Tag Archives: LIBOR

Too Big to Jail Is Being Tested by US LIBOR Trial

Friday, 16 Oct 2015 07:27 AM

Dollar banknotes, handcuffs and judge's gavel isolated on white

Financial behemoths have paid handsome penalties to settle criminal and civil charges related to manipulation of the LIBOR. Now American citizens may be in jeopardy, thereby disrupting the implication that bank employees are “too big to jail.”

In recent years, more than $5 billion have been ponied up by several financial institutions for these transgressions: $2.5 billion from Deutsch Bank, $1.5 billion from UBS, $450 million from Barclays, and $325 million from Rabobank. Other perpetrators include Citigroup, The Royal Bank of Scotland, JP Morgan, Lloyds, and ICAP.

LIBOR, or the London Interbank Offered Rate, is the interest rate paid by banks to borrow funds from other banks. It represents the average lending rate offered by the 16 participating banks. These offers are submitted daily to the British Bankers’ Association for five currencies and 7 borrowing periods, spanning overnight to one year loans. Other lenders, including financial institutions, mortgage banks, and credit card companies set their rates relative to these. It is estimated that $350 trillion of derivatives and other financial products are based on the LIBOR.

The Justice Department issued a memo last month that prioritizes the investigation of employees for financial malfeasance before seeking settlement with corporations. In an important test for U.S. prosecutors, two Rabobank employees are now being tried in a Manhattan federal court for manipulating LIBOR in order to benefit other Rabobank traders’ trading positions that were tied to the LIBOR. The traders on trial are Anthony Conti, a senior U.S. dollar trader, and Anthony Allen, a former global head of liquidity and finance, and supervisor of Rabobank’s Libor submitters, including Mr. Conti. They are alleged to have conspired to rig the rate on or about May 2006 through early 2011.

Thirteen individuals have been charged thus far in the U.S. in relation to the LIBOR investigation. While several defendants have pleaded guilty, including three other former Rabobank traders, none have gone to trial yet. Six former brokers accused of rigging LIBOR are currently on trial in the U.K. This comes on the heels of Tom Hayes’ conviction in London several months ago. He was a former UBS and Citigroup trader sentenced to 14 years for LIBOR manipulation.

Former Federal Reserve Chairman Ben Bernanke believes some Wall Street executives deserve jail time for their roles in the financial crisis, since individuals, not abstract firms, committed these crimes. He lays the blame with the Department of Justice and others who are responsible for enforcing the laws of our country.

Wide swaths of the political spectrum are extremely dismayed with the way the financial industry operates. In the recent debate, democratic presidential candidate Bernie Sanders claimed the banking business model is one predicated on “fraud.” And republican presidential candidate Donald Trump believes too many in the financial industry do not pay their fair share of taxes.

The maximum tax rate for capital gains on financial products is 23.8 percent, while that for ordinary income is 39.6 percent. Further, unlike ordinary income, capital gains are not subjected to social security taxes of 12.4 percent, which is shared equally by the employee and employer.

The only effective deterrent to financial misdeeds is the possibility of personal punishment.

© 2015 Newsmax Finance. All rights reserved.

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Treasury Market-Rigging Further Disrupts the Middle Class

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By Barry Elias | Friday, 02 Oct 2015 06:48 AM

The U.S. Department of Justice and the New York State Department of Financial Services are looking into possible manipulation of the U.S. Treasury market by banks and brokers that serve as primary dealers to underwrite government debt.

To date, 23 lawsuits have been filed, with 2 more coming soon, that allege collusion by these institutions to enhance their profits at the expense of their investor clients. More than half of the cases brought forth thus far have been on behalf of pension funds, which predominantly serve the middle class.

The allegations claim the dealers inflated the price of newly issued Treasury securities that they sold to investors and lowered the price for securities they purchased from the U.S. Treasury. If accurate, this raises the cost of issuing Treasury security debt to taxpayers.

