The Federal Reserve And The Libor Scandal

By Simon Johnson

On June 1, 2008, Timothy F. Geithner – then president of the Federal Reserve Bank of New York – sent an e-mail to Mervyn A. King and Paul Tucker, then respectively governor and executive director of markets at the Bank of England. In his note, Mr. Geithner transmitted recommendations (dated May 27, 2008) from the New York Fed’s “Markets and Research and Statistics Groups” regarding “Recommendations for Enhancing the Credibility of Libor,” the London Interbank Offered Rate.

The recommendations accurately summarized the problems with procedures surrounding the construction of Libor – the most important reference interest rate in the world – and proposed some sensible alternative approaches.

This New York Fed memo stands out as a model of clear thinking about the deep governance problems that allowed Libor to become rigged.

At the same time, the timing and content of the memo raises troubling questions regarding the Fed’s own involvement in the Libor scandal – both then and now.

According to the recent order against and settlement with Barclays by the Commodity Futures Trading Commission, the Libor “market” had by 2005 become a hotbed of collusion and price-fixing, in which reported interest rates were being manipulated both up and down to the advantage of individual traders and, sometimes, to benefit the banks that employed them.

These activities were widespread, representing – depending on your reading of the details – some combination of a complete breakdown of compliance and control at Barclays and presumably other banks (mentioned but not yet named by C.F.T.C.) and a pattern of apparent criminal fraud.

The New York Fed was apparently aware of Libor-rigging at some level in 2007 and serious concerns – although presumably not the full details of what the C.F.T.C. later established – had reached the most senior levels of the Federal Reserve System by early 2008.

In response to a question from Senator Pat Toomey, Republican of Pennsylvania, at a hearing on Tuesday of this week, the Fed chairman, Ben S. Bernanke, confirmed that he became aware of Libor-related issues in April 2008 (see Page 23 of the preliminary hearing transcript from Congressional Quarterly’s Transcripts Wire; the other quotations below are from the same source, which is available by subscription only).

There are three questions that Mr. Geithner and his colleagues are likely to face in Congressional testimony on Libor. (The House Financial Services Committee has already announced it will hold hearings.)

First, why didn’t Mr. Geithner tell Mr. King the full depth and motivation for his concerns?

Both Mr. King and Mr. Tucker say they did not learn of accusations of dishonesty until recent weeks. What exactly did Mr. Geithner communicate as the specific context and rationale for his reform memo? Did he really only talk in general and vague terms, rather than about the detailed and apparently credible accusations regarding Barclays?

Officials at this level speak with each other on a regular basis. There was ample opportunity for full sharing of relevant information.

Second, why didn’t the Fed do anything itself about the rigging of Libor, including deliberate misrepresentation of information by people at big banks for material gain – keeping in mind that any action that makes a bank look better should be presumed to boost the bonus of the people involved? This issue also came up in Tuesday’s hearing.

“Senator Toomey: The question is why have we allowed it go on the old way when we knew it was flawed for the last four years, with trillions of dollars of transactions?

Chairman Bernanke: Because the Federal Reserve has no ability to change it. “

Mr. Bernanke emphasized that Libor-rigging is a major problem but was adamant that the Fed bears no responsibility for what has happened, adding:

We have been in communication with the British Bankers’ Association. They made some changes, but not as much as we would like. It is, in fact, it is, you know, it’s not that market participants don’t understand how this thing is collected. It is a freely chosen rate. We’re uncomfortable with it. We’ve talked to the Bank of England.

Mr. Bernanke’s answer raises – but does not address – the central issue. The Federal Reserve is responsible for the “safety and soundness” of the financial system in the United States. Does allowing suspicions of fraud to continue unchecked at the heart of this system help to sustain the credibility and legitimacy of markets? Surely not.

Trust is essential to all financial transactions. When trust evaporates – or is smashed to oblivion through reckless and self-serving behavior at megabanks – the consequences can be dire.

The severity of the financial crisis in fall 2008 can be directly attributed to the collapse of trust among financial institutions. Cheating on Libor was not the only cause of this collapse but – if Mr. Bernanke is right and market participants knew what was going on – it must have contributed to it. Concerns about governance may be tolerated in boom times; when the economy goes sour, investors worry much more about who is hiding problems and may be about to collapse.

