So when I saw this piece on Bloomberg, I nearly split a rib in laughter. It tries to make the argument that Libor fraud isn't really that bad, it only happens during extreme times like the crash and finally, the cherry on the cake, argues that Libor fraud actually helped the poor by bringing down their mortgage rates during and after the crash. But enough of me, I will let the article speak for itself.
[ begin article ]
Libor Punishment Could Be Worse Than the Crime
By Mikhail Chernov Aug 1, 2012 12:30 AM GMT+0200
People are rightly appalled at the way bankers manipulated Libor, a benchmark interest rate that influences the value of hundreds of trillions of dollars in financial contracts worldwide.
But before authorities topple more banks’ managements and scrap an indicator that has served the market for three decades, they should ask themselves a question: Who was really harmed?
The most significant misreporting of the London interbank offered rate, in an economic sense, occurred during the financial crisis. Banks lowered the borrowing rates they reported for the calculation of Libor because they wanted to avoid the impression that they were in distress. Some estimates suggest U.S. dollar Libor might, at certain times during 2008, have been artificially depressed by more than 0.30 percentage point.
The misreporting was bad for investors in various securities, such as mortgage bonds tied to Libor, because it artificially lowered the payments they received.
[ This is the first bit I am going to chew into. Depressing Libor may have provided some relief for mortgage owners, but also meant that pension funds made significantly less profits. What this article manages to totally avoid is the reality that the retirement savings of millions of people are invested in funds that use Libor as a benchmark rate for the returns that they get. Because of inflation, this is critical. If a pension fund can only make 1% over inflation on their investments, then there is no way they can meaningfully grow the wealth that they are supposed to be protecting for those millions of people. If the rate is manipulated down enough, you can get to a point where investors actually have to start paying people to keep money for you (negative interest rates) this is already happening in Germany. As a result, the retirement savings of millions of people were shrinking to exactly the same extent that it kept mortgage rates low. What it basically does is discourage saving, after all, if inflation is 4% and you can only get a bank account that pays you 0.1% interest, you are losing 3.9% a year. Do not think this is a joke. When I went into my bank the other day, I was amazed to find I was getting exactly 0.1% per year in my savings account. The very nice lady managed to have it bumped up to 1%, but she had to call another part of the bank to do that and the only way she could get them to up my rate was by saying that I had threatened to move to another bank. Even so, this new interest rate will only last for 6 months, before resetting again to 0.1%. In an environment like that, it actually makes more sense to just get yourself deeper into debt, since credit is cheap and if you spend the money on assets, they often depreciate slower than the currency itself.
Now all this is fine until you raise the interest rate, which has to happen eventually. As soon as that happens, all the debt accumulated at ultra low rates suddenly becomes a massive burden. It may help savers, but alot of savers wont have anything left at that point, because perhaps they had to spend their retirement early on staying alive while they were unemployed, or maybe they borrowed money, or a thousand other reasons. The raising of interest rates will cause a flood of defaults and bad debts on loans, which is why the govt will be loathe to do it, but sooner or later, they must. The resulting bankruptcy is likely to wipe out your pension fund and the resulting financial chaos may crash your bank, meaning you are left with less than nothing, just a massive debt and nothing to pay it back with.]
It also provided a welcome relief for millions of struggling U.S. homeowners with floating-rate mortgages, and greatly helped the Federal Reserve in its efforts to get interest rates down.
[ It helped the Federal Reserve get interest rates down? What the hell has this guy been smoking? The interest rates are SET by the Federal Reserve, it doesn't need any help to raise or lower the interest rate, it just has to have a meeting, take a vote and announce it. ]
At the time, the Wall Street Journal estimated that the benefit to homeowners and other borrowers amounted to more than $10 billion a month -- a meaningful stimulus at a crucial moment in the recession.
