The scandal over global interest rates has state officials like Janet Cowell of North Carolina working intensely behind the scenes to build a case for suing the nation’s largest banks. Ms. Cowell, the state’s elected treasurer, and several of her staff members have spent the summer combing through the state’s investments trying to determine how much the state may have lost because of suspected manipulation of the London interbank offered rate, or Libor, which is used as a benchmark for trillions of dollars of financial contracts around the world.
“We think this could be as big as the mortgage crisis settlement, that this could be a really high impact situation and that we should be aggressive on this,” Ms. Cowell said, referring to the $25 billion settlement that the nation’s biggest banks entered with state attorneys general.
The activity provides a glimpse at how widely the Libor scandal has spread through the financial world, and how much damage may still be in store for the banks accused of manipulating Libor. Her work also suggests just how difficult it is, and how long it may take, to get to the bottom of the losses.
The attorneys general in Maryland, Massachusetts, New York and Connecticut have all been examining how much their states may have lost as a result of a lowered Libor. A spokeswoman for Connecticut’s attorney general, George C. Jepsen, said that the state’s work with New York’s attorney general, Eric T. Schneiderman, “has broadened significantly over the last few weeks and we are now coordinating with a much larger group of attorneys general.”
Even before the British bank Barclays admitted in June that its employees had tried to manipulate Libor, there were a number of lawsuits filed by cities and municipal agencies seeking damages from large banks for manipulating Libor. But while those cases were filed by private sector lawyers, the public officials are looking at bringing more wide-ranging lawsuits on behalf of the states. The Justice Department has coordinated with the states and is leading its own investigation.
The government officials are hoping that their cases will be bolstered by new settlements between regulators and individual banks that are suspected of participating in the manipulation. Most of the more than one dozen banks involved in setting Libor have said in official filings that they are in discussions with regulators about their involvement in the Libor process.
Libor is supposed to represent how much banks are paying for short-term loans from other banks. It is determined by the British Bankers Association after a daily poll of the world’s largest banks. It then serves as a benchmark for rates paid by consumers and businesses on everything from mortgages to derivatives to student loans.
Barclays said in its settlement that it and other banks pushed Libor down artificially during the financial crisis to appear more healthy. Barclays also admitted that its traders tried to manipulate Libor at other points in order to sweeten particular financial deals. Barclays paid $450 million to settle the charges.
The financial products used by states and local governments are especially vulnerable to an artificially lowered rate.
Ms. Cowell, a 44-year-old Democrat and former business consultant who is running for another four-year term, was aware of the potential implications of the Libor case for North Carolina almost as soon as the Barclays settlement was announced on June 27. The next Monday, at her weekly staff meeting, she asked her office’s lawyers and investment officers to begin looking into it.
The inquiry has focused primarily on two areas of the state’s finances.
One was the state’s public pension plans, which in North Carolina are overseen by the treasurer. A state money manager began identifying bonds held by the state pension fund and money market fund investments that derived their value from Libor.
In July, lawyers from the treasurer’s office took part in a conference call on the topic with pension funds in other states. Ms. Cowell and members of her staff have found a few investments held by the $76 billion pension fund that were tied to Libor, but they have now determined that the losses were most likely “pretty small.”
The other, more significant area where Ms. Cowell began looking for losses was in a kind of financial contract that many states use, known as an interest rate swap. States use swaps when they want to issue a bond at a floating interest rate but protect themselves from future swings in rates. In a standard swap, a state makes a regular payment to its bank and gets a payment back that is determined by the level of Libor. If Libor was lower, the payments will be, too.
North Carolina had two major swaps at the time the benchmark was suspected of being rigged. Together, the two swaps were tied to $1.3 billion of bonds that were issued in 2002 and 2005. The banks on the other side of these contracts included Bank of America, of Charlotte, N.C., and JPMorgan Chase & Company based in New York, both of which are involved in setting Libor.
The challenge facing North Carolina and other states is that there is no agreement yet on how much the banks actually manipulated Libor, and for how long. The lawsuits that have already been filed have estimated that the banks held Libor down by at least 30 basis points, or 0.30 percent, for three years. By one method of calculation, that could have meant losses for North Carolina of around $10 million on their swaps.
Ms. Cowell said she assumed that as more banks settled with regulators, those numbers would become clearer. In the meantime, the treasurer’s office is working out formulas for losses that they can plug numbers into if and when new settlements are made public. At that point, Ms. Cowell also plans to share her work with other municipal agencies in North Carolina that held about 40 swaps during the period in question.
“This is an unprecedented level of analysis, and an unprecedented wide spectrum of financial impact,” Ms. Cowell said.
The inquiry could provide a political bump for Ms. Cowell, who is seeking another term as anti-Wall Street sentiment is running high. A graduate of the Wharton School of Business, she served on the Raleigh, N.C., City Council and then the state Senate before taking office in 2008. She cites among her accomplishments the state’s maintaining its status as one of eight with a AAA rating from the major credit rating agencies.
North Carolina’s attorney general will make the final determination on whether the state will join existing lawsuits, proceed with its own case or take no action at all. The attorney general’s office did not respond to requests for comment.
But the office has been involved in many of the discussions with the treasurer’s staff, people involved in the meetings said.
Source: New York Times
Showing posts with label LIBOR. Show all posts
Showing posts with label LIBOR. Show all posts
Wednesday, September 5, 2012
Tuesday, September 4, 2012
Barclays makes £500m betting on food crisis
Barclays has made as much as half a billion pounds in two years from speculating on food staples such as wheat and soya, prompting allegations that banks are profiting handsomely from the global food crisis. Barclays is the UK bank with the greatest involvement in food commodity trading and is one of the three biggest global players, along with the US banking giants Goldman Sachs and Morgan Stanley, research from the World Development Movement points out. Last week the trading giant Glencore was attacked for describing the global food crisis and price rises as a "good" business opportunity.
The extent of Barclays' involvement in food speculation comes to light as new figures from the World Bank show that global food prices hit an all-time high in July, with poor harvests in the US and Russia pushing up the average worldwide cost of staples by an unprecedented 10 per cent in a month. The extent of just one bank's involvement in agricultural markets will add to concerns that food speculation could help push basic prices so high that they trigger a wave of riots in the world's poorest countries, as staples drift out of their populations' reach.
Nor has the UK escaped rising food costs. Shop food prices have risen, on average, by 37.9 per cent in the past seven years, according to the Office for National Statistics, as the demands of an increasingly affluent and growing world population strain supply. Oils and fats have soared by 63 per cent in the UK during that period, fish prices by 50.9 per cent, bread and cereals by 36.7 per cent, meat 34.5 per cent and vegetables 41.3 per cent. In April, average UK food prices were 4.2 per cent higher than a year earlier.
Oxfam's private sector adviser, Rob Nash, said: "The food market is becoming a playground for investors rather than a market place for farmers. The trend of big investors betting on food prices is transforming food into a financial asset while exacerbating the risk of price spikes that hit the poor hardest."
The World Development Movement report estimates that Barclays made as much as £529m from its "food speculative activities" in 2010 and 2011. Barclays made up to £340m from food speculation in 2010, as the prices of agricultural commodities such as corn, wheat and soya were rising. The following year, the bank made a smaller sum – of up to £189m – as prices fell, WDM said.
The revenues that Barclays and other banks make from trading in everything from wheat and corn to coffee and cocoa, are expected to increase this year, with prices once again on the rise. Corn prices have risen by 45 per cent since the start of June, with wheat jumping by 30 per cent.
Barclays makes most of its "food-speculation" revenues by setting up and managing commodity funds that invest money from pension funds, insurance companies and wealthy individuals in a variety of agricultural products in return for fees and commissions. The bank claims not to invest its own money in such commodities.
Since deregulation allowed the creation of such funds in 2000, institutions such as Barclays have collectively channelled an astonishing $200bn (£126bn) of investment cash into agricultural commodities, according to the US Commodity Futures Trading Commission.
Barclays' dominance in commodities trading is thanks to its former chief executive Bob Diamond, who was Britain's best-paid banking boss until he was forced to resign last month following a £290m fine for attempting to manipulate the Libor interest rate. As boss of Barclays Capital he boosted trading in agricultural products.
Dealing with the reputational headache associated with high levels of food speculation will be yet another item in the already-bulging in-tray of Antony Jenkins, who was promoted to become Mr Diamond's replacement on Thursday.
Christine Haigh, policy and campaigns officer at the World Development Movement and one of the analysts behind the research, said: "No doubt the UK's biggest player in the commodities markets is hoping it will do better this year by cashing in on rising food prices. "Its behaviour risks fuelling a speculative bubble and contributing to hunger and poverty for millions of the world's poorest people."
Banks and hedge funds typically argue that speculation makes little or no difference to food prices and volatility and argue, correctly, that no definitive link has been proved. Barclays declined to comment on the amount of money it makes from trading in agricultural commodities yesterday.
The bank defended its actions, pointing out that trading in so-called futures contracts – an agreement to buy or sell a certain quantity of a product, at a given price on an agreed date – helped parties such as farmers and bakers to hedge against the risk of rising or falling prices. "Our clients include investment companies, food producers and consumers who, among other things, seek our help to manage risks."
