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Libor Scandal: This is Racketeering, Folks!!

Posted by Larry Doyle on December 10, 2012 9:00 AM |

If it looks like a racket, and smells like a racket, and feels like a racket, it is probably a racket.

Those involved in the Libor scandal either directly or on the periphery certainly have little interest in this scandal being defined as a racket and thus subject to the RICO Act. Yet if we are going to have a degree of integrity in defining just what the hell goes on in our financial markets, then we had better hold the bar at the appropriate level if we ever care to root out the cronyism that is eroding our public interest.

The key point there being whether those charged with regulating our markets are truly willing and able to do just that. What is racketeering

Racketeering is the federal crime of conspiring to organize to commit crimes, especially on an ongoing basis as part of an organized crime operation.

The Racketeering Influenced and Corrupt Organizations Act (RICO) is a federal law allowing the federal government to place in trusteeship organizations which are convicted of being dominated by racketeers or organized crime.

A person injured as a result of a RICO violation can recover treble damages and reasonable attorneys’ fees. In order to prove a RICO violation, the person must be able to show that he or she was injured by a person associated with an “enterprise” that has been engaging in a “pattern of racketeering,” which consists of at least two “predicate acts” during a ten-year period. The list of “predicate acts” includes securities fraud, mail fraud and wire fraud but does not include commodity fraud.

What have we learned about the Libor scandal? As laid out in today’s Financial Times, Compound Interest: The Global Rate-Rigging Probe,

Adding to the complexity is the fact that investigations into rate manipulation focus on two distinct types of abuse. First was the practice by banks of lowballing – submitting artificially low rates – their daily rate submissions to paint a rosier picture of their financial health and mask difficulties at the height of the financial crisis.

Regulators, legislators, and senior bank executives would certainly like to keep the focus strictly on this aspect of the scandal given that the rate-rigging could be defined as merely another tool utilized to save the entire financial system. But the racketeering began far earlier than the crisis.

Then there are the alleged abuses by traders – requesting that submissions be either high or low – with the objective of personal gain.

Interviews with bankers, settlement documents and court filings indicate that some traders were influential enough – and connected enough – to reach out to contacts across the sector and ask for favours.

Capitalising on relationships formed as they moved from bank to bank in the course of their careers, they had personal access to a wider network of colleagues and could tap into their know how to organise rate-rigging between institutions.

Savor that. “Organize rate-rigging between institutions.” That is racketeering right there, folks!!

According to the FSA’s 44-page settlement notice to Barclays, there were multiple instances of traders at other banks asking their Barclays counterparts to change the submissions that were used to compile the benchmark rate.

Now-infamous email exchanges made public by the FSA also establish a picture of a clubby world where tips on rate-setting and manipulation could be rewarded with bottles of champagne.

Any settlement involving UBS could also shine a light on another potential network of traders. The Canadian Competition Bureau has alleged that a small group of traders attempted to rig the yen Libor rate.

And while UBS is not identified in those filings, those with knowledge of the case say it is the institution that provided information about the alleged attempted manipulation, which involved employees at banks including HSBC, Deutsche Bank, RBS, JPMorgan Chase and Citi. UBS and other banks named in the case declined to comment.

Yet such a scenario could prove virtually impossible to map completely. One senior regulator recently alluded to the difficulty of this intra-bank aspect of the investigation, stating simply that the practice of rate manipulation was “pervasive”.

The FSA found that at Barclays there were at least 173 trader requests to influence US dollar Libor submissions between January 2005 and May 2009, a period which coincided with the bank beefing up its swaps desk in New York and its presence in US derivatives.

While the banks and the regulators are more than willing to target individual traders involved in this scandal, the real focus should be on the executives involved in running the divisions for a failure to supervise. Beyond that, the executives should be subject to aiding and abetting a fraud.

I feel strongly that the Libor scandal is the single largest financial fraud ever perpetrated. As such, it deserves to be the single largest investigation with the greatest degree of integrity and transparency. I personally believe a fully independent investigator should be appointed given the lack of confidence in those running our primary financial regulatory agencies.

If the Libor scandal looks like a racket —and it does —, and smells like a racket —and it does —, and feels like a racket —and it does —, then it is probably a racket and should be pursued as such. To not do so merely allows those at the top of the banks involved the further comfort in knowing that they own the financial regulatory system. The costs of that reality are immeasurable.

Navigate accordingly.

