Sunday, July 1, 2012

Fixing the LIBOR

I remember one of the first references to LIBOR in a money and banking textbook describes a quaint process in London where market makers got together before the open to"fix the LIBOR."  The British use of the word "fix" wasn't meant to be nefarious, but the news of Barclay's settlement tells us that "fixing" refers to the same fixing that happens in Italian professional soccer games.

I read on one blog that the benefit to the brokers from some of the rate manipulations amounts to an estimated £46 billion.  In the case of insider trading scandals, the illegal profits are clawed back, along with fines on top of these amounts.  In the case of Barclay's the total fine amounts to a relatively paltry £163 million pounds.  Nobody from Barclays does any jail time. 

The rigging of the rate setting process was so widely known in the company that emails fly around routinely about rates being set at a level which "kills" some profit centers, or alternatively at a rate setting that generates a  "thanks for the favor."  Clearly a bad tone at the top if everyone knew about the rigging and carried it out routinely. 

Lord Turner has talked about the so called "financial innovation" process as producing products which only serve to enrich the City/Wall Street.  There can be no social benefit to "dark pools," another financial innovation.  Mark Cuban's describption of high frequency traders as the "ultimate hackers" is perfectly apt.  Another innovation that society doesn't need.  If we value transparency and a level information field as critical to our capital markets, there is no rational argument for supporting the long list of current abuses, none of which have been substantively curtailed as a result of Dodd Frank or other regulatory frameworks.

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