The LIBOR scandal

Trading Discussion
1

Corruption at the top of the Interbank Network

Six of the 7 largest players in the interbank network have been implicated in an interest rate-fixing scheme that has gone on for years. This scheme, involving the London Interbank Offered Rate (LIBOR), is alleged to have manipulated the key interest rate on which virtually all other interest rates worldwide are based.

The effect of this manipulation on the borrowing costs of credit card holders, homeowners, businesses, cities, states, provinces, and nations will be easy to ascertain.

The effect on the foreign exchange market may be less obvious, and more difficult to expose.

Here are three articles on this unfolding scandal — Here, Here, and Here

This quote (from the first of the 3 articles linked to above) is pretty scary:

“Robert Shapiro, former Under Secretary of Commerce for Economic Affairs in the Clinton administration and now chairman of Sonecon, an economic advisory firm, warned Wednesday that the LIBOR scandal could become the largest financial fraud in history.”

Here’s a very quick summary of where we (retail forex traders) stand in relation to the mega-banks which make up the interbank network.

When you place a trade, someone somewhere takes the other side of your trade. If you are LONG, that “someone” is SHORT, and vice versa. In the case of small retail traders, that “someone” is almost never one of the mega-banks. However, the BID and ASK prices presented to you, on which you (and that “someone”) decide to transact a trade, are determined in the interbank network, by the moment-to-moment trading between the mega-banks in that network.

If your retail forex broker is a so-called “ECN broker”, then the interbank BID/ASK prices will be presented directly to you. On the other hand, if your retail broker is an STP broker, or a market maker, then your broker will mark up the interbank BID/ASK prices and present the marked-up prices to you.

But, regardless of the type of broker you use, the prices which your broker presents to you — prices on which you can trade — originate in the interbank network.

So, who are these mega-banks that comprise the interbank network? They are the 100, or so, largest banks in the world.

But, foreign currency trading volume — and, therefore, the power to push currency prices — is concentrated in the hands of the 10 biggest mega-banks. Collectively, these 10 banks transact 78%-80% of all the foreign currency turnover ($4 trillion per day) in the world.

The list of top 10 banks doesn’t change much from year to year; the changes which do occur are usually just a minor re-shuffling of positions within the rankings.

Here is the current list of the top 10 banks, showing each bank’s share of the $4 trillion per day market —


Data source: EuroMoney FX Survey 2012 – Graphic: courtesy of Wikipedia

And here is the same list with arrows marking the banks implicated in the LIBOR rate-fixing scandal —

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If these 6 banks (and possibly others not yet identified) are guilty as charged, how has this affected the market that we trade on a daily basis?

We would like to believe that a combination of competition and regulation ensures a measure of honesty and transparency in the forex market. But, we aren’t naive…

We know that the mega-banks manipulate forex prices — for very short periods of time — in order to run stops and trigger price moves.

But, now we have to ask: Has the manipulation of the LIBOR rate, which has been going on for years, created totally artificial prices — extending over long periods of time — in the foreign exchange market?

And if so, who benefited from that price manipulation, and who got hurt?

We can be sure of one thing: The mega-banks are sharks, and sharks very seldom get hurt.

SHARKS ARE CIRCLING
MINNOWS BEWARE

><(((°>

…

2

Clint, rates are be held artificially low, and have been for several years by a group of banks not on your list, The BoE, Boj, Fed Reserve, etc…

It is believed that the BoE was either aware of the LIBOR fixing, or was actively involved in it

3

Read this folks:

Libor Is Not the Only Manipulated Economic Number | ZeroHedge

Anyway, manipulation in FX is common, but it presents also opportunities, like fading a stop hunt move.

4

JPM Admits That CIO Group Consistently Mismarked Hundreds Of Billions In CDS In Effort To Artificially Boost Profits | ZeroHedge

This is also a brilliant article, pointing out how the private and highly manipulated Credit Derivates market impacts the real economy.

5

Criminal prosecutions are imminent

Sun Jul 22, 2012 12:18pm EDT

(Reuters) - U.S. prosecutors and European regulators are close to arresting individual traders and charging them with colluding to manipulate global benchmark interest rates, according to people familiar with a sweeping investigation into the rate-rigging scandal.

Exclusive: Prosecutors, regulators close to making Libor arrests | Reuters

Here’s another brief excerpt from the article —

“The individual criminal charges have no impact on the regulatory moves against the banks,” said a European source familiar with the matter. “But banks are hoping that at least regulators will see that the scandal was mainly due to individual misbehavior of a gang of traders.”

Yeah, right. This worldwide manipulation went on for [B]years,[/B] and the higher-ups in the banks knew nothing about it?

It was all just the work of a few rogue traders? And they were the only ones who knew what was going on?

Some interbank traders were involved, for sure. But, it has yet to be determined whether they were “rogue”, or not.

And, apparently, the New York Fed, and the Bank of England, and the ECB knew the LIBOR was being faked.

Even so, the banks themselves are claiming total innocence? Are you kidding me?

Call me a conspiracy theorist, but I’m not buying what the banks are selling.

6

Of course they knew.

They rounded up a bunch of fall guys, will arbitrate to get them a prison with a golf course, and there will be some healthily funded pensions available when they get out in 5 years for good behavior.

7

Of course banks knew… is business for them

Are Big Banks Criminal Enterprises? | ZeroHedge

8

I doubt so, US regulators are laisy and corrupt. All US system is corrupt, noaction was taken against Goldman Sachs and all those who triggers the crisis, legaly they were doing nothing wrong and that is the point, the average US citizen if he can will swindle at you. Maybe in UK they will pour gasonline on these guys because brits are a little less corrupted.

I repeat, no action were taken against the mortgages fraud responsabiles in 2008.

Regards.

9

I predict that at some point we will have something like a revolution in a worldwide scale, with bankers and politicians being lynched. Maybe it could be several decades or even centuries from now, but it will happen. This is no different than slavery or occupation - and as we know from history, those situations never never NEVER resolve without violence.

10

Helicopter Ben Bernanke and Tiny Tim Geithner told Congress there was nothing they could do about the LIBOR rate manipulation. And Congress said: Are you kidding? We aren’t buying that crap!

An “internal” investigation at Deutsche Bank concluded that two “former” rogue traders “may have” participated in the dirty deed, but top management knew nothing about it.

(Deutsche Bank must have the dumbest top management in banking history.)

Here’s the story — Bernanke, Geithner response to Libor scandal rings hollow | Reuters

11

I was wondering when I’d see a thread about this. This is the biggest collusion in the world.

I found this info graphic explaining the whole shebang.

*THIS IS NOT MY WORK…ALL CREDIT TO MATT TAIBBI AT ROLLING STONE and accountingdegree.net

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