If you agree, let’s send a message to Wall Street, Washington, and all the state AGs as to how we feel and spread this commentary as far and wide as possible.

Related Sense on Cents Commentary
Libor Scandal (a nice library of 26 separate commentaries)

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

    Adding further fuel to the racketeering fire,

    The scandal over banks’ attempted manipulation of interest rates has mostly centered on the London interbank offered rate. But Libor’s lesser known cousin, the euro interbank offered rate, or Euribor, is facing mounting attacks.

    The European Union is expected soon to accuse multiple banks of attempted collusion in the setting of Euribor, according to people briefed on the probe.

    Banking Industry Squirms Over European Rate Probe

  • Peter Scannell

    But LD, they’re not gangsters – they’re banksters.

    • LD

      Haha…although not so funny for the many millions of people adversely impacted.

      Recall that the very definition of racketeering includes,

      The list of “predicate acts” includes securities fraud,

      • Peter Scannell

        LD, what don’t you get? How could we possibly charge well heeled banksters with such evil – who would fill the coffers of Congress?

        • LD

          Good point!!

          • John B. Egan

            ….or become the next Secretary of the Treasury. It’s where they all come from.. Keep hearing Jamie Dimond mentioned. Probably the biggest Govt supported crook in the financial business.

  • fred

    LD,

    I smell yet another relatively small, “neither confirm nor deny”, settlement between Wall St and Main St brokered by “our friends” in Washington.

    As it relates to LIBOR, one of the big gorillas in the room is the MBS market. Assume rate manipulation occurred and the majority of the manipulation resulted in understated LIBOR.

    1) How did/does this manipulation ripple through the mortgage market, 2)who assumes the understated risk and 2)who is adversely affected?

    3)Is the MBS market fully functioning now (Jeff Gundlach seems to be pretty active, who’s on the other side of his trade)?

    4)Is the Fed destined to become the “bad bank” if it does QE3 and transacts MBS onto its balance sheet at par?

    • LD

      Fred,

      There are conflicting forces at work here. On one hand, Wall Street firms would be incentivized to keep Libor artificially low on those dates when large swaps transactions were to be reset. Given that the street was more often paying on these swaps they would want to keep the rate low so that the receivers would not earn as much interest.

      However in regard to mortgages, the banks would be incentivized to keep the rate artificially high on those dates when a large volume of ARMs (adjustable rate mortgages) were scheduled to reset so that the people paying the mortgages would pay more than would have otherwise occurred.

      It is a function of knowing the entire exposure of an institution and jockeying the rate accordingly. To gain an understanding of the firm’s entire exposure there would likely have to be strong links and communication between those on the derivatives desks and those within the treasury operation of the bank. Understanding the full exposure and the timing of the changes would be critical in order to manipulate the rate.

      Sound, feel, smell, and look like a racket?

      The MBS market overall remains dominated by the Fed and Freddie and Fannie. Gundlach is most likely playing in the residual bonds that remain from the Jumbo space that were issued back in the middle part of last decade. That is just a guess on my part.

      Freddie and Fannie remain a conduit for recapitalizing the banks balance sheets. The Fed is taking inordinate risk in this space and will be left holding the bag when rates ratchet higher.

  • fred

    I assume ABS markets and bank internal incentives were aligned in a similar manner to what you described above.

    With over $800 trillion in LIBOR linked securities globally, the fallout/implications is/are potentially huge!

    • Peter Scannell

      Too “Big To Charge With Racketeering.”

    • LD

      Fred,

      Yes, HUGE as in BIGGER than BIG!! With over $800 trillion in Libor-linked securities and transactions, this is why I call it the largest financial fraud in the history of Wall Street. Not sure there is a close second.

      Yet the scandal itself gets nowhere close to the attention it deserves in the press nor the courts. No surprise that the banks knew they could run roughshod over the regulators elsewhere given that they had manipulated this market for likely the last two decades.

  • GMA

    “While the banks and the regulators are more than willing to target individual traders involved in this scandal, the real focus should be on the executives involved in running the divisions for a failure to supervise. Beyond that, the executives should be subject to aiding and abetting a fraud”.
    I highly doubt we will ever see that happen, Larry, but I am grateful to you for your efforts to shed some light on the “backstory” here. Hmmm…really makes me feel good about seeing my federal income taxes go up…so I can keep supporting the regulators who don’t do their jobs and the “banksters” who believe they can play by their own rules…to the detriment of the rest of us. Thanks, again, for your efforts to make them accountable.






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