Counterparties: What the Fed knew

By Ben Walsh
July 13, 2012

We now know what the New York Fed knew about Barclays fudging its Libor submissions. Included in the NY Fed’s vast document dump in response to a congressional request is this confidence-deflating exchange from Apr. 11, 2008:

Barclays: So, we know that we’re not posting um, an honest Libor.

NYFR: Okay.

B: And yet and yet we are doing it, because, um, if we didn’t do it

FR: Mm hmm.

B: It draws, um, unwanted attention on ourselves.

The NYT reports that after that and other exchanges between members of the NY Fed and Barclays, Tim Geithner, then head of the NY Fed, called and emailed the head of the Bank of England with his concerns and suggestions for how to improve oversight of Libor. The governor of the BoE, Mervyn King, called those suggestions “sensible”, but as the NYT’s Marc Scott writes, none of them were actually implemented.

And that leads back to the post-scandal explanation offered by Barclays: that England’s central bank tacitly encouraged Barclays to continue its improper Libor submissions. Deputy BoE governor Tucker forcefully argued before members of Parliament on Monday that he was acting precisely as he should have, questioning what Barclays was doing to lower its borrowing rates in the aftermath of its rejection of government capital.

To Matt Levine, the real question for regulators in Barclays’ Libor fixing is intent. The latest emails, he writes, actually make Barclays seem more diligent:

The earlier Barclays emails, in which derivatives traders asked Libor submitters to change their rates to help the swap book, sound terrible: market manipulation for high-fives and profit. Mis-marking within a reasonable range is not necessarily a scandal; in some sense it’s most of what most traders do most of the time. It only becomes a scandal when you do your mis-marking for nefarious purposes, with “hiding trading losses” and “screwing derivatives counterparties” being reasonably obvious nefarious purposes. “Keeping our name out of the FT and our stock price out of the crapper” is a gray area…

During the financial crisis interbank lending all but dried up and, Levine writes, Libor was widely known to be a fiction: ”I think these Fed documents make it hard to share the collective amnesia of thinking that Libor was the most important and trusted thing in the world until it was broken by a secretive coterie of bankers and nobody knew about it. Everybody knew about it”. – Ben Walsh

On to today’s links:

Economy
Public-sector cuts have likely cost the US economy 751,000 private-sector jobs – Jared Bernstein

Politicking
To counter super PAC influence, Soros’s son launches super-duper PAC – WaPO

Long Reads
A mega-mall isn’t all – the multibillion-dollar business of the Mormon Church – Businessweek

JPMorgan
JPMorgan reports $5.8 billion loss on failed CIO trades, quarterly profit drops 9% – DealBook
The complete JPMorgan earnings release – JPMorgan
JPMorgan’s 8K: CIO traders mis-marked securities – JPMorgan
Former-CIO head Ina Drew cedes two years’ pay over trading losses – Bloomberg

China
China’s economic growth is slowing  – and likely at a faster rate than official GDP data suggests – Also Sprach Analyst
China’s “M&A is driven more by politics than the domestic economy” – Bloomberg

Ouch
In a few years the federal government will face a trillion dollars of student loan credit risk – Sober Look

Welcome to Adulthood
Youth unemployment is double the national average – Young Invincibles

Disgusting
Far-right party wants to create Greeks-only blood bank – Foreign Policy

Terrifying
Bankruptcy-seeking San Bernardino has “no legitimate financial filings” – Cate Long

Nothing to See Here
Wells Fargo pays $175 million to settle discrimination claims it denies – WaPo

4 comments

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The Federal Reserve story, and Geithner’s role in it, is one to watch. I was surprised at the way the story broke. I think there is bad news in the pipeline and Geithner — every savvy Washington player — is trying to get ahead of it, shape the narrative that he was crying fire to others who didn’t listen. Get the docs that paint him in the most favorable light out first.

I suspect he knew a lot more than he is letting on and did nothing. There is probably some good stuff to be found by digging around. But these are experienced bureaucratic hands — far more adept than Diamond — and it’ll be interesting to see how the end up looking.

Posted by f.fursty | Report as abusive

Could someone please clarify a matter for me – did Tucker give his legslative testimony this week ‘under oath’? Is so, IMO, he’s got a Whale of a problem.

Posted by MrRFox | Report as abusive

All this hoopla and outrage over rigging the LiBor 5 , 10, or 30 basis points is really missing the elephant in the room.  

The “Prime Rate” is really much more relevant to the U.S.  during the past 50 years.  Until more recently the Libor is not even in the picture in U.S. consumer credit. Most credit cards and consumer loans are/were more tied to the “prime rate” which was defined as the “the rate the banks charged to the banks’ most credit worthy customers, such as the AAA companies”.  Since the late 1980′s the banks have been systematically rigging the prime rate by gradually increasing it over time so that it is now almost 300 basis points (3%) over the real “prime rate”, i.e., what the banks really charged AAA companies such as Exxon and Johnson and Johnson.  This is the banks way of picking everyone’s pocket without permission to the extend of billions and billions of dollars every year.  It is the biggest fraud in America.

Our government and the Federal Reserve actually are part of this scheme in that they redefined the definition of “Prime Rate” in the official publications rather than stopping the banks from doing this. You can check this out just by looking at the old publications from the Federal Reserve Interest Rate Series vs. the current ones.

Even attempts to correct this thru the legal system has been unsuccessful as the banks seem to have influence over the courts also (see Lum vs. Bank of America, et al).

Posted by coochepuma | Report as abusive

“B: It draws, um, unwanted attention on ourselves.”

Ourselves? He of course means “…on us.” For some reason there is a growing collection of, mostly younger, people in the UK who have no idea when or where to use the reflexive. It’s just so wrong. And if they can’t get simple English right, perhaps it is no wonder that other rules are broken without much thought – just avoid getting caught, take no responsibility, just take the money – even if you don’t deserve it.

Posted by FifthDecade | Report as abusive