LIBOR-gate: Here Come The Arrests

by Tyler Durden on 07/22/2012 - ZERO Hedge


For over four years, virtually everyone in the finance industry knew that Libor was manipulated.

The stench of manipulation rose to the very top and thanks to a document release of formerly confidential information, we now know for a fact that even the Fed was in on it - recall that as part of production, the Fed provided a transcript of an April 2008 phone call between a Barclays trader in New York and Fed official Fabiola Ravazzolo, in which the unidentified trader said: "So, we know that we're not posting um, an honest LIBOR." And yet without any tangible, black on white evidence, there was no catalyst for pursuing legal action.

That all changed when in a desperate attempt to protect its ass, Barclays decided to rat out everyone by settling with regulators, and "turn state" producing e-mail based evidence, most of it quite visual (after all what is more tangible to the common man that evil bankers sipping on Bollinger), which essentially threw years of quiet cartel cooperation under the bus. As a result, regulators, enforcers, and legal authorities, many of whom were in on this manipulation from the beginning, no longer had an excuse to not pursue civil and criminal charges against perpetrators, who until recently were footing the tabs at various gentlemen's venues and ultra expensive restaurants. And while the imminent waterfall of civil prosecution will force bank litigation reserves to go through the roof, here comes, with a very long delay, the criminal charges.

As Reuters reports, here come the arrests.

But before we get into it, we wanted to share something mildly curious involving that British Bankers Association: the entity that until recently at least, was implicitly in charge of the Libor fixing, submission, and distribution process (also the entity that will quite soon be non-existent).

It involves the BBA's self-professed Governance process and obligations. The extract below shows what it is currently.

All aspects of the operation and management of bbalibor as a benchmark are the responsibility of the independent Foreign Exchange and Money Markets Committee ('FX&MM Committee'). This includes design of the benchmark and the governance and scrutiny of all bbalibor data and all panel bank contributions. BBA LIBOR Ltd undertakes the day to day running of the benchmark under the supervision of the Foreign Exchange and Money Markets Committee. As of 1st January 2010, BBA LIBOR Ltd. has been governed by an independent Board.

Thomson Reuters - the 'Designated Distributor' of BBA LIBOR - is tasked with collecting the daily submissions that are inputs into the bbalibor process and submitting them to rigorous checks before publishing the resulting calculation to the market. If any bank submission falls outside a defined set of parameters, Thomson Reuters will consult the contributor and request confirmation that the rate provided is correct, thus allowing any simple typing errors to be amended promptly. These parameters are agreed by the FX&MM Committee and are regularly reviewed to ensure they reflect prevailing market conditions and maintain the highest level of scrutiny over the rates.

There is a named individual at each bank responsible for submitting the daily bbalibor rates to Thomson Reuters and this will be the person responsible for the bank's cash - usually their title is 'treasurer' or similar. There is written guidance on what information that person should take into account when calculating that day's rates for his or her bank. As all contributor banks are regulated, they are responsible to their regulators, rather than BBA LIBOR Ltd. or the FX&MM Committee, for maintaining appropriate procedures for contributing, including the maintenance of internal chinese walls.

The reason we have bolded the third paragraph is that if one had gone to the BBA's Governance section as recently as a few weeks ago, or prior to Liborgate becoming front page news, the paragraph read something totally different. However, courtesy of the Way Back Machine, we have a great idea of just what the BBA quietly and under the radar tried to change vis-a-vis its own obligations and responsibilities in the Libor scandal. This is what the third paragraph said before.

BBA LIBOR Ltd. receives the fixings and underlying contributor data at the same time as all other live data recipients and monitors all submissions into the fixing process. Any anomalous rates are queried with the submitting bank, and a log of these queries is kept and given to the FX&MM Committee on a periodic basis, who may choose at their discretion to follow up these queries in line with established governance and scrutiny procedures.

Up until literally minutes ago, the question to be asked was why was this change made on the page, on a governance page of all places, a change which shirks responsibility and accountability and begs the question, did BBA log any queries of anomalous rates, did the FX&MM Committee follow up on any queries, or are they simply trying to bury something here? Now, thanks to Reuters, we know.