The Fed has jurisdiction whenever the safety and soundness of the financial system is at stake. Scott Alvarez, general counsel at the Board of Governors, acknowledged this point in a briefing to Senate staff last week. According to The Financial Times:

“In response to questions from Senate aides, Mr. Alvarez said that the Fed was unable to do more because the alleged manipulation of Libor did not constitute a so-called “safety and soundness” concern – a term used by bank regulators to signify threats to a lender’s viability.”

It is hard to see how Mr. Alvarez and his colleagues could have been more wrong – manipulation of Libor most definitely raises safety and soundness concerns.

Third, why wasn’t the impact of potential Libor-related litigation included in recent stress tests for the American banks that may prove to be involved?

Three American banks take part in Libor panels today – and apparently also during the period in question. (I have asked the British Bankers’ Association to confirm this and other details; they indicated a willingness to help but were not able to respond by my deadline – I will report on their information in a future column.) Bank of America is a member of the United States dollar Libor panel; Citigroup belongs to several of the larger Libor panels (including the United States dollar, the British pound and euro); and JPMorgan Chase is present on 9 of the 10 Libor panels.

One argument now being advanced from some financial circles against large fines for the banks involved is that this would reduce their shareholder capital enough to constitute a risk to the financial system.

More broadly, we do not yet know with whom Barclays personnel colluded – or the full extent of the damage to investors and borrowers. Consequently, no one yet knows the scale of balance-sheet damage that will be done by settlements of Libor-rigging claims.

This could even become a “tobacco moment,” in which an industry is forced to acknowledge its practices have been harmful – and enters into a long-term agreement that changes those practices and provides ongoing financial compensation. Certainly attorneys general from states that have been damaged will be thinking along these lines.

Yet at his conference call with analysts on July 13, JPMorgan Chase’s chief executive, Jamie Dimon, was already discussing the possibility of resuming share buybacks later this year. It is hard to know how the Fed could agree to such reduction in shareholder capital. It is also hard to understand why the Fed continues to allow the payment of bank dividends under these circumstances.

The Libor scandal is different in some ways than other recent financial fiascos; it involves egregious, flagrant criminal conduct, with traders caught red-handed in e-mails and on tape. This is the definition of a “smoking gun.”

It is inexcusable and indefensible if these traders aren’t soon brought to account, facing criminal charges in court. That should be first step, with the full support of the Fed (although it obviously doesn’t run criminal investigations).

As Dennis Kelleher of Better Markets told Eliot Spitzer this week,

“Slapping handcuffs on these traders has to be the next step … handcuffs, squeeze them, handcuffs, squeeze them and move up the chain….  This is an open and shut case….This is egregious criminal conduct….There’s never been any accountability on Wall Street.  Wall Street’s a high-crime area and the criminals are just let to run free. This would never be tolerated anywhere else in America, and it’s time to end the two sets of laws. We apply [one set of] laws to everybody in this country and we pamper Wall Street.”  (See from around 3:29 in this clip:  http://current.com/shows/viewpoint/videos/will-banks-be-held-accountable-for-libor-manipulation/)

This is what should have been done years ago for all the illegal behavior that led up to the crisis.

And the Fed should want this clean-up, in the interest of financial stability and ensuring future economic prosperity. The integrity and legitimacy of markets are at stake.

There are slight glimmers of hope that Fed thinking may be heading in the right direction, at least in thinking about the structure of the problem.

At Tuesday’s hearing, Senator Sherrod Brown, Democrat of Ohio, listed the litany of big banks’ recent wrongdoings and the consequent damage, and told Mr. Bernanke: “So many of our biggest banks are too big to manage and too big regulate. I think this behavior shows they’re too big to manage and too big to regulate.”

Mr. Bernanke’s reply was sensible. “I think the real issue is too big to fail,” he said, adding, “And I think that if banks are really exposed to the discipline of the market that we’ll see some breakups of banks.”

Mr. Bernanke feels that the discipline of the market is already working. This is harder to see, particularly in the light of what we learn about bank behavior in connection with Libor.

Let’s hope he is starting to see issues in the financial sector more clearly: Too big to fail is too big to exist – or to behave in accordance with the law. This is a problem of vast, nontransparent and dangerous government subsidies; the market cannot take care of this by itself.

