Monday, July 2, 2012 - Barclays Rate Rigging

Barclays Rate Rigging
by Sinclair Noe


DOW – 8 = 12,871
SPX + 3 = 1365
NAS + 16 = 2951
10 YR YLD -.08 = 1.58%
OIL -.06 = 83.69
GOLD – 2.20 = 1597.00
SILV +.03 = 27.62
PLAT + 7.00 = 1461.00


The Institute for Supply Management's index of national factory activity fell to 49.7 from 53.5 the month before. It was the first time since July 2009 that the index has fallen below the 50 mark that separates expansion from contraction. Manufacturing has been one of the drivers of the U.S. economic recovery, this is the biggest sign yet that the US is catching the slowdown that is well under way in Europe and China. So, with growth and inflation slowing  the ISM report increased the odds the Federal Reserve will step in with a third round of bond buying - known as quantitative easing, or QE3 - to prop up the economy. Oh yeah, unemployment is still high; that's another good reason to have the central bank pass out free money. Of course, there is little to indicate QE3 will help the economy but it is a great justification. Banksters love free money. If the Fed won't give it to them, they'll create their own little scams – case in point:


The Barclays rate rigging scandal is all the outrage in London. We've been a bit slow to ignite a spark of indignation on this side of the pond. Legislators in the UK are calling for the resignation of Bob Diamond, the CEO of Barclays. The Chairman of the Board, Marcus Agius, part of the  Rothschild banking family, has already announced his resignation, saying the buck stops here. As if he is the one who determines culpability. 


And so politicians from both major parties are starting an inquiry, due to start within days and to report by the end of the year, will have free rein to call witnesses under oath from the worlds of finance and politics and will influence the government's reform of the financial sector.


It could result in bank bosses being held to account by law for the actions of rogue staff, while a separate and independent review of the way interest rates are set and regulated in financial markets will also feed into new banking legislation. Britain's Serious Fraud Office, a government agency, said it would decide within a month whether to press criminal charges against any of the banks under investigation. This, on top of last week's record high fine, which might actually cost a week or two's profit.


The Libor scandal is actually a pretty big deal.  Libor is the basis for pricing over $10 trillion of loans. US dollar Libor is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange which last year traded somewhere between $560 trillion and $800 trillion in notional value. 


First, price fixing is a criminal violation. The Department of Justice says that since Barclays had been the first bank to cooperate with the investigation and had been extremely forthcoming, and for that reason it would not be prosecuted if it complied with the settlement terms for two years. The implication is that the DoJ will not be as generous with other banks involved in the price-fixing scheme. Barclays rolled over, but on whom?


The Financial Times reports Barclays admitted that it lowballed estimates of its borrowing costs from late 2007 to May 2009 because it wanted to reassure investors of its strength during the financial crisis and it believed other banks were doing the same. It also admitted that its traders improperly influenced the rate submissions from 2005 to 2008 to make money on derivatives.


So, we really have two scandals. The key point of the first scandal is that Barclays lied about its financial strength at the height of the credit crunch; in 2008,  the perception of banks’ financial strength was linked to how much they had to pay to borrow. Barclays managers were very worried that the appearance of the bank paying more to borrow than other banks was damaging confidence in its health.


So Barclays so-called “submitters”, the managers who gave borrowing data to the British Bankers Association’s Libor-setting committees, consistently told these committees that Barclays was paying a lower interest rate to borrow than was actually the case.


What is striking is that even the artificially suppressed quotes for Barclays’ borrowing costs provided to the BBA committee were higher than other banks’ quotes. The way the Libor is calculated is that the British Bankers Association asks the banks to tell how much they pay for the interbank rates every day. They didn't bother to check the accuracy. 


The second scandal is the more run of the mill “rogue trader” sort. Barclays traders attempted to influence the bank’s submissions in order to try to benefit their own desks’ trading position. This is, of course, totally sleazy and illegal.  Barclays submissions should reflect the cost of interbank borrowing rather than individual traders’ positions. The interventions in question were typically on the short term one and three month rates relevant to the wholesale markets and not the longer term rates used to set, for example, retail mortgages. It is also important to note that these traders had no way of knowing whether or not their actions would ultimately benefit or detriment Barclays overall. They were operating purely for their own benefit. “Hey, I got a trade that could be great if only the Libor was about 10 basis points lower; think you could help me out?” “Sure, thing.” Oh yeah, many of these trades were supervised by senior management. 


The Guardian quotes Mervyn King, Governor of the Bank of England:


It is time to do something about the banking system…Many people in the banking industry are hardworking and feel badly let down by some of their colleagues and leaders. It goes to the culture and the structure of banks: the excessive compensation, the shoddy treatment of customers, the deceitful manipulation of a key interest rate, and today, news of yet another mis-selling scandal.


Could you imagine Ben Bernanke saying that? And consider this remark from a Guardian article by Will Hutton:


Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced – and would have been if British regulators had been weaned off the doctrine of “light touch” regulation earlier and if the Serious Fraud Office’s budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavor – the beast that is devouring British capitalism.


So, what will the Libor scandal investigation reveal? Barclays is supposedly going to roll over on some banks; which ones? Will any of the banks be American? If Barclays was playing this sort of illegal scam in the Libor markets, is it crazy to think they were the only one? Yes. 