With arrests on deck, the BBA is doing everything it can to distance itself from what it knows with absolute certainty is about to be a shitstorm of epic proportions:

U.S. prosecutors and European regulators are close to arresting individual traders and charging them with colluding to manipulate global benchmark interest rates, according to people familiar with a sweeping investigation into the rate-rigging scandal.

Federal prosecutors in Washington, D.C., have recently contacted lawyers representing some of the individuals under suspicion to notify them that criminal charges and arrests could be imminent, said two of those sources who asked not to be identified because the investigation is ongoing.

Defense lawyers, some of whom represent individuals under suspicion, said prosecutors have indicated they plan to begin making arrests and filing criminal charges in the next few weeks. In long-running financial investigations it is not uncommon for prosecutors to contact defense lawyers for individuals before filing charges to offer them a chance to cooperate or take a plea, these lawyer said.

The prospect of charges and arrests of individuals means that prosecutors are getting a fuller picture of how traders at major banks allegedly sought to influence the London Interbank Offered Rate, or Libor, and other global rates that underpin hundreds of trillions of dollars in assets. The criminal charges would come alongside efforts by regulators to punish major banks with fines, and could show that the alleged activity was not rampant in the banks.

Actually what it will show is that criminal activity was not only rampant, but everyone knew about it, certainly the regualtors, and most certainly the Fed and the BOE. After all how could they not: they are the ultimate entities who manipulate rates. But for them it is a matter of "policy." As such they are desperate to throw anyone under the bus, as long as public attention is redirected from them.

So where will the first arrests come? Why the world's biggest bank of course.

The source familiar with the regulatory investigation in Europe said two traders who have been suspended from Deutsche Bank were among those being investigated. A Deutsche Bank spokesman declined to comment.

Then, once DB is down and out, next it will be a turn to not only break up of the IR derivative trading cabal in Geneva, which Zero Hedge exposed first, but also extract a solid fee from the Swiss banks in the process.

The Financial Times reported on Wednesday that regulators were looking at suspected communication among four traders who had worked at Barclays, Credit Agricole, HSBC and Deutsche Bank.

And so the tide turns, as banks, all of which should have ended up as bailed out utilities in the aftermath of the Lehman collapse, will now be forced to fork over billions in cash to the same governments and administrations that bailed them out in the first place, under the guise of civil and criminal penalty disgorgement in what will almost certainly end up as the biggest financial settlement in history, one which will leave most of the world's banks sorely undercapitalized and force the Basel implementation of various capital requirements to be scrapped indefinitely.

But for now, the public will get its circus (if not corn bread: its price is about to shoot right to the moon courtesy of prayer not being a viable strategy when it comes to procuring rain... or central bank intervention) courtesy of an imminent procession of perp walks. We, for one, having waited nearly 4 years for just this, can't wait.

How Banks Cheat

Artful Liars

by CHRISTOPHER BRAUCHLI

I think a lie with a purpose is wan iv the’ worst kind an’ the mos’ profitable.
– Finley Peter Dunne On Lying

There was something refreshing about Bernie Madoff.  He robbed Peters to pay Pauls and it worked well until there were more Pauls than Peters. It was straightforward and simple.  And that is the difference between him and Barclays, JPMorgan Chase, Goldman Sachs and the many other large financial institutions that cheat those with whom they deal. Bernie was not subtle.  No Congressional hearings or hearings in the British parliament were required in order to understand what happened.

A man named Diamond runs Barclays and a man named Dimon runs JPMorgan Chase. The similarity in names is not all they have in common. Each man has presided over an institution that has dealt less than fairly, in the case of JPMorgan, with its customers,  and in the case of Barclays, with consumers everywhere.  JPMorgan did it by ripping off its customers and Barclays did it by manipulating the LIBOR rate.  (It is now reported that four other major European banks are being investigated for similar behavior.)

Barclays manipulated the LIBOR rate from 2005-2009.  The LIBOR rate is the rate banks charge each other for inter-bank loans.   

