The libor scandal is particularly bad, even though not a lot of actual $ gains/losses involved, in that it happened after the financial crisis when there was at least some hope that the surviving major banks had, in general, cleaned up their act. And also at least some hope that the crisis was a wake up call to bank regulators and supervisors.

It’s not that hard to spot. For example, relatively wide libor basis swaps indicate markets are discounting libor settings being away from actual deposit rates by more than typical bid/offered spreads.

Banks Face $6 Billion of Libor Litigation, Morgan Stanley estimates

July 12 (Bloomberg) — Banks being probed for attempting to rig benchmark interest rates could face $6 billion of related litigation costs, analysts at Morgan Stanley estimated. The 16 banks may also lose 4 percent to 13 percent in 2012 earnings per share from regulatory fines on a base case scenario, Morgan Stanley analysts led by Betsy Graseck wrote in a note to investors today. They may also suffer from tighter scrutiny from regulators in response to the Libor investigations, the analysts said.

31 Responses

  1. $6 Billion seems like a real low ball estimate to me. Hey, maybe I can jump on a class action suit because I have a home equity loan indexed to 1-month LIBOR. In any event, the CDS market has been screaming about the problem with LIBOR since 2008.

    10/06/11 Low LIBOR doesn’t reflect true cost of borrowing: Rombach….

  2. A bit of a strange take on the LIBOR manipulation Warren, given that it was going on long before the financial crisis hit, and after the financial crisis began, it was obvious to everybody that the rate was being manipulated lower, something no doubt that was being encouraged by the Fed and other regulators.

    By the way Ed, you almost certainly benefited from the LIBOR manipulation since mid-2007. Lenders/investors are the ones who lost out.

  3. Here is eliot spitzer and matt taibbi, our “policemen” can spy on spitzer and find out he pays 5K an hour for no condom sex with hookers (see that SMEAR team probably studied with the guys that did the D Strass Khan smear), but our 350 million citizens can’t put enough pressure on a few corrupt government regulator types to keep integrity in the monetary system.

    The lawyer in this interview says what citigroup chairman reed says, the crooks are still in charge, heck seems like they are getting MORE powerful to me, they just blatantly give the finger to everyone in public now, why even try to hide it! Also mentioned in the interview, the UK has a political party that is able to challenge the evil corrupt banksters who have bought off the other parties, but in the USA, we are not able to get a political effort together to challenge the 2 corrupted parties we have, why can’t we do that? Why can’t we get a successful third party – a LABOR party and many other nations can?

    According to the info below, team USA is the ONLY cited developed economy without near full employment, but we can’t get a labor party political unit together. Pathetic, sheeple get the govt they deserve.
    Nearly full employment in all the cited developed economies except the US shows that the deflationary environment of the recent months is only temporary.

  4. How can there be maipulation given that they throw out top and bottom quartiles when setting rate…additionally look at the extremely tight correlation (99.6%) between libor and fed funds over past 10 years (see pragmatic cap sight).

    1. @FIN,

      Half a basis point can be a very big deal on a $100 Billion book of interest rate swaps. When I was a derivatives analyst for Thomson Reuters I used to conduct a daily survey of swap dealers to obtain quotes for swap spreads. Most of the big banks were contributors and they also used the output to mark the positions to market. It occurred to me how easy it would be for a corrupt swap dealer to collaborate with a corrupt analyst to fade the quote a quarter or half a BP or even a full 1bp for a kick back of some kind.

    2. @FIN, Fin watch the matt taibbi interview above and then go read his article, he is FREAKING OUT that more people are not OUTRAGED how many banks must be complicit in this corruption, YOU are the PERFECT example of what he is talking about, people just can’t BELIEVE the corruption spreads to all 16 banks or a majority of them, people don’t want to BELIEVE it, how can it all be so ROTTEN to the core? Fin, who said that famous quote about a successful banker doesn’t stand out, but makes sure him and all his peers are ruined equally, when was it said? Open your eyes dude! Hickey says it was over since eisenhower warned about the MIC, Erickson points out new stuff everyday about peers in DC, Rombach telling you stuff now, You are a freaking sheep getting sheered sucker!

