The Biggest Financial Fraud of All Time

An anonymous reader sends this excerpt from an article at Bloomberg giving an inside look at how the Libor scandal happened: "Every morning, from his desk by the bathroom at the far end of Royal Bank of Scotland Group Plc’s trading floor overlooking London’s Liverpool Street station, Paul White punched a series of numbers into his computer. White, who had joined RBS in 1984, was one of the employees responsible for the firm’s submissions for the London interbank offered rate, or Libor, the global benchmark for more than $300 trillion of contracts from mortgages and student loans to interest-rate swaps. Behind him sat Neil Danziger, a derivatives trader who had worked at the bank since 2002. On the morning of March 27, 2008, Tan Chi Min, Danziger’s boss in Tokyo, told him to make sure the next day’s submission in yen would increase, Bloomberg Markets magazine will report in its March issue. 'We need to bump it way up high, highest among all if possible,' [Tan wrote]. ... Events like those that took place on RBS’s trading floor ... are at the heart of what is emerging as the biggest and longest-running scandal in banking history. ... For years, traders at Deutsche Bank AG, UBS AG, Barclays, RBS and other banks colluded with colleagues responsible for setting the benchmark and their counterparts at other firms to rig the price of money, according to documents obtained by Bloomberg and interviews with two dozen current and former traders, lawyers and regulators. UBS traders went as far as offering bribes to brokers to persuade others to make favorable submissions on their behalf, regulatory filings show."

Sheila Bair's quote says it all

[JoeyRox]

From the article: âoeWhen a bank can benefit financially from doing the wrong thing, it generally will,â

Re:Fundamentally...

[swampfriend]

Except even the Federal Reserve has a little bit of a mandate to do what's in the best interest of America and long-term financial stability, whereas these people have no guiding principle but profit. I'm not saying the Federal Reserve is doing a great job with that, but there's a real difference between state-aligned central banks protecting their currencies and this kind of collusion.

Re:Fundamentally...

[khallow]

So the "mandate" is a bit different? And what is the Federal Reserve doing that is actually in the best interest of "America" and long-term financial stability? Last I checked, their big thing was buying up trillions of dollars in bonds from banks that should be going through bankruptcy court. Deed doesn't seem to be matching mandate.

Re:While this is important news...

[anagama]

Put it in the category of stuff that matters, even to Americans --- we just don't know it:

A sizable chunk of the world's adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions. The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money.

http://www.rollingstone.com/politics/blogs/taibblog/a-huge-break-in-the-libor-banking-investigation-20120628#ixzz2JQ77kD9d [rollingstone.com]

Matt Taibbi is doing some of the most in depth reporting on the recent financial crimes of any reporter anywhere. Don't be put off by the Rolling Stone source. Plus he's funny.

Re:I don't understand...

[alexander_686]

LIBOR is the rate that banks are supposed lend to each other, As a bond market index it is one of the biggest. This has replaced the old “prime rate” index that was published in the Wall Street Journal. Most floating interest rates are tied to this index.

The index is calculated by a person calling up the banks and asking them what rate they could borrow money.

On the plus side, because it is an opinion poll, it is not distorted by temporary technical issues that can affect the price of U.S. Treasuries.

On the down side, it is an opinion poll and people can lie though their teeth, which is what was done here.

Some of the lying was reporting a lower rate, making the bank look stronger then it was. Some of the lying was to nudge the rate slightly up/down so option contracts would end up in/out of the money. A small difference (less then .1%) could cause an option contract to be worth millions or nothing.

Re:I don't understand...

[mister2au]

Each bank gives their answer, none are discarded as outliers, and the figures are averaged

Rubbish ... no-one would be THAT stupid ...

It is the average of the middle 10 out of 18 responses, with the upper and lower 4 eliminated.

So you need AT LEAST 5 out of 18 banks manipulating in a single direction to have any impact AND you need an asymmetric level of manipulation (low and high) so that the competing manipulations are not averaged out.