Explainer: Why The LIBOR Scandal Is A Bigger Deal Than JPMorgan - WaPo

[WillyT]

Explainer: Why the LIBOR scandal is a bigger deal than JPMorgan
Posted by Dylan Matthews - WaPo
July 5, 2012 at 11:10 am

<snip>

Last week, Barclay’s admitted to rigging the London InterBank Offered Rate (LIBOR) and agreed to pay U.S. and British regulators $450 million dollars in penalties to settle the case. Then the heads began to roll: On Tuesday, its CEO, Bob Diamond, and COO Jerry del Missier resigned, and yesterday Diamond told a British parliamentary inquiry that regulators in Washington and London alike were complicit in his manipulations.

This is a big deal. Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay’s making money by hurting you.

In the simplest terms, LIBOR is the average interest rate which banks in London are charging each other for borrowing. It’s calculated by Thomson Reuters — the parent company of the Reuters news agency — for the British Banking Association (BBA), a trade association of banks and financial services companies. The actual process of determining the rates is dead simple, and in fact conducted by only two people. Donald MacKenzie, a sociology professor at the University of Edinburgh, described the process in the London Review of Books:

The calculation of Libor is coordinated by just two people, who work in an unremarkable open-plan office in London’s Docklands. I watched the process, which seemed utterly routine, a couple of years ago. Just after 11 a.m. on every weekday that’s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn’t sent in its estimates, and if the latter seem implausible – typos, for example, are fairly common – they’re checked, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? … Bit of a spread on the two month. Everyone else is coming in a good bit under that.’

A simple computer program discards the lowest quarter and highest quarter of the estimates, and calculates the average of the remainder. The result is that day’s Libor. The calculation is repeated for each of ten currencies and 15 loan durations (from overnight to 12 months), so 150 Libors are published daily: overnight sterling Libor, one-week euro Libor, one-month yen Libor, three-month US dollar Libor and so on.

So why does everyone care about a handful of numbers that a couple guys in an office crunch every day before lunch? The simple answer is that $360 trillion in assets worldwide are indexed to LIBOR, and much of those assets are consumer debt instruments like mortgages, car loans and credit card loans.

<snip>

More: http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/07/05/explainer-why-the-libor-scandal-is-a-bigger-deal-than-jpmorgan/

[Sherman A1]

1. Thanks for Posting

hopefully there will be prosecutions & stringent (I would prefer draconian) regulations going forward.

[malaise]

2. This is huge

and the links to Willard (ex-CEO Bob Diamond was supposed to be hosting his London fund-raiser) are simply delish!!

[WillyT]

3. I Thought So Too...

And think about that for a moment... a London Fund-Raiser.

Why would the British be donating to an American Presidential Election?

[malaise]

4. Don't forget that the Olympics are a gathering of the 1% to

cheer on the athletes (most of whom are from the 99%) and to plot about trade and commerce and how to make the 1% richer..

[muriel_volestrangler]

19. Diamond is American

as are many bankers in London (the Barclays COO who also resigned was Canadian, not American; it's an international circuit, with most spending part of their careers in different countries).

[turtlerescue1]

5. WOW, just listened to Thom Hartmann on this

HOW do they come up with so many ways to screw the 99%? And what are the odds this won't disappear before truth finds a way to appear?

GROAN!!

[banned from Kos]

6. JP Morgan did nothing illegal. Unseemly? Maybe.

But Barclay's could be huge and illegal. Was Barclay's cashing out interest rate swaps while LIBOR was manipulated?

Look at how the two respond. Dimon of JPM was contrite but confident and its all blown over.

Diamond of Barclay's quit and is circling the wagons around him.

[Lucky Luciano]

14. Of course they were cashing in through interest rate swaps.

Barclays is really remarkable because the setters even did favors for traders outside the firm! Unreal. The setters are not even paid all that much - but it shows that they wanted to help out a few big swingers hoping they could make friends with someone that could help them down the line.

The emails made it look like the people did not even realize this was a big deal - if it was run of the mill insider trading of stocks, they never would have been so open in the emails.

[riderinthestorm]

7. Really important read. A LOT of important info DUers should know K&R nt

[freshwest]

8. DOH!

[AnotherMcIntosh]

9. The individuals resigned -- and kept all their money. The only penalties were paid by LIBOR.

[Overseas]

10. K&R. Shocking.

[MannyGoldstein]

11. The complete list of people who'll be prosecuted for this:

[this space intentionally left blank]

[OnyxCollie]

12. K&R. nt

[OnyxCollie]

13. We shouldn't begrudge their wealth.

Or some such bullshit.

[byoung6]

15. This reminds me...

Of a place I worked that employed over 8k mostly part-time workers in over nite shipping. Every week the supervisors would tell the leads which time clocks not to use in which buildings because every week a few clocks were set to short the workers 5-10 min. Now, you might say whats 5-10 min? But multiply that by lets say you capture say half of those 8k workers for 5-10 min....see? And due to the nature of the work people were moving from job to job, building to building all nite long. Now thats a luctrative! Anyway, thats what this libor scandal reminds me of, colluding to make millions and billions a few dollars at a time from millions of people, who's the wiser unless ya get caught, thats why everything feels rigged against a working person.
This scandal if actually investigated and the truth is allowed out is gonna be huge on both sides of the pond, and btw, anybody who watched the c-span british investigation notiice that Barclay's is in trouble for this from as far back as 2007!

[Odin2005]

16. This horrifies me.

[just1voice]

17. Imagine if the American people got refunded the difference between rigged rates and

the rates of return we should have been getting on our checking, saving and investment accounts. Too bad the banks are "too big to convict".

[JohnyCanuck]

18. It's not just the bankers; it's the disfunctional monetary system that is at the root of the problem

Another week, another banking scandal. If you’ve seen the papers you’ll have seen Barclays boss Bob Diamond falling on his sword and professing his love for Barclays, the bank at the centre of a scandal about manipulating interest rates. Politicians have been expressing their moral indignation that a bank – a bank, of all things! – could do something that wasn’t entirely in the public interest. And yet, for the fifth year since the banking crisis started, the media once again managed to cough up a million words of analysis whilst completely and utterly missing the point.

So what if Barclays manipulated Libor, the interest rate statistics that influences how much interest people pay on millions of mortgages, loans and other financial contracts? We’ve given the banking sector a monopoloy on creating the nation’s money supply, in the form of those numbers that appear in your account. Rather than getting angry that we’ve been slightly overcharged for the privilege of borrowing this money from them, maybe we should be getting angry that we’ve been put in a position where we are – collectively – forced into a position of debt to the banking system.

We have to stay focused on what the real problem in banking is. We need to tackle the creation of money, by private profit seeking-banks, for their own short-term interest. A system like this will never work well for society or ordinary people.

http://us1.campaign-archive2.com/?u=7396d6c5dc44c9d3b64d8265c&id=d0eefa18fc&e=2a0c5d0036

[riderinthestorm]

20. I am so tired I'm not sure where this is in GD (has it fallen off the page?)

But an evening K&R nonetheless - a really excellent article that deserves more views...

[WillyT]

21. Everybody Is Tired Man... A Lot To Keep Up With...

And thanks for the

[upi402]

22. like sipping from a firehose

for decades on end

good thing we can vote the bums out here in the land of the free!


kick

[WillyT]

23. Word !!!

[riderinthestorm]

24. LOL! I went right to "My posts" without looking at the current front pages

and remembered this OP. A most excellent piece that deserved more views... (sorry, I'm just a bit punchy).