American and British officials knew since 2008 that some of the big world banks influenced for their own profit Libor interest rates. Over $500,000 worth of assets are evaluated worldwide according to the London Interbank Offered Rate (Libor), but it is unclear to what extent the authorities tried to force banks to stop abusive behavior. Because of poor way the system of setting interest rates was setup, traders did not have to discuss with each other to manipulate the Libor, according to the conclusions of supervisory authority in the field, writes Bloomberg.
By “nudges” given to the proposals from their own small businesses to the institutions that calculate the interest, traders were able to increase the value of their portfolios or reduce losses. “It is much easier to manipulate Libor than it seems. There is no need for any conspiracy,” said Andrew Verstein, professor at Yale Law School. The possibility for a single bank to influence interest is highlighted in e-mails and transcripts of telephone conversations made public after British bank Barclays has paid a record fine of $452 million in U.S. and UK authorities for Libor manipulation.
In a transcript of a call in April 2008 between employees of Barclays, Britain’s second largest bank by assets, and Federal Reserve (Fed) New York, the bank employee said that the institution was reporting incorrect data in setting interest rates to avoid “unwanted attention”, writes The Wall Street Journal. In October 2008, after the crisis has worsened, a Barclays employee told Fed that the Libor is “a mess”. Transcripts were published by the Fed and the Bank of England, U.S. institution responding to congressional requests for documents related to interest rate manipulation.
The documents also show that the current Treasury Secretary Timothy Geithner, who was back then president of New York Fed, warned U.S. Treasury officials and other US and UK authorities, in 2008 about the problems associated with Libor and proposed changes in the way the indicator is calculated by the British Bankers Association. But documents provide only a partial picture of internal discussions about the problems with the interest rates.
Libor Interest is calculated daily by the association taking into consideration loan interests reported by a group of major banks worldwide. This makes it possible for banks to report data that make them seem healthier than they really are. During the financial crisis, Libor has attracted the attention of authorities bacause borrowing costs were seen as a sign of their financial health. “Suggestions that some banks report lower interest rates to avoid appearing weak were showing in anecdotal reports and many e-mails, including from Barclays, and in a telephone conversation with the British bank in December 2007 which said that Libor is unrealistically low,” reads a Fed document.
An employee of Barclays told Fed that the bank “is just trying to join the crowd” and that “we know that we don’t have, ummmm, an honest interest”. The bank is the only one that has admitted it used this practice, but investigations in the US and UK will probably bring to light other cases. Deutsche Bank, the largest German bank could pay penalties and charges up to $1.57 billion, according to estimates by Morgan Stanley. British bank RBS payments could rise to $1.48 billion.
After causing the Great Depression, banks still do stupid things
After the worst financial crisis since the Great Depression has severed the legs of the global economy, new rules, tougher and deeper internal controls at the world’s largest banks would have to rebuild confidence in the financial system. But the recent news make investors and the public question the progress made. In addition to the Libor scandal, horror stories coming from the U.S. banking system include huge losses at JP Morgan after a series of “bets” and possibly disastrous attempt to cover-up and loss of customer funds from the brokerage firm PFGBest, detected after its founder committed suicide and left a letter describing the ongoing fraud for 20 years.
The image is complemented by insider trading scandals that led to the conviction of fund managers and big names in world financial affairs like Rajat Gupta, former managing director of McKinsey & Company and member of the board of directors at Goldman Sachs.
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