situation, market data raises questions about the integrity of LIBOR today,” a U.S. regulatory official testified last month.

Previous news reports have explored how alleged LIBOR manipulation could affect home, credit card, and car loans in the U.S. But LIBOR could also spell trouble for U.S. taxpayers who have an ongoing stake in the government’s bailout programs, the SIGTARP said.

There are two bailout programs—one managed by the Treasury Department, the other managed by Treasury and the Federal Reserve—that continue to rely on the LIBOR benchmark. These agencies have the authority to use a different benchmark, but they refuse to make the change, according to the SIGTARP.

Taxpayers are still owed more than $5 billion in outstanding debt from one of these programs, the Public-Private Investment Program, which may continue through 2017, the SIGTARP reported.

The SIGTARP did not provide specific examples of LIBOR manipulation leading to taxpayer losses, and concerns about future losses may be largely academic given that LIBOR is under intense regulatory scrutiny.

Nonetheless, the bailout watchdog urged Treasury and the Fed to use a different benchmark, rather than waiting for “global LIBOR reform.”

“For Treasury and the Federal Reserve to cling to the status quo of keeping in TARP a rate that is broken, unreliable, and subject to manipulation, is contrary to TARP’s historical goal of using unprecedented solutions to promote confidence in the financial system,” the SIGTARP said.

BINGO!! That final statement nails the real costs of this particular scandal involving Libor and the compilation of all the other incestuous scandalous activity we have witnessed over the last 5 years.

While the cronies over at Treasury and the Fed would like to baffle us with BS over the particulars of different programs under their purview, they miss the real point and the real cost of the Libor scandal.  Those are? What price for trust and confidence? What is the very real cost to our economy of a total lack of trust and confidence in the legal and regulatory system overseeing our markets and entire financial industry?

I will tell you the cost.


Navigate accordingly.

Related Sense on Cents Commentary/Libor Scandal (the full library consists of 22 cutting edge commentaries going back to July 2nd shortly after this scandal broke)

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.

  • LD

    An institutional scandal if not a total violation of the Racketeering Act?

    Nine more banks have received subpoenas in connection with a probe into alleged widespread interest-rate manipulation by banks, a person familiar with the investigation said.

    9 More Banks Subpoenaed Over Libor

  • coe

    From trillions of dollars in interest rate swaps to hundreds of billions in consumer linked debt – as well as to several trillion in the government programs you have mentioned in this article, LD – never has so much been tied to such an arcane index that has proved all too easy to manipulate…it reminds me of the early days of adjustable rate mortgages linked to the 11th district cost of funds – the what?!!!

    I have sat for mind numbing hours in the hallowed halls of bank Board meetings, regulatory reviews, stress tests, and have fully participated in an alphabet soup of ridiculously unfathomable acronyms – VAR/CCAR/FINRA/PPIP/MLE/SIV/QE i, II, III – where, I swear, most people involved had only a passing familiarity with the substance of what was being discussed – though the future of the free world hinged on every turn of phrase/every nuance…

    Why is anyone surprised at this stage? Human nature is what it is. Just because something is “too complex to understand” shouldn’t allow us to take a deep breath, hope it goes away, and move on.

    Does that mean my mom needs to have a degree in capital markets finance – please, let’s get real…but let’s also acknowledge that the impacts are wide reaching, but not at all isolated to LIBOR!

  • wallstreet69

    LIBOR is the cost at which these banks will lend to each other on an unsecured basis for X time period. Pre-crisis, these banks lent based on their own creditworthiness. Post-crisis, all these TBTF fails rely on the creditworthiness of their respective governments. Low LIBOR makes sense until everyone realizes these governments have no credibility. Jimmy telling Tony to set the level low in order to pick off a hedge fund…yes, fraud. Don’t you love it when they said “the government made a profit off TARP?” As those same reporters, “what would one charge as a premium to backstop the entire financial system?” Ofcourse, you would first need to find a willing and “credible” insurer. The taxpayers received no where near a “market” price for their services provided. Management should’ve been thrown out, equity holders wiped out, debt holders haircut!! Instead, we pay for this poor decision for the years to come.

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