Barclays also declined to comment on whether it thought large amounts of speculation pushed up prices and volatility. A spokesman said: "We recognise there is a perception held by some stakeholders that participation in agricultural futures markets by some participants can unduly influence the prices of commodities. As a result, we continue to carefully monitor market trends and any research produced on this subject," a spokesman said."
Barclays Capital analysts admitted in a note to clients in February that speculation did push up prices. Barclays said: "The second key driver is that commodity investors have begun allocating to commodities again after beginning 2012 heavily underexposed to the sector." The other drivers were the "health of the global economy" and "weather and geopolitics".
Source: The Independent
The extent of Barclays' involvement in food speculation comes to light as new figures from the World Bank show that global food prices hit an all-time high in July, with poor harvests in the US and Russia pushing up the average worldwide cost of staples by an unprecedented 10 per cent in a month. The extent of just one bank's involvement in agricultural markets will add to concerns that food speculation could help push basic prices so high that they trigger a wave of riots in the world's poorest countries, as staples drift out of their populations' reach.
Nor has the UK escaped rising food costs. Shop food prices have risen, on average, by 37.9 per cent in the past seven years, according to the Office for National Statistics, as the demands of an increasingly affluent and growing world population strain supply. Oils and fats have soared by 63 per cent in the UK during that period, fish prices by 50.9 per cent, bread and cereals by 36.7 per cent, meat 34.5 per cent and vegetables 41.3 per cent. In April, average UK food prices were 4.2 per cent higher than a year earlier.
Oxfam's private sector adviser, Rob Nash, said: "The food market is becoming a playground for investors rather than a market place for farmers. The trend of big investors betting on food prices is transforming food into a financial asset while exacerbating the risk of price spikes that hit the poor hardest."
The World Development Movement report estimates that Barclays made as much as £529m from its "food speculative activities" in 2010 and 2011. Barclays made up to £340m from food speculation in 2010, as the prices of agricultural commodities such as corn, wheat and soya were rising. The following year, the bank made a smaller sum – of up to £189m – as prices fell, WDM said.
The revenues that Barclays and other banks make from trading in everything from wheat and corn to coffee and cocoa, are expected to increase this year, with prices once again on the rise. Corn prices have risen by 45 per cent since the start of June, with wheat jumping by 30 per cent.
Barclays makes most of its "food-speculation" revenues by setting up and managing commodity funds that invest money from pension funds, insurance companies and wealthy individuals in a variety of agricultural products in return for fees and commissions. The bank claims not to invest its own money in such commodities.
Since deregulation allowed the creation of such funds in 2000, institutions such as Barclays have collectively channelled an astonishing $200bn (£126bn) of investment cash into agricultural commodities, according to the US Commodity Futures Trading Commission.
Barclays' dominance in commodities trading is thanks to its former chief executive Bob Diamond, who was Britain's best-paid banking boss until he was forced to resign last month following a £290m fine for attempting to manipulate the Libor interest rate. As boss of Barclays Capital he boosted trading in agricultural products.
Dealing with the reputational headache associated with high levels of food speculation will be yet another item in the already-bulging in-tray of Antony Jenkins, who was promoted to become Mr Diamond's replacement on Thursday.
Christine Haigh, policy and campaigns officer at the World Development Movement and one of the analysts behind the research, said: "No doubt the UK's biggest player in the commodities markets is hoping it will do better this year by cashing in on rising food prices. "Its behaviour risks fuelling a speculative bubble and contributing to hunger and poverty for millions of the world's poorest people."
Banks and hedge funds typically argue that speculation makes little or no difference to food prices and volatility and argue, correctly, that no definitive link has been proved. Barclays declined to comment on the amount of money it makes from trading in agricultural commodities yesterday.
The bank defended its actions, pointing out that trading in so-called futures contracts – an agreement to buy or sell a certain quantity of a product, at a given price on an agreed date – helped parties such as farmers and bakers to hedge against the risk of rising or falling prices. "Our clients include investment companies, food producers and consumers who, among other things, seek our help to manage risks."
Barclays also declined to comment on whether it thought large amounts of speculation pushed up prices and volatility. A spokesman said: "We recognise there is a perception held by some stakeholders that participation in agricultural futures markets by some participants can unduly influence the prices of commodities. As a result, we continue to carefully monitor market trends and any research produced on this subject," a spokesman said."
Barclays Capital analysts admitted in a note to clients in February that speculation did push up prices. Barclays said: "The second key driver is that commodity investors have begun allocating to commodities again after beginning 2012 heavily underexposed to the sector." The other drivers were the "health of the global economy" and "weather and geopolitics".
Source: The Independent
Wednesday, August 15, 2012
Widespread criminal practices by UK banks
Scandals emerging from the financial services industry on an almost daily basis point to the ongoing criminal practices of British banks. They expose the complicity of the regulators—the Financial Services Authority (FSA) and the Bank of England (BoE), who famously practice “light touch” regulation—and successive governments that function as the advocates and protectors of these financial gangsters.
The Royal Bank of Scotland (RBS) has announced half-year losses of £1.5 billion—double that of the same period last year. It cited the cost of charges for the “mis-selling of financial products.” This loss is before any charge for RBS’s role in rigging the interbank lending rate, Libor.
RBS and other high street banks mis-sold expensive and useless payment protection insurance to more than 3 million people who did not need it. Now RBS is setting aside £850 million to compensate people who bought the payment protection insurance, taking the total charge over the last 18 months to £1.3 billion. Even this pales into insignificance besides Lloyds Banking Group, which has set aside another £700 million, bringing its total to £4.3 billion over the last 18 months. The total compensation across the banks could top £10 billion.
RBS is making a provision of £50 million for compensation to small businesses to which it mis-sold interest rate insurance. It is also setting aside £125 million to compensate its 13 million customers who were locked out of their accounts for at least 10 days when its computer crashed in June—a cost that could rise further.
RBS is one of 18 giant banks at the heart of the rigging of the Libor rate, the interbank lending rate linked to $800 trillion in financial transactions. Barclays has already been fined £290 million and RBS expects to be fined hundreds of millions of pounds and has sacked four people involved in the manipulation.
Between 2005 and 2009, the banks manipulated the rate upwards, robbing millions of people of billions of pounds in inflated loan costs, and downwards, depriving states, cities, pension funds and pensioners with fixed investments of billions in lost income from bond holdings. Documents that have been released implicate the Bank of England and show that neither the bank nor the government did anything to stop it. In its latter stages this was because reducing Libor after 2007 helped to conceal the depth and scale of the banking crisis and thus facilitated the bailout of the kleptocracy.
Stephen Hester, the chief executive of RBS, made it clear that this was not all, saying that there could be further problems as it turned over the “rocks” left by the previous CEO Fred Goodwin. It means that RBS will post its fifth year of losses since the bank’s bailout in 2008. It made losses of £2 billion in 2011, up from a loss of £1.1 billion in 2010.
When RBS, along with Lloyds Bank and HBOS, faced bankruptcy in October 2008, Alistair Darling, then Labour chancellor, organised a massive rescue. It came after secret talks over a weekend, with no strings attached, no discussion in Parliament, much less any public consultation, and was announced to the stock markets early on the Monday morning.
Despite this, there has been no proper examination of the banks’ activities in Britain. The one “report” into the collapse of RBS, which at first the FSA refused to publish, turned out to be just a series of memos and statements, concluding that no rules or statutes had been breached. This was despite cables released by WikiLeaks revealing that Lord Turner, the FSA chair, had been concerned about the directors’ mistakes. According to the cables, Turner had said, “Negligent boards of directors bore much of the responsibility for the crisis,” by “failing to provide oversight or check risky activity,” something that publicly he denied in the context of RBS. The cables show that no less a person than RBS’s new chairman, Sir Philip Hampton, flatly contradicted the FSA’s line, telling visiting congressmen that the former directors were in breach of their fiduciary responsibilities.
Later Mervyn King, the governor of the Bank of England, revealed that the BoE had provided £36.6 billion in secret loans to RBS and the government had agreed to underwrite RBS’s debts should it default on its loans. This was in addition to the £45 billion the government paid the shareholders to acquire an 82 percent stake in the failed bank. As well as providing the ultimate backstop for the banks, the government is currently providing £512 billion of explicit public support, and hundreds of billions in guarantees.
Furthermore, with its “quantitative easing” (QE) programme—essentially printing money—the BoE has provided the banks with a further £375 billion of cash by buying up the banks’ assets—typically financial assets such as government and corporate bonds. While the declared aim was that the banks would to lend to businesses and thus boost the economy, business lending has fallen sharply.
A BoE report claims that the first round of QE had helped to increase gross domestic product by between 1.5 and 2 percent, which if true means that without it, GDP would have fallen by a catastrophic 6 percent since the financial crash.
Less has been said about the losers. RBS laid off 5,700 workers in the past year, bring the total since 2008 to 36,000. HBOS, another government-owned bank, has shed 45,000 jobs in the same period.
