LIBOR Rate Manipulation: What it Means for Investors

by Jason Jenkins, Investment U Research
Tuesday, July 17, 2012

The Barclays LIBOR case has brought to light LIBOR rate manipulation on a massive scale. What does this mean for your investments?

In case you’re not up on your major British multinational banking and financial services conglomerates, Barclays is headquartered in London and was founded in the late seventeenth century.

It has operations in over 50 countries and territories spanning across five continents. We’re talking upwards of 48 million customers. At the end of last year, it had a market capitalization of approximately $34 billion and was the twenty-second largest company listed on the London Stock Exchange.

So yeah, it’s a big deal…

LIBOR Rate Manipulation

Bear with me. The concept of the LIBOR rate is both simple and convoluted at the same time.

It’s almost amazing that it has a place in the world of high finance.

LIBOR stands for the London Interbank Offered Rate. This is the rate banks are charged to borrow money from each other.

Here’s how it works. Thomas Reuters, on behalf of the British Bankers Association (BBA), goes around daily to a bunch of BBA member banks asking how much it would cost to borrow money today from one another. The rate submitted isn’t based on anything concrete, but an estimate of what they believe they would have to pay. Take out the highs and lows, average the remainder, and you have your LIBOR for that day. Wow, that’s based on some heavy math and concrete data.

Now what does all this merry ole England stuff have to do with you?

Well, chances are you’ll never be in the market for an interbank loan in the U.K. – or at least I don’t think so. But, LIBOR isn’t just one rate with one purpose. Different LIBORs are calculated over different time horizons and in many currencies. The rate is used to price somewhere around $800 trillion of investment vehicles worldwide, including adjustable rate mortgages and student loans.

So what would be the reason to manipulate the LIBOR rate?

There’s been a lot of talk over media outlets that Barclays understated their LIBOR during the financial crisis. If they lowered rates, isn’t this good for consumers? It may have been. But that doesn’t look at the entire horizon of the story.

If you listen to the Regulators at the Commodity Futures Trading Commission (CFTC), the rate manipulation went in both directions. The rate submitted depended upon what type of contract the traders at Barclays were trying to make profitable. This has been documented as going back as far as 2005. That was at the height of market dealing and gambling.

It wasn’t till after the market hit bottom that there was pressure to keep LIBOR down. The lower your borrowing costs, the stronger the bank looked, and vice versa. Remember, the submissions are public record. This information would have easily been factored into pricing its equity.

And then consider that a low interest rate is good for mortgages and car loans because you pay less interest. However, if you’re trying to save in a LIBOR based investment that’s been manipulated lower, you may have been cheated out of return.

And it may have devastated your community. Many cities, pension funds and transportation systems had invested in vehicles based on LIBOR calculations in the mid 2000s. Those entities would have brought in less income if LIBOR was manipulated downwards.

It begs the question, “What cuts in your city or municipality may not have needed to be made?”

That’s why the city of Baltimore is leading a legal battle against banks, such as Barclays, that determine the LIBOR rate. It’s claiming the city’s budget cuts and layoffs were aggravated by the bankers’ LIBOR rate manipulation, which was linked to hundreds of millions of dollars the city had borrowed.

Will Justice Be Served This Time Around? (Probably Not)

Barclays got hit with about $450 million in fines from regulators both in the United States and the United Kingdom.

What may be even more devastating is another black eye for the banking industry. This story just doesn’t have legs across the pond. The initial findings are suggesting that some other global big time players such as Citibank (NYSE: C), J.P. Morgan (NYSE: JPM), HSBC(NYSE: HBC) and Lloyd’s Banking Group (NYSE: LYG) may have had their hands in the LIBOR cookie jar, too.

The bad press and fines may affect some bottom lines and the industry as a whole going forward – granted it hasn’t done much yet. But we may never fully realize the effect this had on unemployment rates and local economies around the United States and the world.

Good Investing,

Jason

http://www.investmentu.com/2012/July/libor-rate-manipulation.html

The largest banking corruption scandal in history - The Libor Banking Scandal

Published on 4 Jul 2012 by 2012sprint

Watch this video to understand the largest banking corruption scandal in history. These large banks have stolen money from every single human on the planet. Not one person was left out. Not even YOU! Now that it is exposed there is no going back. We will ALL support the "NO MORE BAILOUT" mantra...