According to Ezra Klein from 2005 to 2007 Barclay’s placed bets that LIBOR rates would increase.  Barclays would then report artificially high rates to the authority gathering the rates from the banks to establish the LIBOR rate thus improving the chance that the LIBOR rate would go up and the bets the firm made would pay off.    Investors on the other side of the bet were losers and borrowers whose interest rates on loans were set to LIBOR were paying artificially high rates. Beginning in 2008 when the solvency of financial institutions was being questioned, instead of reporting artificially high rates Barclays reported artificially low rates leading regulators to believe the bank was healthier than it was thus reducing the likelihood that its stability would be questioned.  (When rates were low consumers benefitted since mortgages, credit card loans and other financial transactions are tied to those rates.)   When the LIBOR manipulation came to light, Mr. Diamond sent a memo to staff saying he was “disappointed because many of these things happened on my watch.” 

On July 2 he said that although disappointed he would not resign his position.  On July 3 he resigned.  Chancellor of the Exchequer, George Osborne, said the episode was “evidence of systematic greed at the expense of financial integrity and stability” and said the bank was in flagrant breach of its duty “to observe proper standards of market conduct. . . .”  Any reader who tries to understand my attempt to describe the LIBOR manipulation and its effects will certainly appreciate the simplicity of Mr. Madoff’s scheme.

JPMorgan Chase is one of the largest mutual fund managers in the country.  In addition to selling its own funds, it is in a position to sell other funds to its customers.  According to a story in the New York Times its sales personnel were encouraged to sell customers its proprietary funds rather than those of competitors, even when the competitors’ funds had historically performed better than the bank’s funds. One former employee said he was “selling JPMorgan funds that often had weak performance records, and  I was doing it for no other reason than to enrich the firm.  I couldn’t call myself objective.”  Some people might have been surprised at those disclosures thinking that the bank would have reformed its ways after 2011.  That was the year the bank was ordered to pay $373 million to American Century Investments because it failed to honor its agreement with American Century to promote American Century products when it acquired that firm’s retirement-plan services unit.  The arbitrators who heard the case said JPMorgan employees were rewarded for pushing JPMorgan’s own products.

Goldman Sachs is another venerable institution that benefits itself at the expense of its customers.  In March 2012 Chancellor Leo Strine of the Court of Chancery in Delaware issued a lengthy ruling in the case of in re El Paso Shareholder Litigation.   He criticized Goldman for its blatant conflict of interest when trying to acquire El Paso Corp describing it as “disturbing behavior.” Jonathan Weil who writes for Bloomberg,  made the observation about Goldman’s conduct in that transaction that  Goldman had “every incentive to maximize its own investment and fleece El Paso shareholders.”   

At roughly the same time Chancellor Strine’s opinion was making the news a former Goldman employee published an op-ed piece in the New York Times in which he said, among other things, that the firm’s clients were “sidelined in the way the firm operates and thinks about making money. . . . It is purely about how we can make the most possible money off them {clients.}.”

Readers should understand that the foregoing does not purport to be a complete list of banks that have devised schemes to enrich themselves at the expense of their customers. It is only a small sampling.  As I said at the outset, the nice thing about Bernie was how straightforward his malfeasance was.   Everyone can understand it.  The banks are no more honest than he-just more artful.

This Global Financial Fraud and Its Gatekeepers

Sunday, July 15, 2012 by The Guardian/UK
The media's 'bad apple' thesis no longer works. We're seeing systemic corruption in banking – and systemic collusion

by Naomi Wolf

 

Last fall, I argued that the violent reaction to Occupy and other protests around the world had to do with the 1%ers' fear of the rank and file exposing massive fraud if they ever managed get their hands on the books. At that time, I had no evidence of this motivation beyond the fact that financial system reform and increased transparency were at the top of many protesters' list of demands.

But this week presents a sick-making trove of new data that abundantly fills in this hypothesis and confirms this picture. The notion that the entire global financial system is riddled with systemic fraud – and that key players in the gatekeeper roles, both in finance and in government, including regulatory bodies, know it and choose to quietly sustain this reality – is one that would have only recently seemed like the frenzied hypothesis of tinhat-wearers, but this week's headlines make such a conclusion, sadly, inevitable.

The New York Times business section on 12 July shows multiple exposes of systemic fraud throughout banks: banks colluding with other banks in manipulation of interest rates, regulators aware of systemic fraud, and key government officials (at least one banker who became the most key government official) aware of it and colluding as well. Fraud in banks has been understood conventionally and, I would say, messaged as a glitch. As in London Mayor Boris Johnson's full-throated defense of Barclay's leadership last week, bank fraud is portrayed as a case, when it surfaces, of a few "bad apples" gone astray.

