It's Not Libor Stupid, Central Banks Are The Problem

http://www.forbes.com/sites/shahgilani/2012/07/06/its-not-libor-stupid-central-banks-are-the-problem/

The Libor scandal is about to get a whole lot worse. And, that’s the good news. Not only are at least twenty more big banks under investigation as part of a massive fraud to manipulate interbank lending rates that affect some $800 trillion in loans and derivatives, but the Bank of England is about to take center stage in the scandal. And that’s bad news for central banks around the world. Well, actually, it could be good news, as in really good news if it’s the beginning of the end of what central banks do to manipulate free markets to the benefit of their only real constituents, the world’s big banks.

First the good news.

It’s already come out that traders at Barclays with huge derivatives positions leaned on co-workers who sit on “panels” that submit internal bank borrowing cost data to Thompson Reuters, who averages the middle lot of submissions to determine Libor (London Interbank Offered Rate) “fixings” (not my word, but actually the established nomenclature for what it apparently is that they do…as in “fix” rates) all under the auspices of the British Banking Association.

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Still don’t get why that’s good news? Because it’s proof there are crooks out there and this time it’s easy to see where the “fix” actually occurs. It’s also good news because according to one multinational banking executive, just quoted in the Economist, it’s “the banking industry’s tobacco moment.” He was referring to the potential mountain(s) of litigation being drawn up already to claim that gross manipulation of interest rates caused billions, maybe trillions, of dollars of harm to borrowers and financial players of all stripes. Back in 1998 big tobacco had to settle class-action suits that cost them over $200 billion.

The bad news is the Bank of England, one of the world’s stalwart and oldest central banks, is about to face its own potential Lehman moment (at least we can hope). That’s on account of the fact that Paul Tucker, deputy governor of the Bank of England (and its supposed next top dog), is going to have to come clean in front of Parliament very shortly. Mr. Tucker is apparently on record (according to Bob Diamond’s phone call notes) suggesting that the Bank of England wanted Barclay’s to manipulate it’s Libor submissions downward so as to not panic counterparties and the country who might view tight interbank lending conditions as a sign of stress across the entire banking system.


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