Libor Lie – A Black Swan?

July 16, 2012 | 

The Libor interest rate rigging scandal is being called the biggest financial fraud in history.  Libor is a key interest rate that is used globally to set as much as $800 trillion in transactions.  It is used to set interest rates for things such as credit cards, student loans, mortgages, corporate bonds and hundreds of trillions of dollars in derivatives.   Libor stands for the London Inter-Bank Offered Rate.  It is supposed to be an estimate of what it would cost for some of the biggest banks in the world to borrow money from one another.  Sixteen global banks are involved in setting the rate, three of which are in the U.S. (JP Morgan, B of A, and Citi.)  It was recently revealed by Barclays Bank (in the UK) that this key interest rate quoted by most of these banks was nothing more than a gigantic rate rigging scheme.

In a financial system reeling from one fraud after another, this is the mother of all rip-offs by the banksters.  Karl Denninger of calls this, “the largest organized theft ever committed in human history.”  This has already brought out lawsuits by the dozens from investors and institutions who say they were cheated by Libor rate rigging.  Who’s suing the big banks?  A better question might be who’s not suing?  Let’s start with investors both big and small.  CNN reported last week, “With Libor’s alleged suppression, Charles Schwab says, it was deprived of the higher interest payments it deserved.  In another complaint, individual investor Ellen Gelboim claims she purchased corporate bonds that paid variable interest based on Libor, and suffered lower returns as the banks held the rate down.”  (Click here for the complete CNN story.)  These lawsuits and others have been combined into one in federal court in New York, but avalanches of new cases are coming.

Several state AG’s are also suing, right alongside municipalities and cities around the country, and that is just in the U.S.  Remember, this scandal is global.   Hedge funds trading in derivatives are going to line up to sue the big banks if they were on the losing end of a trade.  Libor affects $550 trillion in derivative contracts.  Some investors got hurt when Libor was manipulated up, and some took losses when Libor was manipulated down.  There is something for everyone, and that equates to very big exposure to the banks involved in the alleged rate rigging.  If the banks are responsible for just 1/10 of one percent of the $800 trillion in Libor transactions, it would represent $800 billion in liability to the banks.  I’ll bet the total cost will be much higher, and some banks will go under as a result of litigation and loss of reputation.  Ron Hera of Hera Research told me last week, “Truth is, if you take back more than 1% of what the banks have stolen, they’re busted.” 

On top of that, there are going to be big fees paid to lawyers to defend lawsuits against the big banks.  There are going to be fines and penalties paid by the banks.  (Barclays paid more than $450 million in the UK to settle rate rigging charges.)  There will also be loss of business to the banks involved in the scheme.  There will surely be derivative contracts voided because rates were rigged and were not the honest interbank lending rates those contracts were based on.  The big banks are already allowed to lie about the value of the assets they hold on their books to look solvent.  I’m talking about underwater real estate and “toxic” mortgage-backed securities.  (FASB 2009 “mark to myth” instead of “mark to market” as the IRS requires.)

The cheap Libor rates also made the big banks look more solvent than reality because they were understating their funding costs by rigging low rates.  Reggie Middleton of told me Libor was, “A lie perpetrated in broad daylight,” and regulators should have “looked for fraud” long ago.   How solvent will the big banks appear when rates are no longer manipulated downward?

Another unintended consequence of the exposure of the Libor rate rigging scandal may have an effect on the value on the almighty U.S. dollar.  Rob Kirby wrote a great piece you can read at that said, “Libor . . . is one of the lynch pins in setting [rigging] global U.S. Dollar interest rates.  This is why a larger discussion needs to be had about the Libor rigging – it is not a London or Barclay’s centric story.  It has EVERYTHING to do with making the American Dollar look viable as the world’s reserve currency.”  (Click here for the complete post.)  How are the U.S. dollar and Treasuries going to fare when the manipulation of Libor stops cold?

Maybe everything is rigged, and there are no free markets anymore.  That’s a point the brought up last week when it said, “. . . investigations have started to discover other examples of rate-fixing in multiple countries. These enquiries are likely to cover a wide range of indices that have hitherto been believed to be set by “the market”. These indices include ones that set the worldwide prices for natural gas, crude oil, metals, wheat and many, many other commodities, all of which are set by clubs similar to the one that sets Libor.” (Click here for the complete story.) 

The banks are surrounded legally on Libor rate rigging.  Some are already saying the financial damage is going to be so hard to calculate that the banks involved won’t be on the hook for much money.  I say, this is going to drag the banks down like an oversized boat anchor in a thousand feet of deep blue sea.  The damage may not be felt immediately, but it’s there, and it will drag on for years or until the next financial collapse.  Yesterday, one visitor to the site asked, “Do you think that these bankers will be indicted for the LIBOR scandal?”  I replied, “Not only are the big banks “too big to fail,” but the banksters are “too big to jail!”  That does not mean there will not be big consequences for this sort of fraudulent criminal activity.  Unfortunately, we will all take a big hit.”

The Libor scandal is another in a long line of lies that are undermining the confidence in the financial system.  MF Global, PFGBest, foreclosure fraud, Lehman Brothers collapse, EU debt crisis, toxic assets, TARP and JP Morgan’s London Whale trading scandal are just a few of the things that are causing people to lose faith.  The economy cannot thrive, let alone recover, in an environment of fraud and corruption.  Both debt and criminals need to be flushed from the global economy.  The Libor rate rigging scandal is coming at a time when the Federal Reserve is worrying about a sinking economy, fiscal cliffs and a crushing EU debt crisis.  Is the Libor lie the black swan that finally sinks the system?

This article was written by Greg Hunter.


About Pat Donworth, D.Min.

I express myself as teacher, writer, and consciousness explorer. These driving interests have manifested in my work/service as a university and hospital chaplain; a book and magazine writer/editor, and teacher and workshop leader. I designed this blog to be a portal that points to and assists awakening souls to implement, and make practical, the changes that will usher in a new world based on unity, compassion, and collaboration.
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