In the New York Times business section, we read that the HSBC banking group is being fined up to $1bn, for not preventing money-laundering (a highly profitable activity not to prevent) between 2004 and 2010 – a six years' long "oops". In another article that day, Republican Senator Charles Grassley says of the financial group Peregrine capital: "This is a company that is on top of things." The article goes onto explain that at Peregrine Financial, "regulators discovered about $215m in customer money was missing." Its founder now faces criminal charges. Later, the article mentions that this revelation comes a few months after MF Global "lost" more than $1bn in clients' money.

What is weird is how these reports so consistently describe the activity that led to all this vanishing cash as simple bumbling: "regulators missed the red flag for years." They note that a Peregrine client alerted the firm's primary regulator in 2004 and another raised issues with the regulator five years later – yet "signs of trouble seemingly missed for years", muses the Times headline.

A page later, "Wells Fargo will Settle Mortgage Bias Charges" as that bank agrees to pay $175m in fines resulting from its having – again, very lucratively – charged African-American and Hispanic mortgagees costlier rates on their subprime mortgages than their counterparts who were white and had the same credit scores. Remember, this was a time when "Wall Street firms developed a huge demand for subprime loans that they purchased and bundled into securities for investors, creating financial incentives for lenders to make such loans." So, Wells Fargo was profiting from overcharging minority clients and profiting from products based on the higher-than-average bad loan rate expected. The piece discreetly ends mentioning that a Bank of America lawsuit of $335m and a Sun Trust mortgage settlement of $21m for having engaged is similar kinds of discrimination.

Are all these examples of oversight failure and banking fraud just big ol' mistakes? Are the regulators simply distracted?

The top headline of the day's news sums up why it is not that simple: "Geithner Tried to Curb Bank's Rate Rigging in 2008". The story reports that when Timothy Geithner, at the time he ran the Federal Reserve Bank of New York, learned of "problems" with how interest rates were fixed in London, the financial center at the heart of the Libor Barclays scandal. He let "top British authorities" know of the issues and wrote an email to his counterparts suggesting reforms. Were his actions ethical, or prudent? A possible interpretation of Geithner's action is that he was "covering his ass", without serious expectation of effecting reform of what he knew to be systemic abuse.

And what, in fact, happened? Barclays kept reporting false rates, seeking to boost its profit.

Last month, the bank agreed to pay $450m to US and UK authorities for manipulating the Libor and other key benchmarks, upon which great swaths of the economy depended. This manipulation is alleged in numerous lawsuits to have defrauded thousands of bank clients. So Geithner's "warnings came too late, and his efforts did not stop the illegal activity".

And then what happened? Did Geithner, presumably frustrated that his warnings had gone unheeded, call a press conference? No. He stayed silent, as a practice that now looks as if several major banks also perpetrated, continued.

And then what happened? Tim Geithner became Treasury Secretary. At which point, he still did nothing.

It is very hard, looking at the elaborate edifices of fraud that are emerging across the financial system, to ignore the possibility that this kind of silence – "the willingness to not rock the boat" – is simply rewarded by promotion to ever higher positions, ever greater authority. If you learn that rate-rigging and regulatory failures are systemic, but stay quiet, well, perhaps you have shown that you are genuinely reliable and deserve membership of the club.

Whatever motivated Geithner's silence, or that of the "government official" in the emails to Barclays, this much is obvious: the mainstream media need to drop their narratives of "Gosh, another oversight". The financial sector's corruption must be recognized as systemic.

Meanwhile, Britain is sleepwalking in a march toward total email surveillance, even as the US brings forward new proposals to punish whistleblowers by extending the Espionage Act. In an electronic world, evidence of these crimes lasts forever – if people get their hands on the books. In the Libor case, notably, a major crime has not been greeted by much demand at the top for criminal prosecutions. That asymmetry is one of the insurance policies of power.

Another is to crack down on citizens' protest.

