Wm. K. Black: The Most Dishonest Number in the World: LIBOR
by Lambert Strether
Posted on March 17, 2014
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives
The FDIC has sued 16 of the largest banks in the world plus the British Bankers Association (BBA) alleging that they engaged in fraud and collusion to manipulate the London Inter-bank Offered Rate (LIBOR). BBA called LIBOR “The most important number in the world.”
LIBOR is actually many numbers that depend on the currency and term (maturity) of the loan. The collusion involved manipulating most of these rates. A vast number of loans and derivatives are priced off of these “numbers.” Estimates of the notional dollar amount of deals affected by the collusion range from $300-550 trillion in deals manipulated at any given time. The LIBOR frauds began no later than 2005 and continued through 2011.
The BBA and the banks claimed to the world that LIBOR was simply the prices (interest rates) set by the market for what it cost the world’s largest banks to borrow from each other. The banks would report to the BBA those interest rates and, after excluding outliers, the average reported cost to borrow for X days in Y currency would be reported as the LIBOR “number.”
The system was not regulated. The theory was that the banks self-regulated. LIBOR was the City of London’s “crown jewel” and theoclassical economics predicted that the elite banks’ self-interest in their reputation and the value they gained from having LIBOR as the global standard would ensure that the banks would report honestly. As my readers know, any discussion of the “banks’” interests is dangerously misleading. The key question is the interests of the banks’ officers, particularly those that control the banks. The “unfaithful agent” (bank officer) is the leading threat to the banks. Theoclassical economists assumed away the “agency” problem.
The fact that the FDIC “only” sued 16 of the largest banks in the world does not indicate that the other elite banks were run honestly. The other elite banks were not part of the group that set LIBOR so they could not join in the cartel. The LIBOR conspiracy could only succeed and persist if none of 16 elite banks was controlled by honest officers and no regulator acted to end the collusion once they became aware of the collusion (which happened no later than April 16, 2008). We ran a real world test of the ethics of the leaders of 16 of the world’s most elite banks. The scorecard according to the U.S. government agency that investigated the matter (the FDIC) reports that each of the leaders failed. Our twin emergencies are financial and ethical.
According to the FDIC investigation, the three largest banks in America (including the world’s two largest banks), the four largest banks in the U.K, the largest bank in German, the largest bank in Japan (plus one of the handful of surviving “main banks”), the third largest bank in France, the two largest Swiss banks, the second largest bank in Canada, and the second largest bank in the Netherlands conspired together to manipulate LIBOR and not only lied about it but also covered up the cartel and the fraud scheme it used. The 15 surviving banks’ total assets were nearly twice as large as the U.S. GDP as of September 30, 2013.
Here are the data on the banks sued by the FDIC
Bank ($ billions, IFRS, as of 9/30/13)
Bank of America Corp 3063^
Barclays PLC 2275
Citigroup Inc 2693^
Credit Suisse Group AG 1643^
Deutsche Bank AG 2420
HSBC Holdings PLC 2723
JPMorgan Chase & Co 3678^
The Royal Bank of Scotland Group PLC 1829
UBS AG 1160
Rabobank 908
Lloyds Banking Group PLC 1409
Societe Generale 1698
Norinchukin Bank 846
Royal Bank of Canada 825
Bank of Tokyo-Mitsubishi UFJ 2469
Total: 29639
Source: SNL Financial
^Data for banks that follow U.S. generally accepted accounting principles (GAAP) (yes; that includes Credit Suisse) adjusted to the International Financial Reporting System (IFRS) basis to make data comparable. (The difference is how financial derivative positions are measured.)
*I excluded one of the banks the FDIC sued, WestLB AG, because the (infamous) German Landesbank was sold as part of a German bailout during the crisis. It had over $400 billion in total assets before its collapse during the crisis.
Ethics
Consider the ethical and political implications of what the FDIC investigation has confirmed. The entire barrel of apples is rotten. Every CEO failed the ethical test, and the ethical bar that they failed to surmount was set exceptionally low. That can only happen when a “Gresham’s” dynamic has been allowed to persist for years because of the three “de’s” (deregulation, desupervision, and de facto decriminalization). Such a dynamic can cause “bad ethics to drive good ethics out of the markets.” No one should be able to view the facts the FDIC cites without a sense of horror combined with an urgent commitment to transform the industry that has done so much financial and ethical harm to our nations. The twin emergencies are global.