[ Which means, simultaneously, $10 billion a month was being taken from peoples savings and retirement funds
Utility Functions
This vast transfer of wealth was not necessarily a zero-sum game, because the winners and losers were very different people. In economic terms, they had different utility functions: A $100 break on a monthly payment would mean a lot more to an unemployed homeowner than a loss of $10,000 to a relatively wealthy investor. So it’s probable that, on balance, the benefit to homeowners outweighed the suffering of investors.
[ However, a $100 a month 'break' on the return of your savings or pension is going to mean alot to a poor person. ]
In other words, by lying about their borrowing costs to make themselves look healthier than they were, banks might actually have done humanity a great service. The people and institutions harmed were largely sophisticated types who should have known what they were getting into. Although anyone who committed fraud should be punished to the full extent of the law, authorities should consider this context in deciding what to do with the senior managements of the banks involved.
[ Notice this extremely cunningly crafted piece of bullshit. It starts by saying that the banks that committed the fraud actually did humanity a great service, the reason that people think it is the rich being harmed is because they have no understanding of how their small share of currency is being stolen through invisible taxes such as inflation, VAT and rate fraud. It then goes on to say the politically correct thing by insisting that anyone who committed fraud should be prosecuted. But if the fraudsters did infact do a great service for humanity, then what is it that they should be prosecuted for? ]
There is, of course, no guarantee that at some point in the future, bankers won’t have an incentive to overstate their cost of funds as systematically as they understated it during the crisis. It’s hard, though, to imagine a situation that would compel them to do so. Individual banks have different investments that a rise in interest rates would affect in complex and conflicting ways. Only something as powerful as the fear of bank runs can override those varied interests. In such cases the incentive is always the same: Push rates down to avoid looking weak.
[ Now this is just so much bullshit. As anyone in the finance industry knows, you can make money by being on either side of an interest rate, as long as you know in advance which way it is going to go. The temptation to overstate could arise in a number of circumstances, say the banking system is trying to attract a bunch of suckers to put their money into their deposit bank, or perhaps they are looking to push rates up to attract more suckers, i mean, savers. Maybe they want higher US Treasury Yields? The options are endless. The idea that a Bank would only ever be temped to push interest rates down is one of the boldest pieces of outright bullshit in this article. ]
Libor actually works pretty well most of the time. [ Kind of in the same way the USD or Windows Vista works pretty well most of the time, after all, you dont have a choice. ]
Outside of crisis periods, dollar Libor closely tracks interest rates on U.S. Treasuries. [ These rates are also manipulated, by the way.] Any significant divergence would immediately set off alarm bells and create arbitrage opportunities, limiting banks’ ability to manipulate the rate. [Bwahaha. So let me get this straight. This guy is saying that because Libor, a highly manipulated number, closely tracks US Treasury yields, another highly manipulated number, and that when the two diverge, it's possible to make money buy buying in one and selling in the other, and this is what limits the banks ability to manipulate the rate?? What??]
When crises do happen, the incentives to lie arise in a way that -- thanks to the Libor scandal -- we now understand pretty well. [This shit has been understood for ages, buddy, it's just that no one is doing anything to fix it because everyone at the top is having a swell time.] Any potential replacement for Libor could entail all kinds of new and less manageable flaws. Consider the general collateral repo rate, the rate at which banks make loans against good collateral, such as Treasuries. It has the advantage of being based on actual, observable loans, as opposed to Libor, which relies on banks to estimate their borrowing costs. Yet the repo rate is also tied to supply and demand in the Treasury market, which can fluctuate in unpredictable ways -- for example, when global investors are looking for a safe place to park their cash.
[ Ok, ok, just hang on there. First, what the hell is the 'general collateral repo rate exactly anyway? Lets ask investopedia.com, shall we?
Definition of 'Implied Repo Rate'
The rate of return that can be earned by simultaneously selling a bond futures or forward contract and then buying an actual bond of equal amount in the cash market using borrowed money. The bond is held until it is delivered into the futures or forward contract and the loan is repaid.