An edited version of this blog post appeared this morning on the NYT.com’s Economix; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

58 responses to “The Federal Reserve And The Libor Scandal

  1. Apparently libor actually became a problem in 1985. That was when he was looking for any reason to be on top for good and found one. Ever since then, the libor scandal has been attempting to expand their ponzi, and even added mandates once the fringes realized they got off track, yet didn’t have the heart to inform the center of their soon to be fatal mistake.

  2. Lady in Red

    Of course there is corruption. And greed. Stupidity and incompetence, also. …it looks like the euro just slammed into a brick wall. The IMF has given up….

    http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100018882/imf-loses-all-faith-in-the-euro-project/

    ….Lady in Red

  3. As well they should, next up is the US congress, the Fed, and of course the treasury dept, headed by that tax dodgin turbo Timmy that has the others by the you know whats. Finders keepers, losers weepers, all in a days work.

  4. Simon, Last Friday, I sent you an email about an independent investigation of the LIBOR scandal participants, banks, regulators, CFTC, the AG’s office, etc., but I heard nothing back.

    Given today’s post, are you suggesting the “system” should be allowed to sort itself out and correct the flaws? The “system” exists to benefit itself and those parties at the top of its food-chain, not to create markets for the efficient allocation of capital. As Kelleher says in the video, “Wall Street’s a high-crime area and the criminals are just let to run free.”

    So are you prepared to just let it continue? Or are you interested in creating a functional system?

  5. ‘The severity of the financial crisis in fall 2008 can be directly attributed to the collapse of trust among financial institutions. Cheating on Libor was not the only cause of this collapse but – if Mr. Bernanke is right and market participants knew what was going on – it must have contributed to it. ‘

    So why don’t you tell us just how, Simon? How did a non-market interest rate that virtually all participants knew was ‘make-believe’ contribute to the financial crisis?

  6. Dave, (and pat) what’s with all the mandates? Even Hercules died after 12 laborious chores, yet you and your like minded cohorts insist on yet another. That’s fine, but expect the competition to put you out o business before you can receive an answer to your rant.

  7. To hear Kelleher in his own words:

    http://www.rollingstone.com/politics/blogs/taibblog/more-on-libor-plus-spitzer-takes-on-bartiromo-in-japanese-monster-movie-epic-20120717

    Thanks for the clear expression of culpability. Until the mob on Wall Street – the ones who skim and then lie and bribe with impunity to try and get away with their crimes – are put into shackles, the anger will continue to build. This needs to be done, and done quickly. We have the evidence now and the rats are turning on each other. The Wall Street Journal with its deceptive and deceitful editorial bleating about innocence are irrelevant. It’s time for justice.

  8. Simon, your article implies that you have not read Geithner’s memo, and the link to it you supply is only for the email to which the memo was attached so we can’t read it [either].

    So, how can you say that: “The recommendations accurately summarized the problems with procedures surrounding the construction of Libor – the most important reference interest rate in the world – and proposed some sensible alternative approaches.”

    Matt Taibbi said today (did he read the memo?) that Geithner only proposed more bank self-regulation as a fix.

  9. All you have to do to read the memo is scroll down, Joe.

  10. I suppose I can’t post often enough for the ‘posts’ who come here, Mervyn King’s November 2008 (6 months after Geithner’s memo) testimony to a parliamentary committee;

    ‘It [LIBOR] is in many ways the rate at which banks do not lend to each other, and it is not clear that it either should or does have significant operational content. I think it is convenient, very often, for people to justify what they do for other reasons, in terms of Libor, but it is not a rate at which anyone is actually borrowing. It is hard to see how it can actually have much of an impact. There is no doubt that what it is representing is the widespread loss of confidence in the financial community at large—not just banks but the financial community at large—in banks, as such. Eighteen months ago it was quite normal for anybody, including companies, to be willing to lend to a bank unsecured for three months at a very tiny margin over Bank Rate, because it was felt unthinkable that this was a risky loan. The world has changed totally; people are very worried about lending, and indeed hardly anybody is willing to lend to any bank around the world for three months unsecured; they want to lend secured. As I have said to the Committee before, I think that in future we will see far less lending to banks on an unsecured basis and far more on a secured basis. The inter-bank market has very often been a market in which overnight or short-term cash holdings can be distributed around the banking system, and banks were willing to do it with each other unsecured at Libor. I just do not think it plays that role now, and I think we are going to see developing over the next few years a much more intensive method in which banks can redistribute cash surpluses and shortages among each other on a more secured basis. At present they are doing it directly with the central bank, and that is true around the world, not just in the UK.’

