‘What’s it got to do with me?’ Turning a blind eye to Libor lies

Barclays was fined a record $450 million last month by U.S. and UK authorities for manipulating the London Interbank Offered Rate, or Libor, the interest rate that underpins transactions worth trillions of dollars worldwide, between 2005 and 2009.  More than a dozen banks are expected to be drawn into the scandal, which is being probed by authorities in North America, Europe and Japan.

Below is the fascinating account of a former bank staff who worked alongside money market traders on just how it all went down:

Going back a step … and in many industries still today, there is this truly working concept which is my word is my bond. And that’s how the City used to function before, a long time ago, and in many things, up until very recently.

This is the basic assumption in the Libor rates … It’s a highly prestigious invitation by the British Bankers’ Association for you to participate and certainly in many banks, in fact, in most banks it was treated with the respect that it was due. In other words, the ones who were lying – cause there is no other word for it – the ones who were lying about the rate at which they had been offered money or were offering money are a few. It was a persistent few and we all knew it.

All we had to do is once they had put their Libor rates in at 11 o’clock, we would look and go ‘Christ, that’s way out of what we had been doing.’ It is a very small group of people in this business, many of whom are on first name terms and know each other by sight and for drinks and you just pick up the phone and say to whoever ‘I see you are offering three-month dollars at x, I’ll have some of those’. And (that person) would then turn around and say ‘I have got none left’. And you knew that his rate was a lie.

Interview: Richmond Fed’s Lacker on Libor, ‘soggy’ growth and the limits of monetary policy

There appears to have been a significant slowdown in the second quarter. In particular we saw the pace of job creation slowed to a pace of 75,000 per month in the second quarter down from 226,000 in the first quarter and there are also concerns about slowing growth globally, beyond Europe but also in the emerging world and China, which was highlighted in the minutes (to the June meeting) this week. So, where do you think we’re headed? Are we just going to remain in a soft kind of pace? Are there upside risks to growth? Are there downside risks to growth?

Growth has definitely softened. The data are unmistakably weaker in the second quarter than we had hoped they would be. I think everyone recognized the first quarter and the end of last year were a little bit stronger than we might be able to sustain in the middle of the year but it’s definitely come in softer than I’d expected.

At the beginning of the year, it seemed as if Europe wouldn’t maybe weaken as much as we thought but lately the weakening from Europe has been coming online. In the U.S., I think we’re in a situation where we’re going to fluctuate from between the level where we are now to a level that’s more like we saw six or eight months ago. We’re going to have soggy patches, we’re going to have stronger spurts. If you look back over the last three years that’s the record you see. I don’t see a reason for that to change markedly.

Creaky credit markets

It’s not a snap or even a pop – but there’s definitely a crackle. Rumblings emerging from key credit markets bare a frightening resemblance to the early days of the 2008 credit crunch.

Take commercial paper, a widely used instrument for short-term funding in the corporate world. Financial sector issuance of commercial paper fell steadily in the second half of last year, from around $556.5 billion in July to $434.4 brillion in December.  The final month of the year saw the downward trend spilling over into other industries.

Paul Ashworth at Capital Economics:

The contraction in commercial paper issued by the financial sector is now being compounded by a dramatic drop off in commercial paper loans to the non-financial sector.