This is unbelievable, shocking stuff. A sizable chunk of the world’s adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions. The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money. – Matt Taibbi
Lord Adair Turner, chairman of the Financial Services Authority, the UK regulator, said in a speech on Tuesday that the “culture of cynical entitlement” shown in the Libor scandal had “justifiably shocked and angered people.” He warned that such behavior was not limited to this part of the industry.
“Too much of what is described in the investment banking world as “creative” or “innovative”, is not creative or innovative on behalf of the real economy, but devoted to tax structures which simply shift money from the generality of taxpayers to the financial sector, to regulatory arbitrage which seeks to gain an improved regulatory treatment of unchanged economic substance, or to accounting devices which attempt to put a favourable gloss on the underlying situation of firms or their clients, for instance understating a country’s true level of debt,” he added.
Meanwhile, some are already circling the wagons to protect the international banking mafia.
Read Yves Smith, the best analysis on the Libor scandal I’ve read so far.
What is “LIBOR”? Compliments of a transcript from a CNBC video:
-you might have heard the term libor when people are quoting interest rates or they’re saying, hey, i’m gonna lend you money a few percentage points above libor. you’ll hear libor quoted on some of the financial news channels, and what it is is just an average of the interest rates that banks are lending to each other and it’s calculated by the british bankers’ association. it’s actually calculated by thomson reuters for the british bankers’ association, but it’s there to kind of provide a benchmark for other types of securities and financial transactions, and it literally stands for the london interbank offer rate, so it’s the– in london, it’s the– it’s the rate, the offer rate between banks. it’s the london interbank offer rate, and to understand that a little bit better, we– i’ve set up 2 banks over here. i have bank a and bank b, and you might already know that when you go and deposit your money in banks, the bank won’t leave all that money around. the way it makes money is it lends a good bit of that money to other people, as loans, and it will keep just enough cash on hand that if things, well, you know, if people actually were to come and ask for their money from their checking account, we have enough on hand, but you could imagine, every now and then a bank might get low on cash, or it might get close to kind of the reserve requirements that the central bank in that country requires a bank to have on hand, so in the– those situations, say, bank a is getting to that– that situation, it says, let me go borrow some money. let me go borrow money from an int– from another bank, so this is interbank borrowing. bank b over here, they’re flush with cash, and they say, well, we don’t like to keep so much cash around, we wanna lend it so we can actually get interest. we get no interest on cash, so maybe bank b lends money to bank a. so, maybe they lend this much cash, so that’s the new cash that bank a got, right over there, the new cash, and, of course, it is a loan, so this is a new loan to offset it. remember, assets are equal to liabilities plus equity so now the liabilities is this whole thing over here. so this is loan from– from b for this cash so they have a little bit better of a cushion, and now b, their loans have increased and their cash has decreased, so this is a loan– loan to a right now. they took this cash and they gave it to bank a. and, that rate that they lent it at, maybe it was at 1%, maybe it’s a 1% annual rate, and of course this will be renewed everyday so it’s an overnight rate. this rate is an interbank rate, so what they do in– it’s on behalf of the british bankers’ association, is they go survey a bunch of banks in london, 8, 12, 16 banks, in london. they say, hey, what was the rate at which you all transacted? and then they will quote that and they’ll quote that as the overnight libor so they’ll quote it and say, hey, maybe it was 1.2% across all of the banks that we surveyed. and what’s interesting about the libor is it’s done in 10 currencies. it’s not just in– in the sterling or the dollar or the yen, it’s in 10 currencies and that’s what really differentiates it, well, amongst other things but what really differentiates it from the– from the effective federal funds rate, which is another interbank borrowing rate but that’s in the united states and that’s more revolving around policy concerns ’cause the federal– the federal bank actually tries to change it.