    Translated; LIBOR just ain’t that important, and we all know it.

  11. ‘Until the mob on Wall Street – the ones who skim and then lie and bribe with impunity to try and get away with their crimes – are put into shackles, the anger will continue to build.’

    Who do you think you are, Thomas Aquinas?

  12. Thanks Patrick. It looks like Taibbi was a bit extreme, but not entirely wrong, in his judgment.

  13. Sam Culotte

    “Bank of America is a member of the United States dollar Libor panel; Citigroup belongs to several of the larger Libor panels (including the United States dollar, the British pound and euro); and JPMorgan Chase is present on 9 of the 10 Libor panels.”

    According to Mervyn King, Libor was obsolete (my word) four years ago. Yet here we are today, and look at the Libor panels still meeting! How many bankers meet, and how often? How much do they get paid? What do they do at these meetings besides, as Mr. King admitted long ago, confect a no-longer-relevant number? Are these self-same bankers the great financial brains we hear so much about these days, the irreplaceable minds without which society could not efficiently allocate its capital?

    Or are they all just common liars, continuing the lie of Libor,
    paying themselves handsomely to lie, and then saying their lies don’t hurt anyone, that lies are a distasteful but necessary part of the business of high finance?

    Libor may not matter anymore, but have ethics ever not?

  14. limericksecon

    Some traders disclosed to the Fed
    That LIBOR deceit was widespread;
    The news reached Tim Geithner,
    Who responded by writin’ a
    Quite well-stated memo, ’tis said.

    In verbiage clear and concise,
    Mr. Geithner dispensed his advice
    To follow the fundin’
    Of bankers in London
    To find the most accurate price.

    But the memo to King, while persuasive,
    Is fairly alleged as evasive,
    In its glaring exclusion
    That traders’ collusion
    On setting of rates was pervasive.

  15. ‘Are these self-same bankers the great financial brains we hear so much about these days, the irreplaceable minds without which society could not efficiently allocate its capital?’

    What alternative would work better? Specifically.

  16. Of course LIBOR isn’t important. That’s why half the ARMs in the US had their rates set with it. And credit cards, and school loans, and re-finances, and…. What a crock. What you mean is that it’s unimportant to the suits in the towers, at least until it’s time for the bonuses and commissions.

  17. @ Who do you think you are, Thomas Aquinas?

    No, religion has no end, we do.

  18. same story, different day. These bank execs get paid extraordinary amounts on money and when caught doing something illegal claim ignorance. Then they throw some underling grunt under the bus to take the blame. Worst of all, is the american labor class/tax payer either does not want to know about these events or sits idle doing nothing about it.

  19. markets.aurelius

    Excellent, Simon.

    You also might want to extend the analysis to something the Fed and the OCC have a direct interest in vis-a-vis safety and soundness. To Norm’s comment re the ARMs adjusted vs. LIBOR, the estimate of contracts worldwide with rates tied to LIBOR is something like $800 trillion (that’s trillion with a TTTTTTTTTTTTTTTTTTTTTTTTTTTT!), based on various estimates reported in the media. (See, e.g., http://online.wsj.com/article/SB10001424052702303567704577516450784443534.html )

    When banks and trading desks run their VaR calcs to determine how bad things can get on any given day — or any calc measuring their exposure to changes in the underlyings against which their outstanding contracts price — LIBOR enters directly into the exposure analysis. I’m going to go to another paragraph to emphasize why this is important. (Getting all post-modern on you … .)

    Every model run by every bank assumes the risks they’re taking on is modeled correctly based on some formulation(s) found in derivatives math, or some coursework the really smart guys at the bank did at grad school. What do you think happens to the output of these models when non-linearities induced by LIBOR manipulation enter the VaR calcs? What do you think that does to the firmwide hedging the models’ output prompts the banks’ firmwide risk desks to undertake? Most of the time, the people doing this stuff are just hitting the “F9″ key without any real understanding or appreciation of what’s driving the models telling them to buy or sell different contracts to hedge the banks’ firmwide risk. What do you think that does to monetary policy, as the Fed and other central banks are attempting to get a read on their charges while those very charges are responding to the hedging instructions being generated by models that are driven by parameters and variables (LIBOR) that have nothing to do with economic reality but are, instead, being manipulated by the very institutions adjusting their firmwide risk positions in response to those FALSE signals? (Imagine, if you will, a giant rat-in-the-maze experiment: Essentially, these are F9-rats being jolted by electric charges forcing them to run to different corners of the maze: If you set the jolting mechanism to some massively non-linear chaotic program, what you’ll observe is a chaotic mad-dash by the rats in the maze as they’re zapped by one charge then another, then another.)