QE has led to a massive increase in company pension scheme deficits—to a record £312 billion. This is because the cost of paying pensions on final-salary schemes is based on the yield from government bonds, which have fallen, necessitating an increase in assets to generate the same level of pension income. At the same time, the fall in bond yields has driven down the annual income from any annuity bought with savings in the last two years, leading to a loss in income that will never be recouped.
The ongoing saga over accusations that Standard Chartered hid illegal Iran-linked transactions is beyond the scope of this article. But it should be noted that last month, HSBC, the world’s second largest banking group, was found by a senior US Senate Committee to have laundered billions of dollars in Mexican drug cartel money. This and other legal claims against HSBC could lead to fines of $1 billion.
HSBC is not alone. Six years ago, Barclays Private Bank, a subsidiary of Barclays, laundered drug money from Colombia through five accounts linked to the infamous Medellin cartel.
In March, Coutts, part of RBS, was issued with a final notice from the FSA to pay a penalty of £8.75 million for breach of its money-laundering code. This followed a review of 103 “high-risk customer files” and “deficiencies in 73 files” that showed a “failure to conduct appropriate ongoing monitoring” over three years.
Despite this record of illegality, recklessness and mismanagement, not a single top executive of a major UK bank has been charged with criminal wrongdoing. Neither has there been any substantive change in the regulation of the banking and financial services sector. The fines, so much loose change for the banks, have become part of the cost of the banking business and are simply passed on to customers in innumerable charges while the top executives walk away with massive bonuses.
Successive governments are linked by countless connections to the financial elite, from whom they recruit their advisors, regulators and even ministers. The present minister of state for trade and investment is Lord Green, a former HSBC chairman. Their record confirms that they are merely the puppets of criminals in London’s Square Mile.
Source: World Socialist Web Site
The Royal Bank of Scotland (RBS) has announced half-year losses of £1.5 billion—double that of the same period last year. It cited the cost of charges for the “mis-selling of financial products.” This loss is before any charge for RBS’s role in rigging the interbank lending rate, Libor.
RBS and other high street banks mis-sold expensive and useless payment protection insurance to more than 3 million people who did not need it. Now RBS is setting aside £850 million to compensate people who bought the payment protection insurance, taking the total charge over the last 18 months to £1.3 billion. Even this pales into insignificance besides Lloyds Banking Group, which has set aside another £700 million, bringing its total to £4.3 billion over the last 18 months. The total compensation across the banks could top £10 billion.
RBS is making a provision of £50 million for compensation to small businesses to which it mis-sold interest rate insurance. It is also setting aside £125 million to compensate its 13 million customers who were locked out of their accounts for at least 10 days when its computer crashed in June—a cost that could rise further.
RBS is one of 18 giant banks at the heart of the rigging of the Libor rate, the interbank lending rate linked to $800 trillion in financial transactions. Barclays has already been fined £290 million and RBS expects to be fined hundreds of millions of pounds and has sacked four people involved in the manipulation.
Between 2005 and 2009, the banks manipulated the rate upwards, robbing millions of people of billions of pounds in inflated loan costs, and downwards, depriving states, cities, pension funds and pensioners with fixed investments of billions in lost income from bond holdings. Documents that have been released implicate the Bank of England and show that neither the bank nor the government did anything to stop it. In its latter stages this was because reducing Libor after 2007 helped to conceal the depth and scale of the banking crisis and thus facilitated the bailout of the kleptocracy.
Stephen Hester, the chief executive of RBS, made it clear that this was not all, saying that there could be further problems as it turned over the “rocks” left by the previous CEO Fred Goodwin. It means that RBS will post its fifth year of losses since the bank’s bailout in 2008. It made losses of £2 billion in 2011, up from a loss of £1.1 billion in 2010.
When RBS, along with Lloyds Bank and HBOS, faced bankruptcy in October 2008, Alistair Darling, then Labour chancellor, organised a massive rescue. It came after secret talks over a weekend, with no strings attached, no discussion in Parliament, much less any public consultation, and was announced to the stock markets early on the Monday morning.
Despite this, there has been no proper examination of the banks’ activities in Britain. The one “report” into the collapse of RBS, which at first the FSA refused to publish, turned out to be just a series of memos and statements, concluding that no rules or statutes had been breached. This was despite cables released by WikiLeaks revealing that Lord Turner, the FSA chair, had been concerned about the directors’ mistakes. According to the cables, Turner had said, “Negligent boards of directors bore much of the responsibility for the crisis,” by “failing to provide oversight or check risky activity,” something that publicly he denied in the context of RBS. The cables show that no less a person than RBS’s new chairman, Sir Philip Hampton, flatly contradicted the FSA’s line, telling visiting congressmen that the former directors were in breach of their fiduciary responsibilities.
Later Mervyn King, the governor of the Bank of England, revealed that the BoE had provided £36.6 billion in secret loans to RBS and the government had agreed to underwrite RBS’s debts should it default on its loans. This was in addition to the £45 billion the government paid the shareholders to acquire an 82 percent stake in the failed bank. As well as providing the ultimate backstop for the banks, the government is currently providing £512 billion of explicit public support, and hundreds of billions in guarantees.
Furthermore, with its “quantitative easing” (QE) programme—essentially printing money—the BoE has provided the banks with a further £375 billion of cash by buying up the banks’ assets—typically financial assets such as government and corporate bonds. While the declared aim was that the banks would to lend to businesses and thus boost the economy, business lending has fallen sharply.
A BoE report claims that the first round of QE had helped to increase gross domestic product by between 1.5 and 2 percent, which if true means that without it, GDP would have fallen by a catastrophic 6 percent since the financial crash.
Less has been said about the losers. RBS laid off 5,700 workers in the past year, bring the total since 2008 to 36,000. HBOS, another government-owned bank, has shed 45,000 jobs in the same period.
QE has led to a massive increase in company pension scheme deficits—to a record £312 billion. This is because the cost of paying pensions on final-salary schemes is based on the yield from government bonds, which have fallen, necessitating an increase in assets to generate the same level of pension income. At the same time, the fall in bond yields has driven down the annual income from any annuity bought with savings in the last two years, leading to a loss in income that will never be recouped.
The ongoing saga over accusations that Standard Chartered hid illegal Iran-linked transactions is beyond the scope of this article. But it should be noted that last month, HSBC, the world’s second largest banking group, was found by a senior US Senate Committee to have laundered billions of dollars in Mexican drug cartel money. This and other legal claims against HSBC could lead to fines of $1 billion.
HSBC is not alone. Six years ago, Barclays Private Bank, a subsidiary of Barclays, laundered drug money from Colombia through five accounts linked to the infamous Medellin cartel.
In March, Coutts, part of RBS, was issued with a final notice from the FSA to pay a penalty of £8.75 million for breach of its money-laundering code. This followed a review of 103 “high-risk customer files” and “deficiencies in 73 files” that showed a “failure to conduct appropriate ongoing monitoring” over three years.
Despite this record of illegality, recklessness and mismanagement, not a single top executive of a major UK bank has been charged with criminal wrongdoing. Neither has there been any substantive change in the regulation of the banking and financial services sector. The fines, so much loose change for the banks, have become part of the cost of the banking business and are simply passed on to customers in innumerable charges while the top executives walk away with massive bonuses.
Successive governments are linked by countless connections to the financial elite, from whom they recruit their advisors, regulators and even ministers. The present minister of state for trade and investment is Lord Green, a former HSBC chairman. Their record confirms that they are merely the puppets of criminals in London’s Square Mile.
Source: World Socialist Web Site
Wednesday, August 1, 2012
Behind the Scenes in the Libor Interest Rate Scandal
Eduard Pomeranz and Rolf Majcen are small fish in the shark tank of international high finance. Their hedge fund, FTC Capital, is headquartered in tranquil Vienna and manages only €150 million ($189 million) in assets. But now Pomeranz, the founder, and Majcen, the head of the legal department, have been able to strike fear in the hearts of the big fish.
"The Libor manipulation is presumably the biggest financial scandal ever," says Majcen, a man with slightly disheveled-looking hair and Viennese sarcasm. Yes, he says, it did shock him that something like this was even possible, namely that a group of international banks had been manipulating interest rates for years. But Majcen takes a matter-of-fact approach to it all. As a financial professional, he is only one of many who want to get back the money that they feel they've been cheated out of.
At the end of June, British and American regulators imposed a $500 million fine on Barclays, the major British bank, and forced its CEO Bob Diamond to resign. Since then, a war of sorts has erupted in the financial sector. Investigators are attacking presumed offenders, banks that are involved are denouncing others in the hope of mitigating their own penalties, and small investors like Majcen are inundating Libor banks with lawsuits.
Deutsche Bank and more than a dozen other financial giants have come under sharp criticism due to the alleged manipulation of the Libor ( London Interbank Offered Rate), a benchmark interest rate. Some are even referring to the banks that are instrumental in calculating that rate a cartel, the sort of vocabulary not normally associated with the financial industry.
Regulators are using terms like "organized fraud." European Justice Commissioner Viviane Reding has suggested that bankers ought to be called "banksters." But in the case of some agencies, especially in New York and London, the outcry is also convenient; it diverts attention away from their own failures. For years, regulators overlooked what was happening right in front of their eyes.