Crony Capitalism and Politics
There are two possibilities: the Obama administration knew for six years that the world’s largest banks were endemically led by frauds or the administration learned of that fact recently when it learned of the results of the FDIC investigation. The LIBOR scandal became public knowledge with the Wall Street Journal’s April 16, 2008 expose, so the Bush administration also knew it was dealing with elite frauds. If the Obama administration has long known that fraud was endemic among the leaders of the world’s largest banks, then its policies toward those CEO and the banks they control have been reprehensible and harmful.
If the administration has just learned from the FDIC investigation about the true nature of the CEOs that it has refused to hold accountable and allowed to retain and even massively increase their wealth through leading control frauds then we can doubtless expect a series of emergency actions transforming the administration’s finance industry policies. The FDIC lawsuit provides a “natural experiment” that allows us to test which of the possibilities was correct.
Let’s review the bidding. The U.S. government, through the FDIC, has found after a lengthy investigation that the leaders of 16 of the world’s largest banks conspired together to form a cartel to manipulate the LIBOR “numbers” and to defraud the public about the scam. This should have led the criminal justice authorities to prosecute large numbers of senior officers of these banks – but none of them have been prosecuted. It obviously poses a grave threat to the “safety and soundness” of the entire financial system . The endemic frauds led by elite CEOs demonstrate such a pervasive failure of integrity and ethics by the leaders of the finance industry that there is a moral crisis of tragic proportions. So here are some questions (along with the usual who, when, where details) I request that the media formally ask the administration:
1.Did the FDIC brief the administration before it brought its LIBOR suit?
2.Why didn’t Attorney General Holder and the FDIC leadership conduct a news conference announcing the suit and emphasizing its implications?
3.Why didn’t the FDIC’s “home page” or press release site even note the suit?
4.Did the suit cause the administration to transform its finance industry policies?
5.When will the President address the Nation about fixing the twin emergencies?
by Lambert Strether
Posted on March 17, 2014
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives
The FDIC has sued 16 of the largest banks in the world plus the British Bankers Association (BBA) alleging that they engaged in fraud and collusion to manipulate the London Inter-bank Offered Rate (LIBOR). BBA called LIBOR “The most important number in the world.”
LIBOR is actually many numbers that depend on the currency and term (maturity) of the loan. The collusion involved manipulating most of these rates. A vast number of loans and derivatives are priced off of these “numbers.” Estimates of the notional dollar amount of deals affected by the collusion range from $300-550 trillion in deals manipulated at any given time. The LIBOR frauds began no later than 2005 and continued through 2011.
The BBA and the banks claimed to the world that LIBOR was simply the prices (interest rates) set by the market for what it cost the world’s largest banks to borrow from each other. The banks would report to the BBA those interest rates and, after excluding outliers, the average reported cost to borrow for X days in Y currency would be reported as the LIBOR “number.”
The system was not regulated. The theory was that the banks self-regulated. LIBOR was the City of London’s “crown jewel” and theoclassical economics predicted that the elite banks’ self-interest in their reputation and the value they gained from having LIBOR as the global standard would ensure that the banks would report honestly. As my readers know, any discussion of the “banks’” interests is dangerously misleading. The key question is the interests of the banks’ officers, particularly those that control the banks. The “unfaithful agent” (bank officer) is the leading threat to the banks. Theoclassical economists assumed away the “agency” problem.
The fact that the FDIC “only” sued 16 of the largest banks in the world does not indicate that the other elite banks were run honestly. The other elite banks were not part of the group that set LIBOR so they could not join in the cartel. The LIBOR conspiracy could only succeed and persist if none of 16 elite banks was controlled by honest officers and no regulator acted to end the collusion once they became aware of the collusion (which happened no later than April 16, 2008). We ran a real world test of the ethics of the leaders of 16 of the world’s most elite banks. The scorecard according to the U.S. government agency that investigated the matter (the FDIC) reports that each of the leaders failed. Our twin emergencies are financial and ethical.