    So what’s the significance of this? The manipulation over the course of years produced chaotic adjustments in each banks’ firmwide hedging, which became systemwide adjustments. These are cumulative marginal effects — every time a firmwide risk position is altered, the adjustment propagates thru the firm’s entire book, which induces further adjustments. Multiply that by every firm making such adjustments, and consider the impact those adjustments have on the system as a whole every time they are made. Now imagine all these firms having to react to systemwide shifts induced by their previous adjustments, and all of the sudden — at a time that cannot be predicted or anticipated — you’ve tipped the entire system into a chaotic space that is totally disjointed. I defy anyone to model that system of feedbacks.

    That’s your real risk. It was amply demonstrated in the JPMorgan London Whale incident: Jamie as much a admitted the position was out of control. It had become a center of gravity for the bank and the market as a whole — $100 billion notional being jolted by forces it cannot identify or specify, careening out of control. Imagine every position with a tangential or direct connect to LIBOR starting to oscillate to these nonlinear effects and you have a new dimension of systematic risk that’s never been seen or conceived. It’s beyond random … or at least our notions of random.

    Oh, and the folks that are going to bring order to this mess are either the OCC or the Fed! The former has been braindead from its inception, and now definitional totem for ineffective; the latter wants nothing to do with this mess … the Fed just what to go back to having theoretical discussions of monetary policy in an ideal world … leave us alone, they cry. How’s the market supposed to solve this one? Left to market discipline, these institutions and their regulators would have ceased to exist long ago, but here they are — the same folks that brought you this mess are still at the helm.

    Staggering when you think about it some.

  20. ‘Of course LIBOR isn’t important. That’s why half the ARMs in the US had their rates set with it. And credit cards, and school loans, and re-finances, and…. What a crock.’

    So, your complaint is that borrowers got lower interest rates than they deserved?

  21. ‘When banks and trading desks run their VaR calcs to determine how bad things can get on any given day — or any calc measuring their exposure to changes in the underlyings against which their outstanding contracts price — LIBOR enters directly into the exposure analysis.’

    Then why did Mervyn King (and Willem Buiter) say it’s a rate at which banks DON’T lend or borrow? That, ‘It is hard to see how it can actually have much of an impact.’

    What do you know that the head of the Bank of England doesn’t?

  22. markets.aurelius

    @ Patrick, the larger question is, what do you know about finance or financial markets? Having been on countless transactions in which LIBOR was the reference rate, I have first-hand knowledge of how it affects virtually every transaction in trading markets. You?

  23. The Bond Man

    @ limericksecon…..good work there, in that limerick you posted here.

  24. The Bond Man

    Hey Pat, answer the question.

    Hey Markets, you da man.

  25. markets, did you note that Mervyn King said,

    ‘I think it is convenient, very often, for people to justify what they do for other reasons, in terms of Libor, but it is not a rate at which anyone is actually borrowing.’

    That it is a reference rate is largely irrelevant. If you’re too stupid to realize that LIBOR is not a real rate, and that you should adjust your negotiating position accordingly, then you’re too stupid to be in financial services in the first place.

    Even if you didn’t realize what LIBOR really was before 2008, that King made the statement publicly should have alerted you.

  26. To simplify even more for those who seem to need it, suppose you are going to make a loan and think you need 2% over your cost of (actually) borrowing. You estimate that LIBOR is 20 basis points below that rate. So, you simply ask for 2.2% over LIBOR from you customer.

  27. Mr. Johnson asks, “why didn’t the Fed do anything itself about the rigging of Libor”. But do we actually know what the Fed did about it? The NY Times reported Sunday that the CFTC opened its investigation in April, 2008, the same month as Mr. Geithner’s letter to the Bank of England, but provides no insight into the connection between the two events. We do not know if Mr. Geithner referred the matter to the CFTC or if the CFTC briefed Mr. Geithner. Presumably, Mr. Geithner will be asked about this when he testifies before Congress. Until we know that nature of their communication we can hardly conclude that it was either inadequate or inappropriate.
    It is also clear that there was close coordination of the investigation by the CFTC with that in the UK by the Financial Services Authority. Mr. Mervyn King’s complaint is that the Bank of England was unaware of this investigation. Should Mr. King have been informed of the investigation by Mr. Geithner or by the FSA?
    All of this is in the news today precisely because the investigation is beginning to bear fruit, four years after it was initiated. Could the investigation have proceeded more quickly? (Acknowledging, of course, that the United States Congress, regardless of which party may hold the reins, has consistently short-changed the enforcement budgets of the CFTC, SEC, etc.)