    3. @FIN,

      The answer to your question FIN is that if you are a bank that manipulated your way out of the index by being too low, that means another bank which was low (perhaps for legitimate reasons) is left in the index when it wouldn’t have been absent manipulation. This point is lost on Matt Taibbi et al. They are wrong to infer that all 16 banks must have been in on the manipulation. Even if they were, it’s extremely unlikely they would all want to go the same way on the manipulation.

      One other point which seems to be completely lost in the discussion. The rates submitted to the BBA by the banks is not the rate that they would charge another bank to borrow funds. It is the rate which they think they would be charged. This is a much more hand wavy number, and it gives the banks some leeway. After all, if they’re not actually in the market doing LIBOR trades at the moment the rates are submitted, they can’t really be sure where they would be able to negotiate a term borrow.

      1. @ESM, ESM, from what I read, Taibbi did say the bankers went high and low, it was not always in 1 direction, but the majority are complicit, what specifics can you give that he is so wrong? From brooksley borne to citigroup chairman reed, there seem to be a lot of people with big credentials saying there is massive corruption all over the place and now Warren seems to be on board, what did keynes say?

        “A sound banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him”.
        – John Maynard Keynes

      2. @Save America,

        “what specifics can you give that he is so wrong?”

        Normally I don’t watch Current because I don’t get channel 1,000,000 (Jimmy Fallon’s joke, but it’s funny), but I did listen to the video you linked to. Matt Taibbi said quite clearly that because the BBA polls 16 banks and the 4 highest and 4 lowest are thrown out, it must be the case that all more than 4 of them are in on the scam because otherwise it wouldn’t work. That’s a logically incorrect statement.

        I didn’t claim that it wasn’t true that all 16 banks were in on the manipulation (although I doubt it). I only claimed that it was wrong to infer it from the information at hand.

  5. If you were to work at a state lottery and game the lottery buy taking a penny of each lottery sale in collusion with other employees, then you would be locked up for life. In Texas you would probably be executed.

    Why are these bankers not locked up for life? why is there not immediate arrests? why does the public seems to accept massive banker fraud and crimes as if it were ok?

    Election 2012, only vote for independent candidates the promise to arrest and then execute banking criminals. LIBOR manipulation is the greatest crime of the last 200 years, terrorism, water board these aholes at Gitmo.

    1. @Alexia,

      “Why are these bankers not locked up for life? why is there not immediate arrests?”

      The reason is that the law is actually quite ambiguous in many areas of finance, and there is often plausible deniability by wrongdoers. Remember, a successful criminal prosecution requires proof beyond reasonable doubt. It is not easy to do in cases like this. I’m not even sure if there is any clear law against rounding up or down LIBOR poll submissions by 1 bp. And even if there is, is it criminal to ask somebody else to do it, or to hint that he should do it, or to simply explain the current exposure of the firm to the setting? The answers to such questions are not obvious.

      I think most people are very wrong about one thing. Federal and state prosecutors would love, absolutely love to pin something on some Wall Street fat cat. The fact that they haven’t done it yet is that it’s hard to do, not that they’re looking the other way.

      “LIBOR manipulation is the greatest crime of the last 200 years …”

      Not a history buff, huh?

  6. “Federal and state prosecutors would love, absolutely love to pin something on some Wall Street fat cat. The fact that they haven’t done it yet is that it’s hard to do, not that they’re looking the other way.”

    They don’t exactly seem to tripping over themselves to go after Jon Corzine.

    1. @Ed Rombach,


      Although to be fair (even though I hate the guy with the heat of a thousand suns), it’s starting to look like he didn’t actually do anything illegal. Unethical? Oh yeah.

      1. @ESM,

        Levander, a partner at the law firm Dechert LLP, is one of the biggest names in the defense bar in the United States. He is currently also representing former New Jersey governor Jon Corzine in investigations into the collapse of the failed commodities brokerage he ran, MF Global.