Now that the authorities have woken up, they are aggressively pursuing the offenders -- and are reaching all the way up to the boardrooms. More than half a dozen government agencies, from Canada to Japan, are investigating the case.
German authorities are also involved. A dozen employees of Germany's central bank, the Bundesbank, have paid several visits to Deutsche Bank in recent weeks. They work for BaFin, the German federal financial supervisory authority, which has ordered a special audit, and are poking around the bank's headquarters in Frankfurt, traveling to London, where its money market traders are based, and flying to Tokyo. Even the bank's two new co-CEOs, Anshu Jain and Jürgen Fitschen, are expected to sit down for a question and answer session with the auditors. This is particularly unpleasant for Jain, who, as head of the investment banking division during the period in question, was ultimately responsible for money market transactions.
Libor, Anchor of the Financial World
The Libor and Euribor (Euro Interbank Offered Rate) are used worldwide as the benchmark rates for financial transactions worth hundreds of trillions of euros. When a savings bank issues a loan to a business at a variable interest rate, the loan agreement is based on the Euribor. "In many cases, the Euribor is even the key guideline for the structuring of call money," says Falko Fecht, a professor at the Frankfurt School of Finance, referring to overnight and other such short-term loans. In Spain, in particular, tens of thousands of construction loans are based on the Euribor, while millions of mortgage loans in the United States are pegged to the Libor rate.
But the bankers in the cartel initially had their sights set on a completely different business. They wanted to influence the giant market for interest rate and foreign currency derivatives in their favor. The volume of outstanding transactions in this area amounted to €567 trillion at the end of 2011 alone. Changes of as little as 0.01 percentage points can translate into hundreds of millions in profit or loss for some banks. This makes the lax approach to the calculation of rates taken for years by banks and regulators alike seem all the more astonishing.
A total of no more than 18 banks, including Deutsche Bank, are involved in the calculation of the Libor. Every morning, they submit estimates of the costs at which they believe they could borrow money on the markets without collateral. Using the resulting data, financial services provider Thomson Reuters calculates averages -- for 10 different currencies and 15 different borrowing periods.
A similar method is used to calculate the Euribor, except that there significantly more banks -- 43 -- involved in the process.
Nevertheless, it is hardly a rigorous calculation. The averages are based on rule-of-thumb estimates; the market supposedly reflected in the data sent to Thomson Reuters has been dead since the financial crisis. Only very few banks can borrow money today without furnishing collateral.
Furthermore, neither bank executives nor regulators have shown much interest in how the important benchmark rate is determined. Inputting the data was often left to ordinary money market traders, who had serious conflicts of interest and acquired a dangerous amount of influence on the financial world. "The Libor interest rate was practically an invitation to manipulate," says BaFin head Elke König.
The Cartel Emerges
In 2005, a young trader with Moroccan roots came to Barclays: Philippe Moryoussef, who is now 44. For him, it was only one station of many: Société Générale, Barclays, Royal Bank of Scotland, Morgan Stanley and, finally, Nomura. The Japanese had let him go when it became clear what role Moryoussef allegedly played in the interest-rate cartel.
In the London financial district, Moryoussef was seen as cool and unassuming. He liked diving, read books and didn't put on airs in public, even when he moved into a £2.5-million ($3.9 million) apartment in London's St. John's Wood neighborhood with his wife and two children.
Moryoussef traded in interest rate derivatives during his time at Barclays. He and his fellow traders knew exactly how much money they stood to lose or gain if the Libor or Euribor changed by only a fraction of a percentage point in one direction or the other.
And they apparently did everything they could to eliminate happenstance. Moryoussef communicated by phone or email with colleagues inside and outside the bank almost daily to steer interest rates in the right direction. To do so, they sent inquiries to the people who were responsible for inputting the Libor rates: the money market traders.
In the glitzy world of investment banking, money market traders were at the bottom of the pecking order before the financial crisis. They were not involved in major deals, and they could only dream of the kinds of bonuses stock and bond traders received. "They were always at the bottom of the food chain," says a former investment banker.
It was a conspiratorial group of underdogs who worked for various banks and met at least once a month for a beer or a mojito in New York, London or Frankfurt. By the middle of the last decade, when there seemed to be a surplus of money at the banks, they all had the same problem: They were derided or, worse yet, ignored by their colleagues in the trading rooms of major banks.
But what if it were possible to know where interest rates were headed at the end of the day, or even in the next hour? What if a few traders could manipulate the ups and downs of interest rates?
By 2005 at the latest, the traders would seem to have begun realizing just how much power they had were they able to collaborate within their small group. There was no need for formal contracts between large institutions, merely agreements among friends. A pointer here, a few traders meeting for lunch there, and soon the group had formed a global cartel that, according to investigators, reached from Japan to Europe to Canada.
"Come on over; I'll open a bottle of Bollinger," a trader, inebriated with his success, wrote to a colleague after the Libor rate had been set. Adair Turner of the British regulatory agency quotes the email as evidence of "a culture of cynical greed in the trading rooms."
The Organized Fraud
"If the rate remains unchanged, I'm a dead man," a trader emailed to a colleague who was responsible for Libor in October 2006. The traders sent at least 173 inquiries of this nature between 2005 and May 2009 for the dollar Libor alone. They were often successful.
Moryoussef, listed in the files of Britain's Financial Services Authority (FSA) as "Trader E," specialized in the Euribor. He reportedly bet €30 billion on certain movements of the interest rate, a normal dimension in the fast-paced money market. "The trick is that you can't do it alone," he bragged to outside colleagues at HSBC, Société Générale and Deutsche Bank, who allegedly cooperated with him.
While the traders were initially out to increase their bonuses, the manipulation took on a different dimension during the crisis. When the first banks began to wobble in 2007, it became more difficult for many financial companies to borrow money -- a problem that would normally be reflected in higher Libor rates.
Now even top managers at Barclays, alarmed by media reports, were instructing the Libor men to input lower rates. In October 2008, the manipulation became a question of survival for Barclays. On Oct. 29, a concerned Paul Tucker, now the deputy governor of the Bank of England, contacted Barclays CEO Diamond. Tucker wanted to know why the bank was consistently inputting such high interest rates into the daily Libor report.
Diamond told a parliamentary committee that Tucker had seemed to imply that lower interest rates be reported for the Libor, which Tucker staunchly denies. Diamond, for his part, prepared a transcript of the telephone conversation he had had with Tucker on that day, in which he had mentioned political pressure. After that, his chief operating officer spoke with the money market traders. The underdogs were suddenly being heard on the executive board, and had become the bank's potential saviors.
Barclays wasn't the only bank that was having trouble gaining access to money in the fall of 2008. UBS, Citigroup and the Royal Bank of Scotland, now prime suspects in addition to Barclays, had to be bailed out by their respective governments. Germany's WestLB, which was involved in the Libor calculation at the time, was also seen as a problem case, although this wasn't reflected in the Libor rates it was reporting.
Deutsche Bank
As early as the fall of 2011, Deutsche Bank's chief risk officer at the time, Hugo Bänziger, ordered an internal audit. Millions of emails had to be reviewed and chat minutes read. Bänziger hired an outside auditing firm, and soon there were 50 people on the team responsible for the scandal. But it was a deeply frustrating task for the auditors; they didn't even know where to begin.
Only when British investigators released the names of two suspicious traders was the audit team able to report success to then CEO Josef Ackermann. Seemingly sensing what was in store for his bank, he inquired about the progress of the audit on a weekly basis. Two traders were fired.
Since the departures of Ackermann, Bänziger and former Supervisory Board Chairman Clemens Börsig, Börsig's successor Paul Achleitner has managed the bank's handling of the Libor scandal. He is reportedly firmly convinced that the bank never tried to push down the Libor to improve its own position. Financing problems? Not at Deutsche Bank, says Achleitner. He also notes that there are no indications that executive board members, or even Anshu Jain, were directly involved in the scandal.
But is it possible that only two wayward traders took part in the cartel? Why were no supervisors and no compliance officers aware of their activities? Deutsche Bank prides itself on being a world leader in the trade in foreign currencies and interest rates. It is part of all panels involved in determining the Libor. And yet Deutsche Bank merely sees itself as a bit player in the Libor-fixing scandal.
But why then was Alan Cloete, thought to have been responsible for the money market business and other areas during the wild Libor years, unaware of the manipulation? And why did Jain promote the stocky South African to the expanded executive board in March, while the investigations and internal audits in the Libor matter were already underway? There are those associated with the bank who think this is odd, while others see it as proof that Cloete is blameless in the Libor case.
The Failure of the Regulators
On April 11, 2008, a member of the Barclays money market team called Fabiola Ravazzolo, an employee of the Federal Reserve Bank of New York.
Barclays employee: "LIBORs do not reflect where the market is trading, which is, you know, the same as a lot of other people have said."
Ravazzolo: "Mm hmm."
A few moments later, the Barclays man, according to the transcript of the conversation released by the bank, said: "We're not posting, um, an honest Libor."
Ravazzolo: "Okay."
Barclays-Mann: "We are doing it, because, um, if we didn't do it it draws, um, unwanted attention on ourselves."