Wall Street investment banks are in a fairly unique role of policing themselves. At most they get a modest little fine and no requirement to admit guilt. Wall Street investment banks bribe government officials and the government officials hire the Wall Street investment banksters, and next thing you know there is some lucrative underwriting business for a sewer system in Alabama, and then the next thing you know is Birmingham is bankrupt and the water system doesn't work. Or the next thing you know the country of Greece is neck deep in debt. Or the next thing you know, the City of Stockton has a bright shiny auditorium but they can't pay the pension for the retired cop. 


Maybe the Brits can show us how to put a banskster in handcuffs and hold them accountable. We'll see, but I wouldn't hold my breath waiting.


Meanwhile, a New York judge has ordered Twitter to hand over tweets and account information connected with an Occupy Wall Street protester arrested last fall during a march on the Brooklyn Bridge. Criminal Court Judge Matthew Sciarrino, who is overseeing the hundreds of criminal cases stemming from Occupy-related arrests, rejected the idea that Twitter would violate protester Malcolm Harris' privacy by turning over the information.  "If you post a tweet, just like if you scream it out the window, there is no reasonable expectation of privacy," the judge wrote in his decision. Defense lawyers for some of the 700 Occupy members arrested during the October 1 march have suggested that police appeared to escort them onto the bridge before taking them into custody. Yes, the same police department JPMorgan bought with a huge bribe, or I should say a major donation at the start of the protests last year. 


Freedom to assemble, freedom of speech, a semblance of privacy, a duty to peaceably protest – you know, that is just going too far, that is extremism that must be punished. Banksters, meanwhile, can bribe and cheat and steal, and the mainstream media in this country will fawn over them like schoolgirls at a Justin Bieber concert. 




Spencer Bachus is the Chairman of the powerful House Financial Services Committee. On June 19, 2012, Bachus issued a press release that carried his opening remarks for the hearing on JPMorgan’s $2 billion losses.., or maybe $9 billion. Bachus said: “Before closing, once again I want to re-emphasize the point that JPMorgan and its shareholders – not the bank’s clients, and more importantly, not the taxpayers – are the ones paying for the bank’s mistakes. This is how the system is supposed to work.” 


First, Bachus is dead wrong on his facts. The money that JPMorgan was gambling with was tens of billions of depositors’ money. That fact is not in dispute. Bachus is almost correct; this is not how the system is supposed to work, but this is how it works.


The Justice Department is probing Chesapeake Energy and the largest nat gas company in Canada, Encana,  for possible collusion after a Reuters report showed that top executives of the two rival energy companies plotted in 2010 to avoid bidding against each other in Michigan land deals. The report uncovered emails showing that the two natural gas companies repeatedly discussed how to avoid bidding against each other in a public land auction in Michigan and in nine prospective deals with private land owners in the state.


Communications between the companies occurred in 2010, when Michigan's Collingwood shale formation was considered one of the nation's most promising new oil and gas plays, and Chesapeake and Encana were among the largest bidders for land leases there. The Michaigan Attorney General's office has also started an investigation. Chesapeake has some ongoing problems; he company's board stripped former CEO Aubrey McClendon of his chairmanship after reports he took out more than $1.3 billion in personal loans from a firm that also finances Chesapeake. The Internal Revenue Service and the U.S. Securities and Exchange Commission have launched inquiries into Chesapeake.


GlaxoSmithKline has agreed to plead guilty to misdemeanor criminal charges and pay $3 billion to settle what government officials described as the largest case of healthcare fraud in US history. The agreement, which still needs court approval, would resolve allegations that the British drugmaker broke U.S. laws in the marketing and development of pharmaceuticals.


According to an investigation led by the U.S. Justice Department, GSK targeted the antidepressant Paxil to patients under age 18 when it was approved for adults only, and it pushed the drug Wellbutrin for uses it was not approved for, including weight loss and treatment of sexual dysfunction. Basically, the sales pitch was that Wellbutrin will make you skinny and you can have more sex. The company went to extreme lengths to promote the drugs, such as distributing a misleading medical journal article and providing doctors with meals and spa treatments that amounted to illegal kickbacks. In a third instance, GSK failed to give the Food and Drug Administration safety data about its diabetes drug Avandia, in violation of US law.


As part of the settlement, GlaxoSmithKline agreed to new restrictions by the U.S. government to prevent the use of kickbacks or other prohibited practices. The inspector general of the U.S. Department of Health and Human Services will oversee the "Corporate Integrity Agreement" for five years. So, I'm just thinking we need to set up a new level of courts; we could call it the Corporate Court  System, they never send anybody to jail; worst case just fines and a promise not to be bad in the future, you know, the same kind of sentence they hand out to most people. This is one more reason why corporations are not people. People would be in a holding cell. Corporations will take a write off and be selling the same old garbage on network TV tonight. 


Mexico has a new President-elect. Enrique Pena Nieto pledged to focus on energy, labor and tax reforms and said he hopes to strike deals with opponents to help shepherd changes through Congress before he takes office in December.  Pena Nieto won Sunday's election with about 38 percent of the vote, good for a lead of about 6 percentage points over his nearest rival, returning his Institutional Revolutionary Party (PRI) to power after 12 years in opposition. But the victory margin was smaller than expected and results suggested the PRI would struggle to win a majority. That would leave Pena Nieto reliant on other parties to back his plans. Mexico has a huge drug problem; the big three illegal drugs that fuel the cartels: marijuana, cocaine and heroin. Only marijuana is indigenous to Mexico. Just in case somebody asks you which came first, demand or supply.