According to the FDIC investigation, the three largest banks in America (including the world’s two largest banks), the four largest banks in the U.K, the largest bank in German, the largest bank in Japan (plus one of the handful of surviving “main banks”), the third largest bank in France, the two largest Swiss banks, the second largest bank in Canada, and the second largest bank in the Netherlands conspired together to manipulate LIBOR and not only lied about it but also covered up the cartel and the fraud scheme it used. The 15 surviving banks’ total assets were nearly twice as large as the U.S. GDP as of September 30, 2013.
Here are the data on the banks sued by the FDIC
Bank ($ billions, IFRS, as of 9/30/13)
Bank of America Corp 3063^
Barclays PLC 2275
Citigroup Inc 2693^
Credit Suisse Group AG 1643^
Deutsche Bank AG 2420
HSBC Holdings PLC 2723
JPMorgan Chase & Co 3678^
The Royal Bank of Scotland Group PLC 1829
UBS AG 1160
Rabobank 908
Lloyds Banking Group PLC 1409
Societe Generale 1698
Norinchukin Bank 846
Royal Bank of Canada 825
Bank of Tokyo-Mitsubishi UFJ 2469
Total: 29639
Source: SNL Financial
^Data for banks that follow U.S. generally accepted accounting principles (GAAP) (yes; that includes Credit Suisse) adjusted to the International Financial Reporting System (IFRS) basis to make data comparable. (The difference is how financial derivative positions are measured.)
*I excluded one of the banks the FDIC sued, WestLB AG, because the (infamous) German Landesbank was sold as part of a German bailout during the crisis. It had over $400 billion in total assets before its collapse during the crisis.
Ethics
Consider the ethical and political implications of what the FDIC investigation has confirmed. The entire barrel of apples is rotten. Every CEO failed the ethical test, and the ethical bar that they failed to surmount was set exceptionally low. That can only happen when a “Gresham’s” dynamic has been allowed to persist for years because of the three “de’s” (deregulation, desupervision, and de facto decriminalization). Such a dynamic can cause “bad ethics to drive good ethics out of the markets.” No one should be able to view the facts the FDIC cites without a sense of horror combined with an urgent commitment to transform the industry that has done so much financial and ethical harm to our nations. The twin emergencies are global.
Crony Capitalism and Politics
There are two possibilities: the Obama administration knew for six years that the world’s largest banks were endemically led by frauds or the administration learned of that fact recently when it learned of the results of the FDIC investigation. The LIBOR scandal became public knowledge with the Wall Street Journal’s April 16, 2008 expose, so the Bush administration also knew it was dealing with elite frauds. If the Obama administration has long known that fraud was endemic among the leaders of the world’s largest banks, then its policies toward those CEO and the banks they control have been reprehensible and harmful.
If the administration has just learned from the FDIC investigation about the true nature of the CEOs that it has refused to hold accountable and allowed to retain and even massively increase their wealth through leading control frauds then we can doubtless expect a series of emergency actions transforming the administration’s finance industry policies. The FDIC lawsuit provides a “natural experiment” that allows us to test which of the possibilities was correct.
Let’s review the bidding. The U.S. government, through the FDIC, has found after a lengthy investigation that the leaders of 16 of the world’s largest banks conspired together to form a cartel to manipulate the LIBOR “numbers” and to defraud the public about the scam. This should have led the criminal justice authorities to prosecute large numbers of senior officers of these banks – but none of them have been prosecuted. It obviously poses a grave threat to the “safety and soundness” of the entire financial system . The endemic frauds led by elite CEOs demonstrate such a pervasive failure of integrity and ethics by the leaders of the finance industry that there is a moral crisis of tragic proportions. So here are some questions (along with the usual who, when, where details) I request that the media formally ask the administration:
1.Did the FDIC brief the administration before it brought its LIBOR suit?
2.Why didn’t Attorney General Holder and the FDIC leadership conduct a news conference announcing the suit and emphasizing its implications?
3.Why didn’t the FDIC’s “home page” or press release site even note the suit?
4.Did the suit cause the administration to transform its finance industry policies?
5.When will the President address the Nation about fixing the twin emergencies?