Ravazzolo: "Okay."
There was no sense of outrage, nor did Ravazzolo question the Barclays employee about the details. A similar conversation transpired with another Fed employee a few months later.
These are transcripts of failure. Barclays employees also contacted British regulators 13 times to report possible misconduct among the competition in determining the Libor, FSA chief Adair Turner admitted in a hearing before the British investigative committee. No one sounded the alarm.
In the United States, the issue ultimately did make it further up the ladder, reaching the desk of Timothy Geithner, who was chairman of the New York Fed at the time before becoming US treasury secretary. At the end of May, he sent an email on the subject of the Libor to the governor of the Bank of England, writing: "We would welcome a chance to discuss these and would be grateful if you would give us some sense of what changes are possible." Attached to the message were two pages of "Recommendations for Enhancing the Credibility of LIBOR". It was anything but a warning about manipulations.
At first, there was no reaction from the other side of the Atlantic, and Geithner's office had to send a reminder email on June 1. Two days later, Bank of England Governor Mervyn King finally responded, writing that the recommendations seemed "sensible" and that he would be happy to discuss the matter further with Geithner.
But nothing further happened in the ensuing months. The financial crisis was coming to a head with the bankruptcy of investment bank Lehman Brothers. The central bankers had other worries. This remains the regulators' line of defense today. If the world hadn't happened to be on the edge of an abyss, they say, the Libor scandal would certainly not have slipped through their fingers as easily.
Meanwhile, the US Commodities Futures Trading Commission (CFTC) had been investigating the issue since 2008, and its efforts eventually led to a worldwide investigation.
The Episode Is Blown Wide Open
"Mechanisms are now taking effect that I only knew of from mafia films," a shaken financial regulator said recently. Since investigations have gone into high gear in New York, London, Brussels and elsewhere, suspected bank executives have been coming clean.
They are under great pressure. Last year, the European Commission filed several antitrust suits against various banks. Antitrust suits are considered to be the sharpest weapons in business law because they allow Brussels to impose stiff penalties on cartel participants.
"In our investigations, we concentrate on suspicious cartel agreements that include derivatives. This includes possible secret agreements about the determination of these lending rates," says European Competition Commissioner Joaquín Almunia. In other words, the investigators are interested in more than the manipulation of global interest rates to benefit specific parties. It's also possible that the enormous market for derivatives was manipulated.
"Derivatives traders are also believed to have agreed upon the difference between the buy and sell prices (spreads) of derivatives, thereby selling these financial instruments to customers under conditions that were not customary in the market," says the Swiss Competition Commission, which is also investigating possible cartels.
It is difficult to find clear evidence, such as a written cartel agreement. But in Brussels alone, more than 40 banks have contacted authorities to report what they know about years of manipulation. The first star prosecution witness to reveal new information about a cartel and provides evidence stands to see his own fine eliminated entirely. The second can expect Brussels to reduce his fine by up to 50 percent and the third by up to 30 percent.
The European Commission can demand up to 10 percent of a year's profits from the banks. "There could be new record-breaking fines," says an employee at the Directorate-General for Competition in Brussels. Individual banks could expect to be slapped with fines of more than €1 billion by the EU.
In the United States, the Justice Department has joined financial regulators in conducting the investigations. This means that the scandal could also have criminal and not just civil consequences for a number of banks, say sources in Washington. Charges will likely be filed against at least one bank this year. US Congress has also announced plans to launch its own investigation.
It wasn't until the fall of 2011 that German financial regulators at BaFin headquarters in Bonn learned of the dimensions of the scandal from their counterparts in the United States and Great Britain. They had been largely unaware of the problem until then. Raimund Röseler, the chief executive for banking supervisor at BaFin, then prepared a special investigation, which has been underway since May.
What the Banks Could Now Face
German banks must have pricked up their ears when BaFin President Elke König recently spoke about the Libor scandal. "Basically, banks must establish suitable reserves for possible losses," König concluded.
Investors, like Vienna hedge fund FTC Capital, have made it clear that they do not intend to let up. They feel obligated to their customers to file claims for damages, explains FTC executive Majcen. Friedrich von Metzler, whose bank feels harmed by the rate manipulation through a fund subsidiary, has filed a lawsuit for the same reason.
There are already 20 lawsuits in the United States, some of which have been combined into class action suits. The plaintiffs range from the City of Baltimore to police and firefighter's pension funds, the City of Dania Beach, Florida, and Russian oligarch Vladimir Gusinsky.
They feel encouraged by the actions of regulators. "Both the American CFTC and the FSA have done excellent investigative work," says Majcen. Bank analysts expect that other institutions could face fines similar to the one imposed on Barclays. In fact, it ought to be in the banks' best interest to quickly settle their cases. "But they're afraid, because since Barclays, they know that it isn't just about money, but also about making heads roll," says a major shareholder of Deutsche Bank.
German attorneys are also lining up to represent potential clients. "A few institutional investors have already contacted us," says Marc Schiefer of the law firm TILP in the southern German city of Tübingen.
Years could go by before damage suits are ruled on. FTC executive Majcen expects that it will take until at least the spring of 2013 for the courts to decide whether to hear the cases, while the evidentiary hearings and trials could take another three to five years. Nevertheless, investment bank Morgan Stanley has already made its projections, estimating the total cost to the banks, including fines and damage payments, at $22 billion, of which $1.5 billion would apply to Deutsche Bank.
Possible Libor-related liabilities would cause serious problems at WestLB, or its successor company Portigon. The once-proud state-owned bank is in the process of being liquidated, at a cost of billions to its former owners, the western German state of North Rhine-Westphalia and savings banks. The Libor scandal could further increase the burden on taxpayers.
BaFin has launched a major offensive to determine whether WestLB and possibly other German banks were involved in the rate-fixing scandal. Letters were sent to all banks that assist in the calculation of the Euribor, giving them until last Thursday to explain their internal processes for calculating the euro interest rate and, most of all, their monitoring mechanisms. If responses suggest possible lapses, these banks could also see special auditors knocking on their doors.
Fund companies also received mail from Bonn. They were asked to determine which of their products are affected and, if possible, to report their possible losses.
Things will get especially uncomfortable for Deutsche Bank, because BaFin intends to double its regulatory capacities for the bank in the near future. Instead of two departments, there will be three or four devoted to Deutsche Bank. The regulator will reshuffle its internal organization to free up the necessary employees.
BaFin has also just prepared a position paper on a subject that is especially sensitive for Jain. The agency is now intensively addressing the question of how, in investment banking, the dangerous practice of proprietary trading could be isolated from the rest of the business through holding structures.
The regulators speculate that relevant draft legislation proposed by Britain's Vickers Commission could also apply to German banks. Nikolaus von Bomhard, CEO of insurance giant Munich Re and a member of the supervisory board of Commerzbank, Germany's second-largest bank, recently made the case for a breakup of major banks. Achleitner, a member of the board of Allianz under recently, was reportedly deeply upset about former colleagues in the industry.
The call for stricter regulation is also getting louder in politics once again. Sigmar Gabriel, chairman of the center-left Social Democratic Party (SPD), has discovered bank-bashing as an effective campaign tool, and has declared the next election, in the fall of 2013, as a "decision on the taming of the banking and financial sector."
Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democratic Union (CDU), accused Gabriel, a potential SPD candidate for the chancellorship, of "cheap populism." But the remark sounded more duty-bound than genuine, especially given the fact that there is also considerable outrage over the Libor scandal in Berlin.
"This is a real zinger," says an insider. In the past, bank manager lapses resulted from their stupidity for having bought securities without understanding them. "Now that was bad enough. But manipulating a market rate is criminal." A portion of the industry, adds the insider, apparently doesn't realize that the writing is on the wall.
The parties involved, including Deutsche Bank and its new co-CEO Jain, cannot expect leniency when charges are investigated. "We can't make any allowances for high-profile names," say officials in the capital.
SOurce: SPIEGEL
"The Libor manipulation is presumably the biggest financial scandal ever," says Majcen, a man with slightly disheveled-looking hair and Viennese sarcasm. Yes, he says, it did shock him that something like this was even possible, namely that a group of international banks had been manipulating interest rates for years. But Majcen takes a matter-of-fact approach to it all. As a financial professional, he is only one of many who want to get back the money that they feel they've been cheated out of.
At the end of June, British and American regulators imposed a $500 million fine on Barclays, the major British bank, and forced its CEO Bob Diamond to resign. Since then, a war of sorts has erupted in the financial sector. Investigators are attacking presumed offenders, banks that are involved are denouncing others in the hope of mitigating their own penalties, and small investors like Majcen are inundating Libor banks with lawsuits.
Deutsche Bank and more than a dozen other financial giants have come under sharp criticism due to the alleged manipulation of the Libor ( London Interbank Offered Rate), a benchmark interest rate. Some are even referring to the banks that are instrumental in calculating that rate a cartel, the sort of vocabulary not normally associated with the financial industry.
Regulators are using terms like "organized fraud." European Justice Commissioner Viviane Reding has suggested that bankers ought to be called "banksters." But in the case of some agencies, especially in New York and London, the outcry is also convenient; it diverts attention away from their own failures. For years, regulators overlooked what was happening right in front of their eyes.