Investopedia explains 'Implied Repo Rate'
The implied repo rate comes from the reverse repo market, which has similar gain/loss variables as the implied repo rate. All types of futures and forward contracts have an implied repo rate, not just bond contracts.For example, the price at which wheat can be simultaneous purchased in the cash market and sold in the futures market (minus storage, delivery and borrowing costs) is an implied repo rate. In the mortgage-backed securities TBA market, the implied repo rate is known as the dollar roll arbitrage.
Oh, right, well, that's very simple then, very straight forward, definitely no way someone could manipulate a number based on so many variables especially if it deals with the futures and derivatives market, right children? ]
Keeping Libor
In some markets, then, it might be best to stick with Libor. One solution would be to separate Main Street from Wall Street, in much the same way we do by allowing only wealthy, sophisticated investors to put their money in hedge funds.
[ And this is what it all comes down to, what this article is trying to make you believe. The central idea that we should not re-instate the Glass-Stiegel Act essentially, before this law was repealed, a bank could do one of two things. It could either take deposits and make loans or it could issue securities, but not both. Why is this critical? Because it's the repeal of this act that allowed the banks to go on thier massive sub-prime CDO securitisation binge, which directly lead to the 2008 crash. Unbelievably, the same law was repealed in the 1920's, which created the 'roaring 20's', much like our 'roaring' 2000-2008 and then it triggered the Great Depression after which, Glass-Stiegel was re-instated. Of course, this observation has not been missed by everyone, which is why there is talk of ring-fencing banks, or separating their deposit and loan business (ie the stuff that all their clients depend upon) from their securities business, so that they cannot bundle loans into crap paper securities, sell them on to everyone and wipe out the economy. ]
Consumer products such as mortgages and auto loans could be pegged to the central bank’s target interest rate, as is already done in some countries. [This is done everywhere. Where the hell do you think banks get their central and deposit rates from?? ] Financial professionals could decide on the best benchmark for all their derivative contracts and so on. [Oh great, so we would have a group of 'financial professionals, like Bernanke and Geithner, arbitrarily deciding a rate, that would be convenient, they wouldn't even have to rig the market, they could just pick the most convenient number out of thin air.]
If they still prefer Libor, so be it. For all its shortcomings, Libor is the evil we know. Before we throw it out and start over, we should consider the potential for unintended consequences.
[ Oh yes, Libor is indeed the evil we know. And we now know that like many financial market benchmarks, it is essentially false, manipulated and therefore fails in it's function of actually identifying real market value, which is what these numbers are supposed to reflect, reality, not just the most convenient environment for bankers. ]
(Mikhail Chernov is a finance professor at the London School of Economics. He has worked as an academic consultant to various institutions, including the U.S. Federal Reserve, the Bank of England and Barclays Plc. The opinions expressed are his own.)
[ end article ]
With Libor now shat through a dustbin, one has to ask oneself, how many other financial benchmarks are being systematically manipulated in this way. In my opinion, it's alot of them. Inflation rates, CPI and PPI, employment rates, everything is altered to give the impression that thing are better than they are, and the reason? Because for a while it works, if everyone think that everything is fine, they dont panic and everything continues chugging along. However, sooner or later, the numbers become so out of joint that no one believes them and they lose their function. this is what happened in the USSR, the people lost all faith in government statistics, so they made them up for themselves, either believing and deluding or thinking the worst. In my opinion, when things get to this state, thinking the worst is probably the better option, after all, they are fudging these number to hide a massive hole in the worlds economy that would really bum alot of people out of they knew about it... But it is slowly leaking out and as people realise and loose faith in the markets, crashes begin. This time, it wont be people losing faith in banks, but in entire countries, which in my opinion is going to make the previous crash look tiny. at the same time mind you, we have a massive rise in the price of food on the way as well.
I would say buckle up guys, it's gonna be a rough year, oh, and get into physical assets, because soon, the only thing that paper is going to be good for is wiping your ass.
Christopher Carrion.
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