This one will not go away. It was not planned to go away like other "banking scandals". This one will build and build and build until it is known by every man, woman and child on the planet. This is the exposure that will END the bad guys reign.

I've said it over and over: Timing, timing, timing.

The evil vampire banksters have been stabbed in the heart with various stakes in the past few months but this one is by far the largest. (note: the last one will be made of SILVER so be ready for it!)

http://www.roadtoroota.com/public/570.cfm?awt_l=Hj.JM&awt_m=3aquxoPW7V4C85B

Know this: All is going as planned for the Good Guys.

May the Road you choose be the Right Road.

Bix Weir
www.RoadtoRoota.com
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VIDEO:"Viewpoint" host Eliot Spitzer, Matt Taibbi, Rolling Stone contributing editor, and Dennis Kelleher, president and CEO of Better Markets, analyze the Libor interest rate--rigging scandal engulfing the banking industry.

Barclays CEO Bob Diamond recently resigned after the bank was fined $453 million for its part in the scandal, which involved manipulating the London Interbank Offered Rate (Libor), a key global benchmark for interest rates, by essentially "faking their credit scores," according to Taibbi. And as Taibbi explains, Barclays couldn't have acted alone.

"It can't just be Barclays and the Royal Bank of Scotland. In fact, it can't even be four banks or even five banks," he says. "Really, in the end it's probably going to come out that it's going to be all of them ... involved in this. And that's what's critical for people to understand: that this is a cartel-style corruption."

Kelleher argues that the Libor scandal is proof that the financial industry "is corrupt and rotten to its core." "The same executives [using] the same business model that crashed the entire financial system in '08 are still running these banks," he says.

'The mob learned from Wall Street': Eliot Spitzer on the 'cartel-style corruption' behind Libor scam
July 3, 2012
http://current.com/shows/viewpoint/videos/the-mob-learned-from-wall-street-el...

The Biggest Financial Scam In World History
http://www.infowars.com/the-biggest-financial-scam-in-world-history/

Barclays Brawl: 'Elite manipulated market, UK laws only give slap on wrist'
http://www.youtube.com/watch?v=mSWUowKuSzI

Keiser Technique for financial criminals
http://www.youtube.com/watch?v=tcbtHeQSrmw&list=UUpwvZwUam-
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Some norwegian links:
http://e24.no/boers-og-finans/jeg-elsker-barclays/20250028
http://e24.no/boers-og-finans/barclays-hevder-bank-of-england-oppmuntret-til-...
http://e24.no/moody-s-nedgraderer-barclays/20250282
http://www.dn.no/forsiden/utenriks/article2429409.ece
http://www.dn.no/forsiden/borsMarked/article2429806.ece
http://www.dagbladet.no/2012/07/05/kultur/religion/vatikanet/paven/cern/22432...

When Banks Don't Trust Banks

COMMENTARY May 27, 2010, 5:00PM EST
When Banks Don't Trust Banks
Credit markets are misbehaving again. But having survived the panic of 2008, investors may no longer be so easily rattled

By Pierre Paulden

As Europe's sovereign debt crisis shows signs of turning into a contagion, infecting everything from interbank lending rates in London to the U.S. junk bond market, credit markets are experiencing déjà vu. The almost $1 trillion pledged by European finance ministers this month to bolster the region's finances has failed to mollify investors who worry that euro zone trouble could cause another Lehman-like disruption in worldwide financial markets.

A primary cause for concern now, as then, is the banks. Independent Credit View, a Swiss rating company, estimates that global banks may have a capital deficit of more than $1.5 trillion by the end of 2011 and some may need state help to survive. Libor, the short-term rate at which banks lend to one another, has shot up to 0.538 percent, the highest since July; it was less than half that as recently as March. Other types of short-term IOUs also show strain, with financial companies having to pay an average rate of 0.47 percent on 90-day commercial paper, the highest in a year, Federal Reserve data show. "Failure is not off the table for large financials," says Brian Yelvington, head of fixed-income strategy at Knight Libertas in Greenwich, Conn.