Now that the authorities have woken up, they are aggressively pursuing the offenders -- and are reaching all the way up to the boardrooms. More than half a dozen government agencies, from Canada to Japan, are investigating the case.
German authorities are also involved. A dozen employees of Germany's central bank, the Bundesbank, have paid several visits to Deutsche Bank in recent weeks. They work for BaFin, the German federal financial supervisory authority, which has ordered a special audit, and are poking around the bank's headquarters in Frankfurt, traveling to London, where its money market traders are based, and flying to Tokyo. Even the bank's two new co-CEOs, Anshu Jain and Jürgen Fitschen, are expected to sit down for a question and answer session with the auditors. This is particularly unpleasant for Jain, who, as head of the investment banking division during the period in question, was ultimately responsible for money market transactions.
Libor, Anchor of the Financial World
The Libor and Euribor (Euro Interbank Offered Rate) are used worldwide as the benchmark rates for financial transactions worth hundreds of trillions of euros. When a savings bank issues a loan to a business at a variable interest rate, the loan agreement is based on the Euribor. "In many cases, the Euribor is even the key guideline for the structuring of call money," says Falko Fecht, a professor at the Frankfurt School of Finance, referring to overnight and other such short-term loans. In Spain, in particular, tens of thousands of construction loans are based on the Euribor, while millions of mortgage loans in the United States are pegged to the Libor rate.
But the bankers in the cartel initially had their sights set on a completely different business. They wanted to influence the giant market for interest rate and foreign currency derivatives in their favor. The volume of outstanding transactions in this area amounted to €567 trillion at the end of 2011 alone. Changes of as little as 0.01 percentage points can translate into hundreds of millions in profit or loss for some banks. This makes the lax approach to the calculation of rates taken for years by banks and regulators alike seem all the more astonishing.
A total of no more than 18 banks, including Deutsche Bank, are involved in the calculation of the Libor. Every morning, they submit estimates of the costs at which they believe they could borrow money on the markets without collateral. Using the resulting data, financial services provider Thomson Reuters calculates averages -- for 10 different currencies and 15 different borrowing periods.
A similar method is used to calculate the Euribor, except that there significantly more banks -- 43 -- involved in the process.
Nevertheless, it is hardly a rigorous calculation. The averages are based on rule-of-thumb estimates; the market supposedly reflected in the data sent to Thomson Reuters has been dead since the financial crisis. Only very few banks can borrow money today without furnishing collateral.
Furthermore, neither bank executives nor regulators have shown much interest in how the important benchmark rate is determined. Inputting the data was often left to ordinary money market traders, who had serious conflicts of interest and acquired a dangerous amount of influence on the financial world. "The Libor interest rate was practically an invitation to manipulate," says BaFin head Elke König.
The Cartel Emerges
In 2005, a young trader with Moroccan roots came to Barclays: Philippe Moryoussef, who is now 44. For him, it was only one station of many: Société Générale, Barclays, Royal Bank of Scotland, Morgan Stanley and, finally, Nomura. The Japanese had let him go when it became clear what role Moryoussef allegedly played in the interest-rate cartel.
In the London financial district, Moryoussef was seen as cool and unassuming. He liked diving, read books and didn't put on airs in public, even when he moved into a £2.5-million ($3.9 million) apartment in London's St. John's Wood neighborhood with his wife and two children.
Moryoussef traded in interest rate derivatives during his time at Barclays. He and his fellow traders knew exactly how much money they stood to lose or gain if the Libor or Euribor changed by only a fraction of a percentage point in one direction or the other.
And they apparently did everything they could to eliminate happenstance. Moryoussef communicated by phone or email with colleagues inside and outside the bank almost daily to steer interest rates in the right direction. To do so, they sent inquiries to the people who were responsible for inputting the Libor rates: the money market traders.
In the glitzy world of investment banking, money market traders were at the bottom of the pecking order before the financial crisis. They were not involved in major deals, and they could only dream of the kinds of bonuses stock and bond traders received. "They were always at the bottom of the food chain," says a former investment banker.
It was a conspiratorial group of underdogs who worked for various banks and met at least once a month for a beer or a mojito in New York, London or Frankfurt. By the middle of the last decade, when there seemed to be a surplus of money at the banks, they all had the same problem: They were derided or, worse yet, ignored by their colleagues in the trading rooms of major banks.
But what if it were possible to know where interest rates were headed at the end of the day, or even in the next hour? What if a few traders could manipulate the ups and downs of interest rates?
By 2005 at the latest, the traders would seem to have begun realizing just how much power they had were they able to collaborate within their small group. There was no need for formal contracts between large institutions, merely agreements among friends. A pointer here, a few traders meeting for lunch there, and soon the group had formed a global cartel that, according to investigators, reached from Japan to Europe to Canada.
"Come on over; I'll open a bottle of Bollinger," a trader, inebriated with his success, wrote to a colleague after the Libor rate had been set. Adair Turner of the British regulatory agency quotes the email as evidence of "a culture of cynical greed in the trading rooms."
The Organized Fraud
"If the rate remains unchanged, I'm a dead man," a trader emailed to a colleague who was responsible for Libor in October 2006. The traders sent at least 173 inquiries of this nature between 2005 and May 2009 for the dollar Libor alone. They were often successful.
Moryoussef, listed in the files of Britain's Financial Services Authority (FSA) as "Trader E," specialized in the Euribor. He reportedly bet €30 billion on certain movements of the interest rate, a normal dimension in the fast-paced money market. "The trick is that you can't do it alone," he bragged to outside colleagues at HSBC, Société Générale and Deutsche Bank, who allegedly cooperated with him.
While the traders were initially out to increase their bonuses, the manipulation took on a different dimension during the crisis. When the first banks began to wobble in 2007, it became more difficult for many financial companies to borrow money -- a problem that would normally be reflected in higher Libor rates.
Now even top managers at Barclays, alarmed by media reports, were instructing the Libor men to input lower rates. In October 2008, the manipulation became a question of survival for Barclays. On Oct. 29, a concerned Paul Tucker, now the deputy governor of the Bank of England, contacted Barclays CEO Diamond. Tucker wanted to know why the bank was consistently inputting such high interest rates into the daily Libor report.
Diamond told a parliamentary committee that Tucker had seemed to imply that lower interest rates be reported for the Libor, which Tucker staunchly denies. Diamond, for his part, prepared a transcript of the telephone conversation he had had with Tucker on that day, in which he had mentioned political pressure. After that, his chief operating officer spoke with the money market traders. The underdogs were suddenly being heard on the executive board, and had become the bank's potential saviors.
Barclays wasn't the only bank that was having trouble gaining access to money in the fall of 2008. UBS, Citigroup and the Royal Bank of Scotland, now prime suspects in addition to Barclays, had to be bailed out by their respective governments. Germany's WestLB, which was involved in the Libor calculation at the time, was also seen as a problem case, although this wasn't reflected in the Libor rates it was reporting.
Deutsche Bank
As early as the fall of 2011, Deutsche Bank's chief risk officer at the time, Hugo Bänziger, ordered an internal audit. Millions of emails had to be reviewed and chat minutes read. Bänziger hired an outside auditing firm, and soon there were 50 people on the team responsible for the scandal. But it was a deeply frustrating task for the auditors; they didn't even know where to begin.
Only when British investigators released the names of two suspicious traders was the audit team able to report success to then CEO Josef Ackermann. Seemingly sensing what was in store for his bank, he inquired about the progress of the audit on a weekly basis. Two traders were fired.
Since the departures of Ackermann, Bänziger and former Supervisory Board Chairman Clemens Börsig, Börsig's successor Paul Achleitner has managed the bank's handling of the Libor scandal. He is reportedly firmly convinced that the bank never tried to push down the Libor to improve its own position. Financing problems? Not at Deutsche Bank, says Achleitner. He also notes that there are no indications that executive board members, or even Anshu Jain, were directly involved in the scandal.
But is it possible that only two wayward traders took part in the cartel? Why were no supervisors and no compliance officers aware of their activities? Deutsche Bank prides itself on being a world leader in the trade in foreign currencies and interest rates. It is part of all panels involved in determining the Libor. And yet Deutsche Bank merely sees itself as a bit player in the Libor-fixing scandal.
But why then was Alan Cloete, thought to have been responsible for the money market business and other areas during the wild Libor years, unaware of the manipulation? And why did Jain promote the stocky South African to the expanded executive board in March, while the investigations and internal audits in the Libor matter were already underway? There are those associated with the bank who think this is odd, while others see it as proof that Cloete is blameless in the Libor case.
The Failure of the Regulators
On April 11, 2008, a member of the Barclays money market team called Fabiola Ravazzolo, an employee of the Federal Reserve Bank of New York.
Barclays employee: "LIBORs do not reflect where the market is trading, which is, you know, the same as a lot of other people have said."
Ravazzolo: "Mm hmm."
A few moments later, the Barclays man, according to the transcript of the conversation released by the bank, said: "We're not posting, um, an honest Libor."
Ravazzolo: "Okay."