Libor Investigation Reveals Widespread Corruption

(We've lamented the lack of bankers being prosecuted for the fraud they pulled on the US and world. The fallout from this might mean bankers' heads will roll...--jef)

++++

Sunday, July 15, 2012 by Common Dreams
 

As details of the investigation into the Libor rate rigging scandal are known, a picture of systemic corruption among the biggest banks is emerging.

While Barclays is the only bank to have admitted wrongdoing at this time, the New York Times reports that "the multiyear investigation has ensnared more than 10 big banks in the United States and abroad."

The Times adds: "Given the scope of the problems and the number of institutions involved, the rate-rigging investigation could provide a signature moment to hold big banks accountable for their activities during the financial crisis."

'It’s hard to imagine a bigger case than Libor,' said one of the government officials involved in the case."

That comment is echoed by Andrew Lo, a professor of finance at the Massachusetts Institute of Technology, who said, "This dwarfs by orders of magnitude any financial scams in the history of markets."

The Independent also reports on the systemic problem, writing that the British Financial Services Authority inquiry into the rate rigging scandal "suggests that there was a culture of rate-rigging in the investment banking division that Mr Diamond ran during the focus of the investigation, from 2005 to 2009, which might have been the cause of Libor-fixing spreading elsewhere.

A source close to the Treasury Select Committee said: 'One of the questions that still needs to be answered is if this was some sort of virus that was spreading through the system from Barclays when people left to go elsewhere, or was it just a dealing room where people were using their old contacts, be it at Barclays or anywhere else?'"

Blogging on Firedoglake, Scarecrow notes that the real victims of the scandal got left in the dark for years. "The thing that has apparently shocked so many people in the last few weeks since the story broke on Barclays’ bid rigging settlement with US and UK regulators is that no one seems to have warned the victims that the entire structure for setting interest rates on consumer loans, mortgages, municipal bonds, insurance swaps and everything else in the economy — literally trillions of dollars in transactions — was rigged. It’s 2012, and they (the victims) just found out, so now there are hundreds of entities lining up to sue the world's largest banksters for one the largest frauds in history."

It’s True, Bankers Really Do Control the World: Study

Tuesday, October 25, 2011 by Globe and Mail

by Catherine McLean 

 

 

WINTERTHUR, Switzerland - Here’s a gift to Occupy Wall Street protesters around the world: you now have scholarly proof that banks control the world.

Researchers at the Swiss Federal Institute of Technology Zurich, also known as ETH, have published a paper that argues just 147 companies account for a large chunk of the total economic value of all the transnational companies around the world. No exact dollar figures, but it’s obviously a vast sum.

Among the top 50 corporations, 45 operate within the financial industry. Barclays PLC is the most powerful, according to the ETH study, followed by such well-known names as JPMorgan Chase & Co., UBS AG, and Merrill Lynch & Co., Inc.

The United States takes home first prize with 24 companies cracking the researchers’ top 50 list, followed by the U.K. with 8, France with 5, Japan with 4, and Germany, Switzerland and the Netherlands tying with 2 companies each. Canada has one company in the researchers’ top 50: Sun Life Financial, Inc. secures the 35th spot.

The research shows “a large portion of control flows to a small tightly-knit core of financial institutions,” authors Stefania Vitali, James Glattfelder and Stefano Battiston wrote in their study entitled: The network of global corporate control.

“This core can be seen as an economic 'super-entity' that raises new important issues both for researchers and policy makers.”

While the authors note that many in the worlds of academia and the media already believe the world’s economy is run by a small number of companies, there was no actual data to back it up. So they set out to study the elaborate ownership structures of 43,060 transnational companies, eventually uncovering more than one million ownership ties within that network.

The authors believe this level of control among a small number of players has a significant impact on the world’s economic health. The 147 companies in the “core” control 40 per cent of the total economic value of all transnational corporations.

“The top ranked actors hold a control ten times bigger than what could be expected based on their wealth,” the authors noted.

The intense interconnection and concentration of power weakens market competition as players form blocs, according to the study. There’s another drawback to those close links, particularly among the banks: when one runs into problems its woes spread quickly to the others.

Critics say the study doesn’t take into account that fund managers don’t always choose to control a company’s strategy via their investment, among other complaints.

Nevertheless, the study is sure to warm the hearts of Wall Street protestors camping out on these cold fall days.