Rats, Chickens, and ‘Professional Courtesy’

Leaving a sinking ship-

As Libor Fault-Finding Grows, It Is Now Every Bank for Itself

By AZAM AHMED and BEN PROTESS, The New York Times

August 5, 2012

Major banks, which often band together when facing government scrutiny, are now turning on one another as an international investigation into the manipulation of interest rates gains momentum.

With billions of dollars and their reputations on the line, financial institutions have been spreading the blame in recent meetings with authorities, according to government and bank officials with knowledge of the matter.

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Authorities around the world are investigating more than 10 big banks for their roles in setting global interest rates like the London interbank offered rate, or Libor. Such benchmarks underpin trillions of dollars of financial products, including mortgages and student loans.

Regulators are examining whether banks colluded to move the rates up or down to get extra profits and limit losses on their trading positions. Some banks are also under investigation for reporting artificially low rates to make themselves appear financially healthier.

When banks first started conducting internal investigations at the behest of regulators two years ago, they figured the potential penalties would be manageable, according to bank officials.

But the size of the Barclays settlement and the growing public outcry have left banks scrambling to limit their culpability as the threat of criminal actions increases. Part of the banks’ problem is that their internal investigations have created a road map that authorities are using to pursue criminal and civil cases.

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The financial industry often tries to negotiate a common deal to avoid getting singled out for bad behavior. This year, five banks collectively struck a multibillion-dollar agreement with federal authorities to address foreclosure abuses.

With the rate investigation, institutions are not sharing information or even discussing the case with rivals, according to lawyers involved in the matter. In part, they do not want to appear to have close ties with their rivals, since such cozy relationships are part of the government’s inquiry.

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The Justice Department is aiming to file criminal actions against two banks before the end of the year and is preparing to arrest former traders at Barclays and other banks, according to government officials. In addition, state attorneys general and local district attorneys have approached the Justice Department in recent weeks, seeking a role in the case.

Coming home to roost-

Banks face valuation losses

Reuters

August 6, 2012

Global banks are delaying what will be an inevitable shift to valuing unsecured derivative positions at market rates because it could hit their bottom lines, but new global prudential regulations next year are set to force their hands.

Traders and accountants have known for some time what is only becoming apparent to the public now – the London Interbank Offered Rate or Libor, the interbank funding rate now at the centre of a rigging scandal, is not the appropriate price to value most derivative deals on banks’ books.

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As of now, no one’s quite sure how entities with huge discrepancies in funding costs will arrive at a market standard for pricing unsecured trades.

FVA, or funding valuation adjustment, is a bitter pill to swallow. In the simplest terms, it means traders have to absorb the rise in borrowing costs over the past four years into the way they price a swap, pay for an option or discount future cash flows from long-term derivatives.

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All that’s clear is the absence of collateral makes these trades riskier, and the economic case for revised valuations is strong.

The Basel III reforms, which kick in from next year, prescribe capital requirements for unfunded deals. The amount of margin banks will have to post with their clearing agents will likewise build as interest rate swaps, currency forwards and other over-the-counter derivatives are mandatorily cleared on exchanges.

Sharks in the water-

Libor, the New Asbestos

By Roben Farzad, Business Week

August 01, 2012

These are parched times for law firms. Clients just aren’t willing to pay what they used to for associates’ billable souls.

How fortuitous then that a multitrillion-dollar financial scandal promises to throw the lawsuit industry beaucoup fees, from both the alleged aggressors and their aggrieved. Thanks to the Barclays blowup, we now know that Libor, the most widely used and quoted benchmark for valuing about $360 trillion in financial products, has been rather rigged. Throw in the fact that this gauge is set by Wall Street, the villain à la mode, and a heretofore harmless interest rate could join the likes of asbestos and tobacco in one-word liability infamy.

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Libor is so ubiquitously baked into the world of financial products that it is hard to get a sense of the extent of who exactly was done wrong and by how much. Libor-related litigation “has the potential to be the biggest single set of cases coming out of the financial crisis, because Libor is built into so many transactions and Libor is so central to so many contracts,” says Harvard Law School professor John Coates. “It’s like saying reports about the inflation rate were wrong.” Or like asbestos, which was built into everything from ships to cars to houses before blowing up into the most expensive mass tort action in history.

Seems Discovery is right on time.

I’ve been disappointed so often it’s hard to get enthusiastic, but facts are stubborn things and the current corrupt Merchantilist system is not going to be able to satisfy even its own ‘beneficiaries’.  It wasn’t the peasants who demanded the Magna Carta, it was the Barons.

Adam Smith, The Wealth of Nations, Book 4 Chapter 8–

But in the system of laws which has been established for the management of our American and West Indian colonies, the interest of the home-consumer has been sacrificed to that of the producer with a more extravagant profusion than in all our other commercial regulations. A great empire has been established for the sole purpose of raising up a nation of customers who should be obliged to buy from the shops of our different producers all the goods with which these could supply them. For the sake of that little enhancement of price which this monopoly might afford our producers, the home-consumers have been burdened with the whole expence of maintaining and defending that empire. For this purpose, and for this purpose only, in the two last wars, more than two hundred millions have been spent, and a new debt of more than a hundred and seventy millions has been contracted over and above all that had been expended for the same purpose in former wars. The interest of this debt alone is not only greater than the whole extraordinary profit which it ever could be pretended was made by the monopoly of the colony trade, but than the whole value of that trade, or than the whole value of the goods which at an average have been annually exported to the colonies.

It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.