Barclays-Mann: "We are doing it, because, um, if we didn't do it it draws, um, unwanted attention on ourselves."
Ravazzolo: "Okay."
There was no sense of outrage, nor did Ravazzolo question the Barclays employee about the details. A similar conversation transpired with another Fed employee a few months later.
These are transcripts of failure. Barclays employees also contacted British regulators 13 times to report possible misconduct among the competition in determining the Libor, FSA chief Adair Turner admitted in a hearing before the British investigative committee. No one sounded the alarm.
In the United States, the issue ultimately did make it further up the ladder, reaching the desk of Timothy Geithner, who was chairman of the New York Fed at the time before becoming US treasury secretary. At the end of May, he sent an email on the subject of the Libor to the governor of the Bank of England, writing: "We would welcome a chance to discuss these and would be grateful if you would give us some sense of what changes are possible." Attached to the message were two pages of "Recommendations for Enhancing the Credibility of LIBOR". It was anything but a warning about manipulations.
At first, there was no reaction from the other side of the Atlantic, and Geithner's office had to send a reminder email on June 1. Two days later, Bank of England Governor Mervyn King finally responded, writing that the recommendations seemed "sensible" and that he would be happy to discuss the matter further with Geithner.
But nothing further happened in the ensuing months. The financial crisis was coming to a head with the bankruptcy of investment bank Lehman Brothers. The central bankers had other worries. This remains the regulators' line of defense today. If the world hadn't happened to be on the edge of an abyss, they say, the Libor scandal would certainly not have slipped through their fingers as easily.
Meanwhile, the US Commodities Futures Trading Commission (CFTC) had been investigating the issue since 2008, and its efforts eventually led to a worldwide investigation.
The Episode Is Blown Wide Open
"Mechanisms are now taking effect that I only knew of from mafia films," a shaken financial regulator said recently. Since investigations have gone into high gear in New York, London, Brussels and elsewhere, suspected bank executives have been coming clean.
They are under great pressure. Last year, the European Commission filed several antitrust suits against various banks. Antitrust suits are considered to be the sharpest weapons in business law because they allow Brussels to impose stiff penalties on cartel participants.
"In our investigations, we concentrate on suspicious cartel agreements that include derivatives. This includes possible secret agreements about the determination of these lending rates," says European Competition Commissioner Joaquín Almunia. In other words, the investigators are interested in more than the manipulation of global interest rates to benefit specific parties. It's also possible that the enormous market for derivatives was manipulated.
"Derivatives traders are also believed to have agreed upon the difference between the buy and sell prices (spreads) of derivatives, thereby selling these financial instruments to customers under conditions that were not customary in the market," says the Swiss Competition Commission, which is also investigating possible cartels.
It is difficult to find clear evidence, such as a written cartel agreement. But in Brussels alone, more than 40 banks have contacted authorities to report what they know about years of manipulation. The first star prosecution witness to reveal new information about a cartel and provides evidence stands to see his own fine eliminated entirely. The second can expect Brussels to reduce his fine by up to 50 percent and the third by up to 30 percent.
The European Commission can demand up to 10 percent of a year's profits from the banks. "There could be new record-breaking fines," says an employee at the Directorate-General for Competition in Brussels. Individual banks could expect to be slapped with fines of more than €1 billion by the EU.
In the United States, the Justice Department has joined financial regulators in conducting the investigations. This means that the scandal could also have criminal and not just civil consequences for a number of banks, say sources in Washington. Charges will likely be filed against at least one bank this year. US Congress has also announced plans to launch its own investigation.
It wasn't until the fall of 2011 that German financial regulators at BaFin headquarters in Bonn learned of the dimensions of the scandal from their counterparts in the United States and Great Britain. They had been largely unaware of the problem until then. Raimund Röseler, the chief executive for banking supervisor at BaFin, then prepared a special investigation, which has been underway since May.
What the Banks Could Now Face
German banks must have pricked up their ears when BaFin President Elke König recently spoke about the Libor scandal. "Basically, banks must establish suitable reserves for possible losses," König concluded.
Investors, like Vienna hedge fund FTC Capital, have made it clear that they do not intend to let up. They feel obligated to their customers to file claims for damages, explains FTC executive Majcen. Friedrich von Metzler, whose bank feels harmed by the rate manipulation through a fund subsidiary, has filed a lawsuit for the same reason.
There are already 20 lawsuits in the United States, some of which have been combined into class action suits. The plaintiffs range from the City of Baltimore to police and firefighter's pension funds, the City of Dania Beach, Florida, and Russian oligarch Vladimir Gusinsky.
They feel encouraged by the actions of regulators. "Both the American CFTC and the FSA have done excellent investigative work," says Majcen. Bank analysts expect that other institutions could face fines similar to the one imposed on Barclays. In fact, it ought to be in the banks' best interest to quickly settle their cases. "But they're afraid, because since Barclays, they know that it isn't just about money, but also about making heads roll," says a major shareholder of Deutsche Bank.
German attorneys are also lining up to represent potential clients. "A few institutional investors have already contacted us," says Marc Schiefer of the law firm TILP in the southern German city of Tübingen.
Years could go by before damage suits are ruled on. FTC executive Majcen expects that it will take until at least the spring of 2013 for the courts to decide whether to hear the cases, while the evidentiary hearings and trials could take another three to five years. Nevertheless, investment bank Morgan Stanley has already made its projections, estimating the total cost to the banks, including fines and damage payments, at $22 billion, of which $1.5 billion would apply to Deutsche Bank.
Possible Libor-related liabilities would cause serious problems at WestLB, or its successor company Portigon. The once-proud state-owned bank is in the process of being liquidated, at a cost of billions to its former owners, the western German state of North Rhine-Westphalia and savings banks. The Libor scandal could further increase the burden on taxpayers.
BaFin has launched a major offensive to determine whether WestLB and possibly other German banks were involved in the rate-fixing scandal. Letters were sent to all banks that assist in the calculation of the Euribor, giving them until last Thursday to explain their internal processes for calculating the euro interest rate and, most of all, their monitoring mechanisms. If responses suggest possible lapses, these banks could also see special auditors knocking on their doors.
Fund companies also received mail from Bonn. They were asked to determine which of their products are affected and, if possible, to report their possible losses.
Things will get especially uncomfortable for Deutsche Bank, because BaFin intends to double its regulatory capacities for the bank in the near future. Instead of two departments, there will be three or four devoted to Deutsche Bank. The regulator will reshuffle its internal organization to free up the necessary employees.
BaFin has also just prepared a position paper on a subject that is especially sensitive for Jain. The agency is now intensively addressing the question of how, in investment banking, the dangerous practice of proprietary trading could be isolated from the rest of the business through holding structures.
The regulators speculate that relevant draft legislation proposed by Britain's Vickers Commission could also apply to German banks. Nikolaus von Bomhard, CEO of insurance giant Munich Re and a member of the supervisory board of Commerzbank, Germany's second-largest bank, recently made the case for a breakup of major banks. Achleitner, a member of the board of Allianz under recently, was reportedly deeply upset about former colleagues in the industry.
The call for stricter regulation is also getting louder in politics once again. Sigmar Gabriel, chairman of the center-left Social Democratic Party (SPD), has discovered bank-bashing as an effective campaign tool, and has declared the next election, in the fall of 2013, as a "decision on the taming of the banking and financial sector."
Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democratic Union (CDU), accused Gabriel, a potential SPD candidate for the chancellorship, of "cheap populism." But the remark sounded more duty-bound than genuine, especially given the fact that there is also considerable outrage over the Libor scandal in Berlin.
"This is a real zinger," says an insider. In the past, bank manager lapses resulted from their stupidity for having bought securities without understanding them. "Now that was bad enough. But manipulating a market rate is criminal." A portion of the industry, adds the insider, apparently doesn't realize that the writing is on the wall.
The parties involved, including Deutsche Bank and its new co-CEO Jain, cannot expect leniency when charges are investigated. "We can't make any allowances for high-profile names," say officials in the capital.
SOurce: SPIEGEL
Monday, July 2, 2012
Barclays chair Marcus Agius resigns
Barclays's chairperson Marcus Agius has resigned over interest rate rigging accusations as the bank faced possible criminal prosecution. The beleaguered bank announced his departure, and promised an independent audit, amid questions about the future of its chief executive Bob Diamond and generally about morality in London's financial sector, or City.
Britain's Serious Fraud Office (SFO) said it was considering whether it was "both appropriate and possible to bring criminal prosecutions" over the issue, adding that it hoped to come to a conclusion within a month. British finance minister George Osborne was set to address Parliament at around 3.30pm GMT to speak on the matter.
The manipulation of interest rates, which may turn out to implicate some other international banks, concerned the Libor and Euribor rates which play a key role on global markets, affecting what banks, businesses and individuals pay to borrow.
Barclays said that Agius, who has chaired the bank for six years, would remain in his post until a successor was found. But markets were also focused on whether Diamond, a high-profile and highly paid banker, would keep his job amid widespread calls for him to go. Markets were also wondering whether the latest banking scandal would result in a radical shake-up of the way in which business is conducted across the City, amid pressure from high up the political ladder. "I am truly sorry that our customers, clients, employees and shareholders have been let down," Agius said in a company statement, less than a week after the bank was fined by British and US regulators for alleged rigging of inter-bank rates.
