Tags: LIBOR, manipulation, Sibor, Singapore
The FX market’s entry into the Great Libor Scandal Lookalike Contest may have been a little underwhelming1 – Libor, a made-up number, was manipulated by making up a different number; the FX market’s WM/Reuters benchmark, which was derived from actual trades, was manipulated by actually trading – but the judges deemed it adequate:
“All benchmarks share similar vulnerabilities so there is a need for a framework that applies to all benchmarks to ensure their integrity and restore market confidence,” Chantal Hughes, a spokeswoman for European Union Financial Services Commissioner Michel Barnier, said in an e-mailed statement.
Trade-based and poll-based benchmarks would actually seem to share opposite, not similar, vulnerabilities, but whatever: uniform standard-setting is vaguely afoot, and “The International Organization of Securities Commissions, a Madrid-based group known as Iosco that harmonizes market rules, may propose final guidelines improving transparency and oversight of benchmarks.” I guess they’ll make the poll-based benchmarks more like the trade-based benchmarks? Which were also manipulated? Read more »
Tags: FX, LIBOR, market manipulation, WM/Reuters
When I was growing up the phrase “market manipulation” really meant something. To be a “market manipulator” in the grand style you needed to corner a market, or pump and dump, or organize a bear raid, or do some other cigar-chompy mustache-twirly 1920s-y thing, I don’t know, it was never really my thing. But there was always a sub-manipulation category of just, like, trader skulduggery. Trading is about eking out tiny advantages over your counterparties by any means that you plausibly think might be legal, and the occasional pounding of the close or conducting of imaginary negotiations was all part of the game. “He’s a scumbag, but he’s our scumbag” was a genuine compliment.
The Libor manipulation scandal has really messed with that, huh? For one thing, Libor manipulation was a pretty uninspired brand of manipulation; all you had to do to manipulate Libor higher was to say “hi our Libor is higher.” Not a lot of imagination there. For another thing, it’s so obviously bad that anyone can understand it and get mad about it. “Wait, you just lied about an imaginary number and made billions of dollars at the expense of now-bankrupt municipalities? You really suck, you know that?” said everybody, basically. Then they all sued.
Which is all bad enough but the real problem is that now every bit of garden-variety scumbaggery immediately gets branded manipulation. And then investigated and, like, reformed and stuff. Today, for instance, there is this Bloomberg article about how FX traders manipulated the WM/Reuters close in certain currencies to basically clip a little bit of money off of clients who had put in orders to execute at that fixing: Read more »
Tags: basis trades, FrontPoint, Hedge Funds, Lawsuits, LIBOR, negative basis trades, Salix Capital, swaps
Here’s a fun Libor lawsuit: the ghost of problematic former hedge fund FrontPoint is suing the Libor banks for (1) selling FrontPoint some interest-rate swaps and (2) manipulating Libor in a way that hosed FrontPoint on those swaps. Here is the complaint and here is Alison Frankel on the legal issues, which are interesting and which we can talk about a little below.1
Up here let’s talk about the trades that FrontPoint (and Salix Capital, which now owns these claims) is suing over. They’re interest rate swaps, of course, where FrontPoint received Libor, and where Libor was systematically manipulated lower by banks looking to enhance confidence in themselves by showing lower funding costs. But those swaps were part of a larger negative-basis package trade where (1) FrontPoint bought bonds (funded at a spread to Fed Funds), (2) FrontPoint bought CDS from a bank to hedge credit, and (3) FrontPoint entered into a swap with the bank to hedge interest rates. Schematically, when everything cancels, it looks like this:
If you asked FrontPoint what the trade was they might say “we are betting that the negative basis in these bonds will converge, making the bonds worth more relative to the CDS,” or alternately, that they would just ride the trade to maturity, getting paid that negative basis, and “earn a risk-free return by buying and selling the same credit exposure via alternative instruments in different markets.” That’s what the trade is primarily about: that orange thing in the lower-right-hand corner labeled “(Basis).” Read more »
Tags: Bob Diamond, bonus watch, bonuses, chauffeurs, LIBOR, shine bright like a Diamond, that's a relief
As you may recall, over the summer, former Barclays CEO Bob Diamond resigned in disgrace after revelations that bank employees had engaged in rampant rate rigging on his watch. And while the scandal clearly had an affect on his last performance review, Bob and friends o’ Bob will be pleased to hear that it didn’t actually hurt him too badly come pay day! In addition to a couple million pounds (for half a year’s work), it was announced today that Diamond’s 2012 package also includes lodging while he’s visiting old colleagues in town, as well as a company car and driver. No need to see the guy reduced to dirtying his hands opening door or walking, when he’s already been through so much. Read more »
Tags: Barclays, clawbacks, LIBOR
Those Libor fines don’t pay for themselves! Read more »
Tags: Carl Payne, LIBOR, mortgages
You may not share my tastes in this sort of thing but I’m going to go ahead and give American Banker a gold star for the headline “Libor-Rigging Set Interest Rates Too Low, Too High and So Low They Were Too High.” The reference is to this Journal article about the mishegas of Libor lawsuits. Since every bank seems to have manipulated Libor, and in different directions at different times, you get to sort of take your pick about what you want to sue over. And so some borrowers are suing banks for setting Libor too low, some municipal swaps counterparties etc. are suing banks for setting Libor too high, and one cable-car driver is taking the second derivative:
Carl Payne, a 72-year-old former cable-car driver in San Francisco, alleged in a federal-court suit filed in December that manipulating interest rates lower inflated margins on adjustable-rate mortgages tied to U.S. dollar Libor. The law firm acting on Mr. Payne’s proposed class action suit, Baron & Budd P.C., estimates that about a million mortgages were affected.
The interest rate on the mortgage for his condominium is based on the one-year rate plus a 2.25-percentage-point margin that is fixed over the life of the 30-year loan. Because the rate when he took out the mortgage was artificially low, Mr. Payne says, he was locked into a higher margin than he should have been.
This is obviously my favorite! I’ve been making this argument since July and I sort of assumed I was kidding, but no, Mr. Payne is right there with me: Read more »
Tags: fiddlings, impossible is nothing, John Hourican, Johnny Cameron, LIBOR, RBS, so that's something
Royal Bank of Scotland Group Plc executives told lawmakers they believed it was impossible to rig Libor, less than a week after regulators found traders at the lender manipulated the benchmark for more than four years. “None of us thought of this as a risk that needed this level of attention,” said John Hourican, who resigned as investment-banking head after the fine, told a hearing of the Parliamentary Commission on Banking Standards in London today. “It just didn’t occur to anyone that it could be fiddled,” former investment banking chairman Johnny Cameron told lawmakers. [RBS]