Just a few weeks ago, the credit markets were almost back to pre-Lehman normality. Investors were asking precious little of the borrowers they shoveled money at. As of mid-May, 60 percent of high-yield borrowers were able to get away with weaker investor safeguards on new debt, according to Covenant Review, a New York-based research firm that analyzes bond offerings. Caps were removed on the amount of debt companies can carry, and fewer restrictions were placed on using assets as collateral for future borrowing, effectively reducing what's available to satisfy creditor claims in a bankruptcy. All of these were symptoms of a larger phenomenon that many viewed as healthy: An appetite for risk had returned.

That now appears to have been premature. Though Lehman-style panic has not set back in, market conditions are, to say the least, fraught. Issuance of corporate debt has slowed considerably, falling from $183 billion in April to $53 billion in May, the lowest monthly total since December 1999, according to Bloomberg data. More than 19 companies have delayed or postponed $5 billion of debt deals since Apr. 13, with immediate consequences for corporate spending. Allegiant Travel (ALGT), a Las Vegas-based passenger airline, was forced to put off a $250 million bond offering that it planned to use to pay for MD-80 and Boeing 757 aircraft already under contract. Jones Apparel Group (JNY), a New York-based retailer, pulled a $250 million bond offering that was going to help it acquire a majority stake in shoe designer Stuart Weitzman Holdings. Meanwhile, companies able to raise new debt have to pay a richer premium over benchmark government securities, adding up to 1.96 percentage points, an increase of 0.47 since the end of April. That's the biggest monthly jump since October 2008, a month after Lehman Brothers collapsed. There is carnage in the market for junk bonds, which slid 4.56 percent this month, their worst performance since dropping 8.43 percent in October 2008.

The silver lining is that while bond investors are fleeing credit markets, they are moving into Treasuries, pushing up prices and lowering the government's borrowing cost. The yield on the benchmark 10-year Treasury note fell to 3.06 percent this week, down from 4 percent in April. Among other felicitous effects, that has pushed down mortgage rates and aided the fragile recovery of the national housing market; homeowners can now get a standard 30-year mortgage at 4.85 percent, down from 5.26 percent in early April, according to Bankrate.com in North Palm Beach, Fla., spurring a new flurry of refinancing and boosting new-home sales by 15 percent to their highest levels since May 2008.

Lower rates have also brought down borrowing costs for companies fortunate enough to live at the top of the credit food chain. Abbott Laboratories (ABT), maker of the lucrative arthritis drug Humira, sold $3 billion of bonds on May 24, its first offering in more than a year. The coupon on the biggest portion of the deal, a $1.25 billion slice due in 2040, was 5.3 percent, a full percentage point lower than similarly rated bonds due in more than 15 years, based on Bank of America Merrill Lynch (BAC) index data. "There is a flight to quality, to solid investment-grade companies," says Nicholas Pappas, co-head of flow credit trading in the Americas at Deutsche Bank (DB) in New York.

Even high-yield debt still has fans—or at least bargain hunters willing to swoop in when they spot an attractive price. After junk bonds gained a record 57.5 percent in 2009 and 7.1 percent through April of this year, the market is "correcting," says Jeff Peskind, founder of hedge fund Phoenix Investment Adviser in New York. He scooped up the bonds of credit-card processor First Data and other large leveraged buyouts as prices tumbled this month, anticipating a rebound. First Data, bought by KKR & Co. for $27.5 billion, has seen its bonds decline 17.5 percent this month through May 25, raising concerns among investors about the Atlanta-based company's ability to roll over the $14.3 billion of loans and bonds it has coming due by 2014.

First Data is not alone. Junk-rated borrowers, some of whom were taken private at the height of the leveraged buyout boom in 2007, have $1.25 trillion of debt coming due through 2015. Their prospects are, at best, mixed. "LBOs need growth to de-lever. They also need access to capital markets to continue pushing out maturities," says Jason Rosiak, the head fund manager overseeing $2.7 billion at Pacific Asset Management, an affiliate of Pacific Life Insurance in Newport Beach, Calif.

As for the ol' Libor, well, it could get worse before it gets better. Deepening concern about the quality of banks' collateral and attempts to regulate the banking industry could force it as high as 1.5 percent by September, says Neela Gollapudi, a strategist at Citigroup Global Markets (C) in New York.