  28. markets.aurelius

    @ patrick: You make life too easy. At random — truly at random — I googled an oil company re libor … so have a look-see, Pat. This is from Devon’s 10k for 2010, pulled at random off the internets:

    “The most significant variable to our cash flow calculations is our estimate of future interest rate yields. We base our estimate of future yields upon our own internal model that utilizes forward curves such as the LIBOR or the Federal Funds Rate provided by a third party. Based on the notional amount subject to the interest rate swaps at December 31, 2010, a 10% increase in these forward curves would have decreased our
    2010 unrealized loss for our interest rate swaps by approximately $68 million.” (p. 48, just to set the table for you.)

    Next check p. 59: “Our cost of borrowing under our Senior Credit
    Facility is predicated on our corporate debt rating. Therefore, even though a ratings downgrade would not accelerate scheduled maturities, it would adversely impact the interest rate on any borrowings under our Senior
    Credit Facility. Under the terms of the Senior Credit Facility, a one-notch downgrade would increase the fully drawn borrowing costs from LIBOR plus 35 basis points to a new rate of LIBOR plus 45 basis points. A ratings downgrade could also adversely impact our ability to economically access debt markets in the future. As of December 31, 2010, we were not aware of any potential ratings downgrades being contemplated by the rating agencies.”

    That’s an honest-to-God random draw from a google search. You try it. Pick any company you want, enter 10k-libor-covenant and see what happens. I get “About 2,400,000 results (0.25 seconds)” from google.

    Here’s another random draw: Dole Foods (2009 10k drawn at random): “In connection with our recent refinancing of our 2009 senior notes, we amended our senior secured credit facilities in order to be able to grant liens under the senior secured notes due 2014. Such amendments, among other things, did the following: (i) increase the applicable margin for (x) the term loan facilities to LIBOR plus 5.00% or the base rate plus 4.00% subject to a 50 basis points step down if the priority senior secured leverage ratio is less than or equal to 1.75 to 1.00 and (y) for the revolving credit facility, to a range of LIBOR plus 3.00% to 3.50% or the base rate plus 2.00% to 2.50% and (ii) provide for a LIBOR floor of 3.00% per annum for our term loan facilities. The resulting increase in the interest rates under the senior secured credit facilities, as well as the increased interest rate of the 2014 notes as compared to the 2009 notes, will have a material effect upon our cash available to fund operations, make capital expenditures or repay our debt, as compared to prior periods.”

    You’re obviously in way over your head there, Paddy. You need to walk it back before you make a total fool of yourself. I know, I know, you’ve blogged on this topic, so you do have some expertise. But, for the love of God, I would have given my left n*t to go up against someone like you in the trading markets back in the day. If that’s the best you’ve got, find another game.

  29. I always say give the devil his due, just make certain their ain’t much due him. Or so says Henry the 3rd

  30. Moses Herzog

    Although I agree with Professor Johnson’s thoughts above wholeheartedly, I would like to do one of my infamous off-topic comments here. Since it is loosely related in the economics front and it is Friday, I hope the always hospitable Sirs Kwak and Johnson will forgive me.

    One thing I would like to say is that although I have had some particular pet peeves with the IMF (International Monetary Fund), actually some are pretty hefty beefs, I have regarded the IMF as basically a well-intentioned organization. That is changing, and I think took a big shift with the appointment of Christine Lagarde, who I have believed from the beginning is not up to the job, & not suitable for the job. She is a patsy/lapdog for inefficient and corrupt French Banks (along with being a lapdog for all European banks when their potential pains correlate with French banks’ potential pains). On this blog I stated pretty strongly that the hands down man for the job was Stanley Fischer, as his resume matched the job better than anyone’s (other than the fact Fischer wasn’t helpful in meeting p*ssy quota requirements).

