Wednesday, December 19, 2012 - You Can't Kill a Bank, Even With a Bushmaster

You Can't Kill a Bank, Even With a Bushmaster

by Sinclair Noe

DOW – 98 = 13,251
SPX – 10 = 1435
NAS – 10 = 3044
10 YR YLD -.03 = 1.80%
OIL + 1.49 = 89.42
GOLD – 5.00 = 1666.90
SILV - .66 = 31.08

All right, let's start with a refresher course; Libor stands for the London Interbank Offered Rate. It’s the rate at which banks are able to borrow money from each other. The lower a bank’s rate (banks submit their own rates) the healthier it’s deemed to be. If you're balance sheet is healthy, you get a low rate when you borrow. If your balance sheet is known to contain toxic assets, you have to pay a higher rate to borrow. The rates were especially indicative of banks’ health during the peak of the financial crisis when the markets were all but frozen and access to funds were limited.

The Libor rate is determined daily; sixteen banks submit their rates to an agency; the four highest rates are wiped out and the four lowest rates are wiped out. The result is averaged and the daily Libor rate is published. It would take more than one bank to manipulate the rates. But once the rate is published it affects trillions of dollars of financial instruments around the globe.

More than a dozen banks in the U.S. and Europe are under investigation for Libor rate rigging. Even though it is not really surprising, the sheer scope and audacity of the market manipulation involved in the latest bank scandal still manages to inspire a sense of awe and nauseum.

In July, Barclays reached a settlement on manipulating the Libor rate, and they paid a $450 million fine. Today, as expected, UBS, the Swiss bank agreed to a settlement of $1.5 billion for its role in manipulating Libor. The charges made against UBS show the bank not only manipulated the Libor rate to make itself look healthier to outsiders but also to make money by colluding with other banks. From a regulator’s perspective that’s a lot worse than lying a bit to appear in better condition.

According to the regulators, at least 45 different managers and traders were involved in a scheme to manipulate Libor. The manipulation was so pervasive that the U.K.'s Financial Services Authority says every single trade in which UBS was involved over five years was suspect. Regulators found at least 2,000 instances of certain manipulation. Where did they find this damning evidence? Emails. And the dumbest email is credited to an eager young trader trying to entice a banker to submit a fraudulent Libor rate. How do you entice a banker to commit a fraudulent act? Apparently bribery works.

“I will f***ing do one humongous deal with you ... I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want."

There is strong evidence to suggest that the UBS traders were incredibly stupid, including this exchange over IM: “dude don’t IM about all the Libor manipulating you’re doing.” Or, one way to read a lot of these exchanges is that many UBS Libor manipulators genuinely didn’t know that it wasn’t okay to lie about Libor, they had no sense of morality or right and wrong, and they felt not a twinge to ask other banks to lie about Libor, and offer bribes to interdealer brokers to get them to get other banks to lie about Libor. Libor was a number, and someone made it up, and so why wouldn’t you make it up to suit you, as opposed to otherwise?

The important thing about this settlement is not the fine, which UBS should have no trouble paying, even though it is going to cause the bank to take a loss in this quarter. The bank's share price was up 1 percent this morning, if that tells you anything about how much financial damage the settlement is going to do. What matters is that criminal charges are finally starting to be filed. Three former UBS traders have already been arrested in the U.K., and more arrests are coming in the U.S. So far, all the arrests are lower level traders, not the executives who clearly authorized and perhaps encouraged the collusion.

On top of that, prosecutors broke a taboo and actually filed a criminal charge against UBS itself, something they are typically too terrified to do. Of course, this charge was designed to do minimal damage; it was limited to UBS's unit in Japan, which pleaded guilty to one count of fraud, and it doesn't affect the rest of the bank. Still, a criminal charge is a criminal charge. Authorities are loath to prosecute big banks criminally because they consider it a "death sentence" for banks. Something we're not sure is completely accurate because, well, these banks never get killed off do they?

But prosecutors don't dare take the chance, because toppling these behemoths might crush the financial system. Of course, given that UBS and other big banks are constantly getting themselves into massive amounts of trouble, a death sentence might leave us all better off in the long run.

Still, the policy is to be nice to banks, even if they are evil. We need look no further than the money laundering bank HSBC. Bank regulators and Treasury opposed having HSBC admit the truth – that it violated the money-laundering statutes; that it was in business with drug cartels and terrorists. Not only would the truth lay bare the hypocrisy of the War on Drugs but it might not be nice to the money laundering bank. They warned that such a guilty plea could cause a systemic crisis because HSBC was too big to fail; it is systemically important. When Treasury warns DOJ that a prosecution could cause a global crisis there is no chance that the AG will override Treasury’s warning on his own initiative. That is why line prosecutors urged AG Holder to meet personally with Secretary Geithner to urge him to withdraw his objections to the proposed prosecution, but Holder apparently declined to seek a meeting. Instead, the DOJ accepted Treasury’s warning that HSBC was too big to prosecute because doing so would cause a global systemic crisis.

Libor manipulation cost Fannie Mae and Freddie Mac more than $3 billion, according to an estimate by a government watchdog, who recommends the government-owned mortgage giants sue the big banks.

That estimate and legal advice were made in a private report by Steve Linick, the inspector general for the Federal Housing Finance Agency, the regulator for Fannie and Freddie, which were taken over by the U.S. government during the financial crisis. Now, $3 billion isn't enough to keep us from going over the fiscal bunny hill, but it's nothing to sneeze at.

And yes, if you have a mortgage through Fannie or Freddie, it means that you are a victim of the Libor rate rigging scandal.

If you still think Libor fraud is a victimless crime, the muni-bond market has 6 billion reasons it begs to differ. States, cities and other municipal borrowers have lost at least $6 billion as a result of banks manipulating Libor.

This $6 billion in losses would come on top of the $4 billion that muni borrowers have already paid big banks to close out derivatives trades that went bad, partly because of Libor manipulation. This is all part of a study released in October.

The Libor investigations have implications for states and cities that are still contending with the fiscal legacy of the recession, which left them grappling with falling tax revenue and rising costs. States have had to deal with combined deficits of more than $500 billion since fiscal 2009, according to the Washington-based Center on Budget & Policy Priorities.

The losses came not because Libor manipulation affected borrowing costs, but because these bond issuers entered some $500 billion in interest-rate swaps with banks, according to some estimates. These swaps were a type of derivative, essentially an insurance policy the muni-bond issuers bought to protect themselves against interest rates rising. When interest rates -- Libor specifically -- fell instead, the muni-bond issuers lost a boatload of money on the swaps.

In other words, in the eyes of the muni-bond issuers, these banks tricked them into betting that interest rates were going to rise and then sold them derivatives to insure against rising rates, and then they colluded to manipulate the rates lower.

States and cities have been lawyering up, preparing to sue the banks over Libor manipulation, lawsuits that could ultimately cost the banks billions of dollars.

And finally,

Walmart sells almost everything inside its stores, including guns and ammunition and assault rifles. But some things are too dangerous to be sold in WalMart, including: a pregnant Barbie doll, a book by George Carlin, and the debut album by Sheryl Crow (because it includes lyrics about buying a gun at WalMart and shooting children). Proving once again that ideas are still more dangerous than the sword, or the Bushmaster assault rifle. I'm not sure how they measure up against an RPG, and it is my understanding that drones do not discriminate.