That's still a safe distance from its peak. Thus far, market participants tend to agree on one point—if the European debt crisis is a contagion, it will probably not lead back into full-blown panic. The recent experience of a brutal, worldwide, coordinated market plunge left calluses, as well as a resolve not to be left out of the next buying opportunity of a lifetime. A lesson from 2008 is that those with the nerve to wade back into markets at their scary lows can reap remarkable profits; just because some investors head for the exits doesn't mean there will be a mad scramble. As Morgan Stanley (MS) strategists Laurence Mutkin and Elaine Lin put it in a May 26 report: "The repricing of spreads in financing markets, sharp and swift though it has been, still does not amount to evidence of anything like the levels of stress during 2008. Nor, given that central banks have already revived their backstop measures, do we think that it will. Financing markets remain orderly and open."

Paulden is a reporter for Bloomberg News. With Tim Catts and Shannon Harrington.

http://www.businessweek.com/magazine/content/10_23/b4181006668043.htm?campaign_id=magazine_related

Credit markets easing

Feb 11, 2009
Credit markets easing

WASHINGTON - US Federal Reserve chairman Ben Bernanke said on Tuesday the vast array of special central bank programs appear to have helped ease a credit crunch that has been choking economic activity.

Appearing before the House of Representatives Committee on Financial Services, Bernanke said that measuring the impact of the Fed's programs 'is complicated by the fact that multiple factors affect market conditions'.

'Nevertheless, we have been encouraged by the responses to these programs, including the reports and evaluations offered by market participants and analysts,' he stated.

'Notably, our lending to financial institutions, together with actions taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets.'

Mr Bernanke said that in the past year since the Fed and other central banks began efforts to pump liquidity into the financial system, there have been signs of improvement.

He said this is notable in the lowering of the Libor, or London interbank rate, used among banks for short-term loans. He also said corporate short-term borrowing terms have improved since the Fed entered the commercial paper market.

Additionally, he said a drop in US mortgage rates may help steady the critical housing market.

'All of these improvements have occurred over a period in which the economic news has generally been worse than expected and conditions in many financial markets, including the equity markets, have worsened,' he added. -- AFP

http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336882.html

LIBOR - London Interbank Offered Rate

What is LIBOR?

The London Interbank Offered Rate is the rate at which banks will lend unsecured funds to one another. Based on a survey of global banks, it's the most widely used benchmark for short-term interest rates.

When are LIBOR rates determined?

The British Bankers' Association publishes rates Monday to Friday at 11:00 a.m. London time of varying maturities.

How is LIBOR determined?

Each bank determines how much they will have to pay to borrow money from each other. The number of contributing banks vary depending on the currency.

U.S. dollar LIBOR is determined by 16 global banks, and the final published rate is the average of the middle eight rates.

LIBOR and U.S. interest rates

Historically, LIBOR tends to track the Federal Funds Target Rate. However, as economic uncertainty over the global credit crisis continued and the initial U.S. government-sponsored financial bailout failed, the spread between the two rates widened as LIBOR spiked, indicating a lack of confidence among banks.

LIBOR's relationship to consumers.

LIBOR ultimately determines interest rates on everything from adjustable-rate mortgages and car and student loans to small-business loans and credit cards.


Additional notes

http://www.investopedia.com/terms/l/libor.asp

LIBOR

An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.

The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K.


http://en.wikipedia.org/wiki/Federal_funds_rate

Federal funds rate comparison with LIBOR

Though the London Interbank Offered Rate (LIBOR) and the federal funds rate are concerned with the same action, i.e. interbank loans, they are distinct from one another, as following:

1. The federal funds rate is a target interest rate that is fixed by the FOMC for implementing U.S. monetary policies.

2. The federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies' securities).

3. LIBOR is calculated from prevailing interest rates between highly credit-worthy institutions.

4. LIBOR may or may not be used to derive business terms. It is not fixed beforehand and is not meant to have macroeconomic ramifications.

Federal Funds Rate and the Discount Rate

The discount rate, in contrast, is usually about a half to a full percentage point higher than the federal funds rate. The Federal Reserve does control that one. The discount rate is the interest rate the Federal Reserve charges other depository institutions for very short-term (usually overnight) loans.