Banksters Behaving Badly
- by Sinclair Noe
DOW + 72 = 12,943
SPX + 8 = 1374
NAS + 24 = 2976
10 YR YLD +.05 = 1.63%
OIL +3.91 = 87.66
GOLD + 19.80 = 1617.70
SILV +.77 = 28.39
PLAT + 34.00 = 1495.00
Stocks extended a rally for a third day; two-and-a-half if you want to get technical. The markets were open for a half day today; closed tomorrow. On Friday, we'll get the monthly jobs report. The best guess right now is that the economy added 90,000 jobs last month.
Oil moved higher ahead of the holiday. Iran is again threatening to block a critical Persian Gulf shipping route in response to a European embargo of Iranian oil; the U.S. has sent military reinforcements into the Persian Gulf to deter the Iranian military from any possible attempt to block the vital waterway.
Today, the Commerce Department said new orders for manufactured goods rose 0.7 percent during May. Economists had forecast orders rising 0.2 percent.
The US recovery remains "tepid" and according to the IMF, is expected to grow only 2% this year. Meanwhile, the fiscal cliff looms in 2013, threatening to reduce the economy's growth to only 1% next year. Meanwhile, the IMF predicts the job market will improve only at a snail's pace. It expects the unemployment rate to average 8.2% this year and 7.9% in 2013.
Amid that weakness and threats from slower growth abroad, the IMF recommended US policymakers spend more on infrastructure, worker training programs, extended unemployment benefits and fixes for the housing market. Boost the economy now and worry about cutting deficits later. Which is just a slightly different tune than they’ve been singing in Europe lately.
Yesterday we had a weak manufacturing report from the ISM and that raised hopes, in a perverse sort of way, that the Fed may have to resort to QE3. The European Central Bank meets on Thursday to determine interest rate policy and it is widely anticipated they will cut rates; which is another way of saying they will assume a more accommodative monetary policy; which is another way of saying they will be throwing free money at the investment bankers.
Barclays chief executive Bob Diamond suddenly quit this morning over an interest rate-rigging scandal that threatens to drag in a dozen more major lenders but suggested the Bank of England had encouraged his bank to manipulate the figures.
Politicians and newspapers have zeroed in on the scandal - which revealed macho e-mails of bankers congratulating each other with offers of champagne for helping to fiddle figures - as an example of a rampant culture of wrongdoing in an industry that stayed afloat with huge taxpayer bailouts. This is big news in London. Here in the US, the media thinks we are too stupid to understand. I actually heard a TV reporter trying to explain the scandal by saying “it has to do with manipulating interest rates and it's too complicated to go into detail.” We is all morons. This ciphering stuff with the interest rates is way over my head.
Barclays released an internal 2008 memo from Diamond, then head of its investment bank, suggesting that the deputy governor of the Bank of England, Paul Tucker, had given Barclays implicit encouragement to massage the interest figures lower during the peak of the financial crisis in order to present a better picture of the bank's financial position.
According to the memo, Tucker told Diamond he had received calls from senior government officials. Diamond said he had been told: "It did not always need to be the case that we appeared as high as we have recently." Part of the scandal involves Barclays publishing short term interest rates that were much lower than they really were. Here's how that works: If you have a really good credit score, you should be able to get a loan for a lower rate than someone who has a bad credit score – right? Same thing with the big banks. The Libor rate is the rate charged among banks, the London Interbank offer rate. If a bank needs a little extra cash, they can borrow from their banking colleagues, usually overnight or for a short-term.
Barclays has admitted it submitted falsely low estimates of its borrowing costs to calculate interbank rates from late 2007 to May 2009, a time when Diamond ran investment banking. Large banks' estimates of the interest rates they pay each other are used to calculate the London Interbank Offered Rate, or Libor, basis for trillions of dollars in contracts around the globe.
By manipulating the figures, banks could give flattering impressions of their financial strength. Barclays says it submitted low figures because it thought rivals were doing the same and higher rates would have made it seem to be in trouble.
Back in the bad days around 2008, Barclays claimed they had a really low interest rate being offered to them, the implication was that they had very good credit, they weren't suffering from the financial crisis. Which was a crock. They lied about Libor rates, they lied about rates they were charging clients, they lied about the health of the bank, they lied in published reports that then determined interest rates on trillions of dollars of loans.
And that's just the first part of the scandal; they also lied about Libor rates, so their proprietary trading desk traders could gamble fast and loose with derivatives tied to interest rates; this basically amounts to cheating on bets.
What Bob Diamond or Barclays appear to be saying is that the Bank of England told them to do this. Diamond will appear before the parliamentary inquiry on Wednesday, where his memo on the attitude of the Bank of England towards the manipulation of the interest rate is likely to take center stage. His evidence will have legal immunity.
This is a very big deal. The scandal has implicated the government of England. It involves hundreds of trillions in trades. It deals with the cornerstone of all interest rates. And it is chock full of sleazy. And we haven't even seen the first of the cascades of lawsuits. We don't know the role of auditors or regulators. We just know that we are all muppets. We know that Barclays and other large banks colluded to defraud their costumers by artificially leveraging international interest rates, in a "textbook illustration" of how banks use privileged information and lax oversight to reap rewards for themselves while savaging the wider societies in which they operate. And if this doesn't result in banksters in handcuffs and pink boxer shorts, nothing will.
Meanwhile, trouble keeps mounting for JPMorgan Chase. Only a few weeks after the so-called London Whale debacle, the Federal Energy Regulatory Commission (FERC) has filed a petition against the bank in the context of an investigation into the alleged manipulation of energy markets in California and the Midwest.
A petition filed Monday at a federal court in Washington DC revealed that FERC is conducting an investigation into JPMorgan’s “abusive” bidding strategies in energy markets, possibly inflating prices by more than $73 million. FERC has served JPMorgan with at least two subpoenas since April. The bank has refused to hand over at least 25 emails with potentially sensitive information. The regulator is now asking the court to force the bank to hand those over, while investigating the potential violation of JPMorgan’s “duty to make truthful and nonmisleading communications to the Commission and regional energy market operators.”
The regulator is accusing JPMorgan of using at least four “abusive” bidding strategies that have helped it extract “exaggerated” payments from wholesale markets in the Midwest and California. Complaints coming from the California Independent System Operation (CAISO) and the Midwest Independent Transmission Operator (MISO) sparked an investigation into how JPMorgan was potentially gaming the system to its own benefit.
One of the techniques described in the complaint to FERC showed how the bid-cost recovery mechanism was gamed in a way so as to trigger overpayments in excess of 50%. The bid-cost recovery mechanism is supposed to provide make-whole payments that cover start-up and minimum load costs for parties requesting electric energy.
Instead, JPMorgan’s bidding strategy allowed it to duplicate market revenues, resulting in at least $56.8 million from August 2010 to February 2011 in excess payments. While it isn’t entirely clear from the filings if this figure is included in the $73 million in improper payments previously mentioned, it suggests that the total number will be higher when accounting for all four bidding techniques.
Now, if you are starting to get a feeling of deja vu, just let your mind wander back to the good old days at the start of the millennium and another company that manipulated the California energy markets. Remember Enron?