    What has Lagarde’s time as managing director done in the way of positive accomplishments for IMF and the IMF reputation??? Other than adding to the laugh-meter (which I suppose is something in these trying times) with well-traversed jokes about Lagarde’s Louis Vuitton panhandling bag, not much.

    But don’t take my word for it—take Peter Doyle’s, a man who just resigned his high position in the IMF, complete with a “please let me brush the dirt off my shoulders” resignation letter. See here:

    http://www.zerohedge.com/news/scandal-imf-senior-economist-resigns-says-ashamed-have-had-any-association-fund-all

    and here: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/07-2/doyle%20Letter.pdf

    Let’s hope Lagarde has the self-dignity to do similar before she does the perp walk off the IMF campus. Sadly for the more demented spectators among us (yes, that would include me), it won’t be as visually stimulating as other perp walks. Exhibit A1 :

  31. Moses, your not forgotten. Here’s one for you.

  32. You can probably count on your fingers the number of people who really know WHY the LIBOR was manipulated.
    The debt-based system of money is broke, broken and insolvent.
    The crash of this insolvent system happens when the NEW debt-based MONEY CREATED is less than the amount of the interest payments due on the old debt-money.
    Reducing the base interest-rates reduces the interest payments due, equals intravenous life support for the debt (monetary-asset) holders.
    No money to make interest payments equals global monetary insolvency.
    I guess they don’t teach that at the IMF.
    But the purveyors know – the debt-industrialist know.

    So, please don’t try to figure out how to REGULATE international finance over this.
    What we NEED is a new money system.
    Please google-up Kucinich H.R. 2990 and let’s get to work.
    For the Money System Common

  33. I’d say someone is over one’s head if they don’t understand their own sources. Such as this;

    ‘Next check p. 59: “Our cost of borrowing under our Senior Credit
    Facility is predicated on our corporate debt rating.’

    No doubt why Mervyn King said what he did, that LIBOR is a mere convenient reference, but actual borrowing costs are, ‘predicated on… corporate debt rating’ .

    What’s so difficult here?

  34. Btw, I’ve already provided you with evidence, marketsa, for the phenomenon;

    http://www.bloomberg.com/news/2012-05-13/barclays-libor-decline-conflicts-with-swaps-corporate-finance.html

    ‘Barclays Plc (BARC), Britain’s second- biggest bank by assets, says the interest rate it pays for short-term dollar loans is the lowest ever relative to rivals even as other measures of its credit deteriorate.’

    Remember that?

  35. Pat. dude, you are over your head, give it a rest. please.

  36. Coming from such a well respected as ‘Anonymous’, that’s really compelling.

  37. The end result? as the result of Bank of England turning a blind eye, as emails suggest.

  38. The Bond Man

    The so-called “market” Simon, is an illusion, no more real than a desert mirage of glimmering water in the distance.

    The only solution is handcuffs, perp-walks, indictments, trials, convictions, and STIFF Prison terms. You don’t need to get everyone in the room, incidentally. A few convictions will have a very chilling effect on these financial, white collar criminals.

    “These activities were widespread, representing – depending on your reading of the details – some combination of a complete breakdown of compliance and control at Barclays and presumably other banks (mentioned but not yet named by C.F.T.C.) and a pattern of apparent criminal fraud.”

    The BEST regulation will always be enforcement of the criminal statutes now codified in law.

  39. At least there’s a scientific explanation for what goes on here;

    http://www.bbc.co.uk/blogs/newsnight/2007/08/the_political_brain_by_drew_westen.html

    ———————quote———————-
    The neural circuits charged with regulation of emotional states seemed to recruit beliefs that eliminated the distress and conflict partisans had experienced when they confronted unpleasant realities. And this all seemed to happen with little involvement of the neural circuits normally involved in reasoning.

    But the political brain also did something we didn’t predict. Once partisans had found a way to reason to false conclusions, not only did neural circuits involved in negative emotions turn off, but circuits involved in positive emotions turned on. The partisan brain didn’t seem satisfied in just feeling better. It worked overtime to feel good, activating reward circuits that give partisans a jolt of positive reinforcement for their biased reasoning. These reward circuits overlap substantially with those activated when drug addicts get their “fix,” giving new meaning to the term political junkie.
    ———————-endquote—————-

  40. The Bond Man

    Pat, perfect description of your worldview.