        Levander, who is known for his trademark bow ties, had a prime seat by Corzine when the former CEO was grilled multiple times at congressional hearings in Washington late last year.

        He has also represented outside directors of Lehman Brothers Holdings Inc, former Merrill Lynch CEO John Thain and hedge-fund manager and philanthropist Ezra Merkin, who was sued over money lost in the Ponzi scheme run by Bernard Madoff.

  7. Why are American loans and mortgages pegged to LIBOR anyway? Isn’t it an entirely European basket of banks, or am I off the wall? Don’t we have the equivalent here?

    1. @MRW,

      Warren’s said exactly that multiple times in this blog. US banks referencing LIBOR distracts from & constrains US markets and policy. It’s simply in the way of better/faster/leaner domestic operations.

      1. @roger erickson,

        I probably read it here and don’t remember. I’m no economic whizzbang; I’m here to learn. But what shocks me is that I don’t hear this complaint in the press from the Love ‘Em or Leave “em crowd with the teabags in their hair. I remember reacting viscerally a few years ago when I was told my mortgage rate would depend on the LIBOR rate. When I asked Why London? I was told that’s just the way it is. It didn’t make jurisdictional sense to me.

  8. I guess I’ll just rob a bank for $10 million this afternoon, a drop in the bucket compared to the “not too much money” involved in the LIBOR fraud.

    It is not just bad it is criminal fraud and these CEOs need to be in jail. Period.

    Our justice system is 100% broken giving criminal bankers a pass on criminal activity as if they are above the law.

  9. Open and shut case if our governments actually wanted to enforce the laws. In Texas people without wealth are put away for life on a daily bases for crimes that pale in comparison to the LIBOR fraud.

    Fraud = A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

    Fraud is most common in the buying or selling of property, including real estate, Personal Property, and intangible property, such as stocks, bonds, and copyrights. State and federal statutes criminalize fraud, but not all cases rise to the level of criminality. Prosecutors have discretion in determining which cases to pursue. Victims may also seek redress in civil court.

    Fraud must be proved by showing that the defendant’s actions involved five separate elements: (1) a false statement of a material fact,(2) knowledge on the part of the defendant that the statement is untrue, (3) intent on the part of the defendant to deceive the alleged victim, (4) justifiable reliance by the alleged victim on the statement, and (5) injury to the alleged victim as a result.

    Open and shut case, lock them up, execution is preferred.

  10. Warren do you agree with Rickards that if Dimon is too stupid to understand volatility and risk and be fooled by his underlings he should quit?

    Maria: what about the in fact he said they were hiding the extent of the losses and the risk they were taking on.

    Rickards: it should not be possible. if you understand any of it you can ask hard questions. ask what’s the long, short, the measure of volatility of the trade, how much you lose on every basis point if the spread widens.

    James Rickards is FUMING that dimon can say he doesn’t understand RISK and too stupid to see the tricks his employees pulled on him, yet remain in charge.

    I remember a talk by Icahn a few years ago, he said China was doing a peter principle on the entire western system, that idiots were being pushed to the top of many companies and government positions. This would make thier economic takeover of us in a couple decades much easier 😉

    1. @Save America, And this from rickards twitter on the guy that was debating him:

      A Skupp‏@ASkupp

      @JamesGRickards Yale bio of Sonnenfeld says: “His clients have included JPMorgan Chase”. So his performance/rant today was objective?

      Retweeted by Jim Rickards

      LOL! Professor Delong always asks WHY OH WHY can’t we have a better press corps? Can’t CNBC get someone who maybe isn’t so biased?

  11. Warren – “relatively wide libor basis swaps indicate markets are discounting libor settings being away from actual deposit rates by more than typical bid/offered spreads”

    What kind of basis swaps would show this – are you talking about 1mo3mo basis?

    1. check out the yen/dollar basis that’s been pushing 100 in the forward markets.
      that can only happen in spot markets if the deposits rates don’t match the libor settings

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