Hard Libor

July 2nd, 2012 at 5:36 pm

Update: See this NYT editorial out this AM on this.  As I note below, the way this worked, traders in the bank asked the folks responsible for setting the Libor to tweak it for them.

“Always happy to help,” one employee wrote in an e-mail after being asked to submit false information. “If you know how to keep a secret, I’ll bring you in on it,” wrote a Barclays trader to a trader at another bank, referring to an attempt to align their strategies for mutual gain.

If that’s not conspiracy and price-fixing, what is?

See also Felix Salmon, who posts a revealing chart showing how out of whack Barclay’s reported interest rates were relative to the others in the daily Libor survey.  The implication here is that this shouldn’t have been hard for regulators to nail were they awake at the wheel…I mean, journalists were writing articles about this years ago (it was also crack journalism that first wrote about the London Whale, btw, the trader who lost all that loot for JPMC).   Must we replace the regulators with some young, hungry muckrakers from BBerg and the WSJ?…I’m for it.


Did some TV this afternoon on the resignation of the chairman of Barclays Bank as a result of a rate-rigging scandal around the Libor, a key interest rate estimated daily by the London banking sector.

The Libor may be one of the most important financial market statistics you’ve never heard of.  It’s the rate at which banks trade with each other, but it’s come to be used as a benchmark interest rate on literally trillions of dollars of financial instruments—everything from derivatives, like interest rate swaps, to US mortgages.

For years, there’s been suspicion that the Libor was being manipulated by the banks that set it each day.  Now, according to the NYT, regulators released evidence supporting those suspicions:

Authorities found that employees in the bank’s treasury department, which helped set Libor, submitted artificially low figures at the request of the firm’s traders, who profited from buying and selling financial products. The two sides are supposed to be divided by so-called Chinese walls to ensure that confidential information is not improperly shared to make profits.

But e-mails showed that the two divisions regularly collaborated in an effort to bolster their profits and avoid scrutiny about the bank’s health at the height of the financial crisis.

[BTW, the British regulator in this case is apparently the Serious Fraud Office, which led us at OTE to wonder what the Frivolous Fraud Office is up to.  (h/t: GL)]

What Martin Bashir wanted to know just now was this: how is it that politicians running for office today can say with a straight face that they’ll repeal financial market regulation—Dodd/Frank—so as to release these “job creators” from the terrible chains that bind them?  And in fact, repealing D/F remains a key plank in Gov Romney’s campaign.

There’s no suitable answer to that question.  Anyone who’s paying any attention should be more convinced than ever of underlying instability of financial markets and thus the need for regulatory oversight.  And the fact that bankers and their political representatives would fight back has been known literally since Adam (Smith, of course):

Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But these exertions of the natural liberty of a few individuals, which might endanger the security of the whole society are, and ought to be, restrained by the laws of all governments…The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

Note that he’s talking about the same kind of “party”/firewalls that were violated in the Barclays case.

And note that this time around—unlike after the Great Depression—the folks that blew things up are not slinking away.  They’re asserting that they were right all along and should again be allowed to self-regulate.  And their allies in Congress are right there with them.

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7 comments in reply to "Hard Libor"

  1. Sergey Vorobiev says:

    Jared, within the framework of the discussion on how corporations make their profits at least sometimes, let me bring you attention to this new paper “Decoupling of Wage Growth and Productivity Growth? Myth and Reality” by João Paulo and Pessoa, John Van Reenen (Resolution Foundation). The authors of this study repudiate the myth that in the US wage growth has fallen significantly behind productivity growth. It seems that implications of this finding is far-reaching. Could you offer your comment on this paper?

    • Jared Bernstein says:

      I actually commented on this paper at an LSE seminar right after they wrote it–I’ll dig up my notes if I can. But in the mean time, see Larry Mishel’s paper on this and the video we did here at OTE–which shows increasing decoupling of the median compensation and productivity. They actually find the same thing Larry does, they just label it different–they call it “gross decoupling.” Too technical to go into here, but Larry explains it all here:

      The main result is that the gap is large in both Larry’s and their paper if you’re looking at median compensation deflated by the CPI and productivity. Any difference then are a function of using averages instead of medians and gdp deflator instead of cpi. BTW, note that Van R et al say one of the main factors that explains the gap is wage inequality…same as Larry.

  2. mitakeet says:

    Not LIBOR specific, but Matt Taibbi has a great article on Rolling Stone that details the issues that are behind some of this rate fixing:


    For the detail oriented (many of the readers here, I am sure) he provides some additional information here:


    I understand this is a rather complex subject, but these people are stealing _billions_ of dollars out of our pockets! Where is the rage?

    • davesnyd says:

      Thumbs up. Taibi has done great work investigating this and other issues of fraud and malfeasance by financial institutions.

      Oh, and Jared, over here in the US, frivolous investigations are alive and well in Issa’s work.

      • Jared Bernstein says:

        Yes–it would be great to send him over to the UK to oversee the FFU for awhile.

  3. readerOfTeaLeaves says:

    A link both for the LIBOR topic, as well as Dr Bernstein’s longer think-piece about how to reach the public regarding policy matters.

    The Guardian has an interesting interactive that enables users to click on different banks, alter the timescales, and get a better sense of the differences between the LIBOR rates, and the manipulations the banks were offering.

    In a sense, this is not ‘opinion’, although I think the integrity of the data is a critical element in public trust. Here’s hoping a few DC investigators, take a few minutes to go play around with this interactive and see the patterns that are right in front of their eyes.

    This kind of ‘data-based’ policy content has a future, I’m convinced.
    I think that the NYT, the Guardian, and the FT are all in the forefront of trying to make this kind of thing accessible. It is critical to clearly identify the sources for the data, but this seems like a good example of how to develop new content for the public.

    (The interactive works nicely on desktop and iPad; can’t find it on the iPhone, but that is something for designers to consider as I frequently read Guardian updates on my iPhone.)

  4. Sharon says:

    “which led us at OTE to wonder what the Frivolous Fraud Office is up to.”

    Oh, that’s easy, they make sure no one is sold a dead parrot.