  41. Well it is his perfect description, the drugs being the QE, the interest payments on the debt being the hangover. As to your illusion, or perhaps it is just a haunting dream. I said as much in 08, and that will be doubled, as in double your trouble, in just a few years. When I take the place of the clowns who left the stage with mandates that would take a magician to account for the mirage you seem to viewing currently. If the mandates are met, you are in a cruel dream land that doesn’t exist, If the mandates are not met, it is off to derivatives races and cash that bonus ASAP.

    You might as well face it, that the humans you are in contact with, and most likely yourself, are doomed, you can’t see a positive end to debt problems and you are quite correct, it will take a God that you and these people don’t believe in, to reset the equation. And until then its 3 years party politics, and one year of election. Default city, here we come.

  42. You have this touching belief that the FED exists for the good of the people, and not the good of the banks. How many examples do you need before you are disabused of that notion?

  43. Moses Herzog

    OK, can somebody tell me if I have finally completely lost my mind (ok, I know some of you are already taking my insanity as an already long-established fact) or does the “alleged” wacko Aurora Batman theatre shooter’s facial features resemble Mark Zuckerberg in some ways???

    NOT attempting to “smear” anyone here, just an honest observation.

  44. Moses Herzog

    Continuing my thought from above comment, the resemblance is more striking I think in this photo, which I found on BusinessInsider site, and I guess they took from an instagram ID “thebawdofeuphony”:

    Anyway, I think it’s fascinating.

  45. The Bond Man

    DOJ expected to file CRIMINAL CHARGES against bank, as set forth here:

    http://www.nytimes.com/2012/07/23/opinion/a-week-in-the-life-of-libor.html?_r=1&hp

  46. Ouch, yea, I’m always jumpin like a monkey by the end of this song.

  47. @makets.aurelius, “…Now imagine all these firms having to react to systemwide shifts induced by their previous adjustments, and all of the sudden — at a time that cannot be predicted or anticipated — you’ve tipped the entire system into a chaotic space that is totally disjointed. I defy anyone to model that system of feedbacks….”

    I’ve heard them argue

    (on a blog called UBRON which exists for Urantia Book haters – 2005 was the hottest time for derivative manipulation via that website – truth WAY stranger than fiction, I know, don’t shoot the messenger)

    that they HAVE modeled that system and it looks like one of the iterations inside the Mandelbrot fractal – not joking. They attached the visual along with a smiley face. Here’s the visual:

    We have to get serious about currency for commerce that is life-sustaining.

    The masters of the chaotic universe need to be contained in a padded cell with this video playing 24/7….”doing god’s work”….

  48. The capture
    is of the money system.
    It’s become in service to the purveyors of debt.
    That’s the vehicle.
    It is a private central bank.
    It is the bankers’ bank.
    It is the private bankers’ central bank.
    It is the private bankers’ money system.
    A judgeship can be just the beginning.

    How anyone pondering the repair of our modern monetary economies can accepts that the Federal Reserve is a multi-facted something or other that also has public traits NEEDs to have his or her head examined.

    Barofsky never flinched in deference to the money power.
    Remember Lord Acton.

  49. I agree, who doesn’t like 50% more cash?

  50. Annette Peters

    I’m so tired of the new visual layout of Baseline Scenario. The posts are as great as ever, but you have to scroll forever to read them because they are only a tiny part of the page. Just very very unkind to readers.

    Used to be SO MUCH BETTER!

  51. Conscience of a Conservative

    Seems Tim Geithner had an obligation to contact the DOJ if he suspected fraud. His memo comes off more as attempting to improve a flawed calculation than of reacting to fraud and collusion

  52. Curious Cat

    If LIBOR is irrelevant for bank borrowing, market trades, etc, as vociferously argued above, then what’s the motivation for manipulating it? Surely there is a purpose behind it; a gain to be had? Surely it wasn’t just for giggles.

  53. CC, that’s been explained before. LIBOR was something of a marketing ploy (or maybe a multi-player Prisoner’s Dilemma); report too high a rate and markets assumed you were in trouble. In fact, that was specifically explained to a curious NY Fed official back in 2008.

  54. @Bond Man – Bloomberg is NOT endorsing Warren for MA Senate – going with the Cosmo layout gen-xer because of some gun law view or something….Yay! Neocons RULE!

    There is no “low” to reach in their Randian monkey brain – it’s an infinity algorithm disconnected from time and space so there is no boundary for “how low can you go”….

  55. No boundaries for new nadirs, Annie, you got it~~!