It should come as no surprise to anyone that major commercial banks manipulate Libor submissions for their own benefit. The OTC derivatives markets was designed by the big banks, for the big banks, to ensure that as they set up their own private securities exchanges - away from regulatory scrutiny - they could control the interest rate settings. Money center commercial banks did not want the “truth” of market prices to determine their loan rates. Rather, they wanted an oligopolistically controlled subjective survey rate to be the basis for their lending businesses.
To that end, if there was a big reset for a specific bank on a given trading day, and a lower rate suited, said bank would surely shade its Libor submission lower. And then of course there were the far more unscrupulous submitters who tried to influence where other banks might post rates on a given day (for a bottle of Bolly or for a quid pro quo at a future date). When there are only 16 players – a “gentlemen’s agreement” is relatively easy to formulate. That is the way business has been transacted in the broader OTC lending markets for nearly 30 years. It is impressive that it took this long for the regulators to actually realize what a complete shame the entire structure really is.
In a way, the evolution of a corrupted Libor market is par
for the course when it comes to the commercial bank tear down of the
Glass-Steagall act. The biggest banks in the US and Europe
spent decades trying regain control of the securities markets. In the
US, Gramm-Leach-Bliley was the final nail in the Glass-Steagall coffin
after the tireless work of folks like Sandy Weill and Hugh McCall (and
their public sector lackeys Bob Rubin, Larry Summers and Alan
Greenspan). One
of the best analyses of the post Glass-Steagall world was done by Luigi
Zingales at the University of Chicago. His recent FT article is
attached below – and it is a MUST read. From the perspective of the
evolution of the OTC derivative market, and Libor misrepresentations,
this paragraph from Luigi says it all –The money center banks have successfully created their own private marketplaces, where everyone from money managers to hedge funds to homeowners MUST trade upon rates that are set in an opaque fashion by the owners of said marketplace. It’s a travesty, but it’s our reality. Maybe that will change, but somehow I doubt it. Even going back to Jefferson and Madison, the debates on bank influence were fierce. Sadly, one of the negative by-products of our wonderful system of capitalism is that banks end up with too much political control. And, of course, they use it to create oligopolistic rents. We can all hope to set up rules that do not allow this, but it’s most likely impossible.“The third reason why I came to support Glass-Steagall was because I realized it was not simply a coincidence that we witnessed a prospering of securities markets and the blossoming of new ones (options and futures markets) while Glass-Steagall was in place, but since its repeal have seen a demise of public equity markets and an explosion of opaque over-the-counter ones.”
To reiterate, it should come as no surprise that Barclays, or any number of commercial banking institutions, used their influence to drive Libor rates towards levels that suited their positions. The rate setting structure was designed to be manipulated. To that end let’s review what Libor is – it is a rate that is not derived from any traded market, it is a survey rate. When a bank submits Libor rates at 7:29am each day, they need not have any paperwork suggesting that is where they actually borrowed funds. In fact, back in 2008, all interbank lending ceased to exist. Yes, we had a $500 trillion OTC derivatives market based off an index that couldn’t even be traded - amazing. And as the attached chart shows, the interbank lending market has never come back. Libor was designed to be an opaque and non-transparent rate. So when a bank submits a rate which may not represent its true borrowing costs, it really has done nothing wrong.
The system was set up to be divorced from reality. But where banks get into trouble is when they work ologopolistically to collude on where these rates are set. That is where Barclays fell down, and that is why senior management has been wiped out.
While we can point to the ridiculousness of 16 banks in London colluding on where mom and pop’s trailer park mortgage rate is set, or where a small business loan rate is set, or where a student loan rate is set; the reality is we have no choice. I wish the bulk of our lending rates were set as a spread off Treasury yields, or COFI, or better yet the Fed funds rate/OIS. But they are not. The banks tore down Glass-Steagall, became too big to fail, and set up a $500 trillion derivatives market that is too big to close. We are stuck trading whites, reds, greens, blues, golds for a good while longer!
Read more @Source: Shhh... Don't Tell Anyone; Central Banks Manipulate Rates | ZeroHedge