Agius said: "Last week's events – evidencing as they do unacceptable standards of behaviour within the bank – have dealt a devastating blow to Barclays' reputation. "As chairman, I am the ultimate guardian of the bank's reputation. Accordingly, the buck stops with me and I must acknowledge responsibility by standing aside," he said in the statement.
Barclays added that it would launch an independent audit that would "undertake a root and branch review of all of the past practices that have been revealed as flawed since the credit crisis started" about five years ago. The bank insisted that it would establish "a zero tolerance policy for any actions that harm the reputation of the bank".
Britain's business secretary Vince Cable on Sunday backed calls for a criminal investigation into bankers involved in the scandal. That was after Prime Minister David Cameron said he intended to bring Diamond and others at the bank to account. US national Diamond, who was in charge of Barclays' investment arm at the time of the suspected manipulation, was to face questions from British lawmakers on Wednesday.
The SFO on Monday said it had been working closely with the Financial Services Authority watchdog during the latter's investigation into Libor rate manipulation. "Now that the investigation into the issue of regulatory misbehaviour has concluded, the SFO are considering whether it is both appropriate and possible to bring criminal prosecutions," the independent government department said in a statement.
Pressure on Barclays has risen after British and US authorities last week together fined the bank £290-million amid international probes into several lenders over alleged rigging of overnight rates. Barclays is the first major financial institution to settle following investigations on both sides of the Atlantic.
On Sunday it emerged that bailed-out Royal Bank of Scotland (RBS) had sacked four traders over their alleged involvement in the affair, raising suspicions that the practice was widespread. Meanwhile the true cost of the scandal risks ballooning for Barclays. "Civil suits represent a significant uncertainty" for Barclays, Deutsche Bank analyst Jason Napier said on Monday. "We see challenges for plaintiffs to show that artificially suppressed or raised Libor estimates from Barclays ... shifted Libor on any given day and that financial loss followed as a consequence," he said in a note.
In afternoon London trading, the bank's share price jumped 3.23% to 168.11 pence on the benchmark FTSE 100 index, which was up 0.62%. Monday's gains helped the bank's share price to recover from last week's heavy losses that wiped billions of pounds from Barclays' market value. "Talk of Barclays and the Libor scandal remains the focus of the London market ... with the resignation of Barclays chairperson, Marcus Agius, compounding fears that the City is facing a significant shakeup in light of last week's events," said Spreadex trader David White.
Source: Mail & Guardian
Britain's Serious Fraud Office (SFO) said it was considering whether it was "both appropriate and possible to bring criminal prosecutions" over the issue, adding that it hoped to come to a conclusion within a month. British finance minister George Osborne was set to address Parliament at around 3.30pm GMT to speak on the matter.
The manipulation of interest rates, which may turn out to implicate some other international banks, concerned the Libor and Euribor rates which play a key role on global markets, affecting what banks, businesses and individuals pay to borrow.
Barclays said that Agius, who has chaired the bank for six years, would remain in his post until a successor was found. But markets were also focused on whether Diamond, a high-profile and highly paid banker, would keep his job amid widespread calls for him to go. Markets were also wondering whether the latest banking scandal would result in a radical shake-up of the way in which business is conducted across the City, amid pressure from high up the political ladder. "I am truly sorry that our customers, clients, employees and shareholders have been let down," Agius said in a company statement, less than a week after the bank was fined by British and US regulators for alleged rigging of inter-bank rates.
Agius said: "Last week's events – evidencing as they do unacceptable standards of behaviour within the bank – have dealt a devastating blow to Barclays' reputation. "As chairman, I am the ultimate guardian of the bank's reputation. Accordingly, the buck stops with me and I must acknowledge responsibility by standing aside," he said in the statement.
Barclays added that it would launch an independent audit that would "undertake a root and branch review of all of the past practices that have been revealed as flawed since the credit crisis started" about five years ago. The bank insisted that it would establish "a zero tolerance policy for any actions that harm the reputation of the bank".
Britain's business secretary Vince Cable on Sunday backed calls for a criminal investigation into bankers involved in the scandal. That was after Prime Minister David Cameron said he intended to bring Diamond and others at the bank to account. US national Diamond, who was in charge of Barclays' investment arm at the time of the suspected manipulation, was to face questions from British lawmakers on Wednesday.
The SFO on Monday said it had been working closely with the Financial Services Authority watchdog during the latter's investigation into Libor rate manipulation. "Now that the investigation into the issue of regulatory misbehaviour has concluded, the SFO are considering whether it is both appropriate and possible to bring criminal prosecutions," the independent government department said in a statement.
Pressure on Barclays has risen after British and US authorities last week together fined the bank £290-million amid international probes into several lenders over alleged rigging of overnight rates. Barclays is the first major financial institution to settle following investigations on both sides of the Atlantic.
On Sunday it emerged that bailed-out Royal Bank of Scotland (RBS) had sacked four traders over their alleged involvement in the affair, raising suspicions that the practice was widespread. Meanwhile the true cost of the scandal risks ballooning for Barclays. "Civil suits represent a significant uncertainty" for Barclays, Deutsche Bank analyst Jason Napier said on Monday. "We see challenges for plaintiffs to show that artificially suppressed or raised Libor estimates from Barclays ... shifted Libor on any given day and that financial loss followed as a consequence," he said in a note.
In afternoon London trading, the bank's share price jumped 3.23% to 168.11 pence on the benchmark FTSE 100 index, which was up 0.62%. Monday's gains helped the bank's share price to recover from last week's heavy losses that wiped billions of pounds from Barclays' market value. "Talk of Barclays and the Libor scandal remains the focus of the London market ... with the resignation of Barclays chairperson, Marcus Agius, compounding fears that the City is facing a significant shakeup in light of last week's events," said Spreadex trader David White.
Source: Mail & Guardian
Sunday, July 1, 2012
UK politicians: Banking system is corrupt
British politicians have harshly criticised the country's banking system after Barclays was fined for manipulating data, with the leader of the opposition calling for an inquiry and government ministers joining the attack.
LABOUR leader Ed Miliband said the once-lauded banking sector has fallen into disrepute, claiming that over the last 20 years the word "banker" has gone from a compliment "to a gross insult." The British public "will not tolerate anything less than a full, independent and open inquiry" that will investigate every part of the industry, he said during a speech at the left-wing Fabian Society think tank.
US and British agencies on Wednesday imposed fines totalling $US453 million ($A452.62 million) on Barclays for submitting false data used in setting the London interbank offer rate (LIBOR), a key market index, between 2005 and 2009, to make its financial position appear stronger. US and British investigators say the employees of Barclays - and possibly those of other major international banks - clearly knew it was wrong to manipulate the London interbank office rate. The scandal has added fuel to public anger at the banking industry, whose executives face mounting accusations of being overpaid and unethical, and politicians from across the political spectrum were taking on the industry with tough language.
Business Secretary Vince Cable, a member of the Liberal Democrats, the junior partner to the Conservatives in Britain's coalition government, described the country's financial sector as "a massive cesspit." Justice Secretary Ken Clarke, a Conservative, said bankers who commit financial crimes must be brought to trial, telling the BBC that he suspected "financial crime is easier to get away with in this country than practically any other sort of crime."
The Royal Bank of Scotland, one of the banks that was bailed out by taxpayer money in the 2008 financial crisis, has also said it was being investigated for a similar scam. Britain's main financial regulator, the Financial Services Authority, uncovered serious failings in the way complex financial products have been sold to small businesses.
Source: news.com.au
LABOUR leader Ed Miliband said the once-lauded banking sector has fallen into disrepute, claiming that over the last 20 years the word "banker" has gone from a compliment "to a gross insult." The British public "will not tolerate anything less than a full, independent and open inquiry" that will investigate every part of the industry, he said during a speech at the left-wing Fabian Society think tank.
US and British agencies on Wednesday imposed fines totalling $US453 million ($A452.62 million) on Barclays for submitting false data used in setting the London interbank offer rate (LIBOR), a key market index, between 2005 and 2009, to make its financial position appear stronger. US and British investigators say the employees of Barclays - and possibly those of other major international banks - clearly knew it was wrong to manipulate the London interbank office rate. The scandal has added fuel to public anger at the banking industry, whose executives face mounting accusations of being overpaid and unethical, and politicians from across the political spectrum were taking on the industry with tough language.
Business Secretary Vince Cable, a member of the Liberal Democrats, the junior partner to the Conservatives in Britain's coalition government, described the country's financial sector as "a massive cesspit." Justice Secretary Ken Clarke, a Conservative, said bankers who commit financial crimes must be brought to trial, telling the BBC that he suspected "financial crime is easier to get away with in this country than practically any other sort of crime."
The Royal Bank of Scotland, one of the banks that was bailed out by taxpayer money in the 2008 financial crisis, has also said it was being investigated for a similar scam. Britain's main financial regulator, the Financial Services Authority, uncovered serious failings in the way complex financial products have been sold to small businesses.
Source: news.com.au
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