Libor non-scandal of the day, Citigroup edition

By Felix Salmon
July 30, 2012
Omer Rosen, it would seem, for one.

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What kind of person confesses to a crime he didn’t commit? Omer Rosen, it would seem, for one. His piece in the Boston Review today is headlined “I, Too, Have Messed with LIBOR”, and after a lot of throat-clearing he finally utters the fateful words:

I was not setting the official LIBOR—no one would borrow money or otherwise make or receive payments based on my LIBORs. However, for the purposes of this particular deal, I was ‘setting’ LIBOR.

The scare quotes are doing a huge amount of work, there, because in fact Rosen not only wasn’t setting Libor; he really wasn’t even “setting” Libor, either. Here’s the tl;dr version of Rosen’s 1,700-word piece: Rosen was working at Citigroup, on a deal which would save a client millions of dollars in taxes. But banks know better than to put things in writing saying “you should do this deal because you’ll save a shedload of money in taxes”. So instead they concoct an ersatz financial justification for the deal which allows everybody to sit around a table gravely nodding their heads and saying “yes of course it makes perfect financial sense, in and of itself, for us to borrow at a high fixed rate instead of a low floating rate, and wow, look at that, there are tax benefits too, that’s just icing on the cake”.

In this case, the ersatz financial justification was about as simple as it could get: Rosen basically just said “hey, if you borrowed at a floating rate, then if interest rates went up, you’d end up paying more money than if you borrowed at a fixed rate”. And that, apparently, was all the wispy gauze of a financial justification needed for the deal to go through.

There was no setting-of-Libor going on here: there was just a possible future path for interest rates generally, combined with a willful ignorance of, say, the existence of interest-rate swaps. According to Rosen, he was told by his managing director that “tax transactions are illegal” — if that’s true, then the real scandal here has nothing to do with Libor, and everything to do with the fact that Citigroup put together an illegal transaction. But frankly I doubt that the transaction was illegal; I think the people structuring it just didn’t want to raise unnecessary red flags with the IRS.

But that’s the problem with things like the Libor scandal, I guess. Once a top-tier bank like Barclays cops to lying about Libor, everybody else wants to inflate their importance by joining their ranks. Even if what they did really had nothing to do with Libor manipulation at all.


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