These cases include a comparable price analysis that was used in the market manipulation trials over the Libor — the London Interbank Offered Rate and the benchmark interest rate for lending between banks — and the currency markets, which resulted in more than $5.6 billion in penalties from six banks.

Gregory Asciolla, a partner at the law firm Labaton Sucharow, which is the lead counsel in two cases that involve the State-Boston Retirement System and Arkansas Teacher Retirement System, claims the auction and pre-auction market — also known as “when issued” — are “rigged.”

The Cleveland Bakers and Teamsters Pension Fund alleges the price was reduced in 69 percent of the auctions for securities in the secondary market — or those already in circulation. This analysis included data between 2007 and 2015.

Declining comment are the U.S. Treasury, The Federal Reserve Bank, and primary dealers contacted by The Financial Times.

Once again, high powered financial institutions continue to prosper at the expense of the middle class.

© 2015 Newsmax Finance. All rights reserved.

Market Manipulation Is Menacing to the Middle Class

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By Barry Elias | Friday, 18 Sep 2015 05:54 AM

Wealth and income inequality has risen substantially since the Great Recession, and market manipulation is making matters even worse for the middle class.

Richard Grasso, former chairman and chief executive of the New York Stock Exchange from 1995 to 2003, suggests the average person is severely disadvantaged relative to Wall Street institutions and the causes need to be thoroughly investigated and corrected.

Prompting this remark was stock trading the morning of August 24, when the Dow Jones Industrial Average tanked approximately 1,000 points within the first six minutes on news of a dire Chinese economy that may portend poorly for the world.

The large sell orders precipitated nearly 1,300 trading halts, as ETF indices were unable to execute transactions in an optimal fashion and prices fell below the underlying stocks they held. TD Ameritrade experienced volumes 10 times larger than average in the first half-hour of trading, causing severe price volatility: 30 percent for Facebook within several minutes as its price moved from $86 to $72 to $84.  (Trading is halted for five minutes when there is a price move of 5 percent or more in either direction.)

Ironically, the ETF products are marketed to middle-America so they can participate in the American dream of investing in a cost-effective and diversified manner. However, the lack of adequate trading liquidity and the capital losses that result may greatly offset the low trading cost.

Grasso believes high frequency traders receive proprietary trading information ahead of others and transaction speed trumps competition and fairness. He suggests the trading of shares on more than 60 venues makes execution at the best possible price quite difficult and costly to the little guy.

Jeffrey Sprecher, chairman and CEO of Intercontinental Exchange Inc., also says the stock market is overly complex and needs simplification.

Evidence of market rigging has been uncovered in the pricing of the gold fix, LIBOR and foreign currency exchange.

Recently, 12 banks and two institutions agreed to pay $1.87 billion to settle allegations that they manipulated the $16 trillion credit default swap market by prohibiting exchanges from placing these products on open, regulated platforms where pricing is more transparent.

The 12 banks named in the suit are Bank of America, Barclays, BNP Paribus, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland and UBS, along with the International Swaps and Derivatives Association (ISDA) and Markit Group, a data provider.

The Los Angeles County Employees Retirement Association and several Danish pension funds claimed the banks influenced the ISDA to deny intellectual property to the exchanges, such as auction price data.

As part of the agreement, the ISDA will form a committee, comprised of banks and investors that are independent of its board of directors, to license credit derivative products to exchange-like venues.

Currently, ISDA decisions are made by its board, which until 2009 was comprised entirely of bank representatives.

Dark pools have also been under intense scrutiny lately. These venues permit stock trading with greater anonymity than on the stock market exchange, amounting to a competitive disadvantage to many.

Credit Suisse tentatively agreed to pay $85 million to New York and the federal authorities for this practice. Last month, Investment Technology, a New York Brokerage, set aside $20.3 million to settle allegations of wrongdoing.

In January, the UBS Group agreed to pay $14 million for creating an unfair playing field using dark pools. And Barclays is in negotiations with the New York State Attorney General and the Securities and Exchange Commission regarding their involvement in this area.

The middle class has been ill-served by the current financial climate. Perhaps progress is afoot.

© 2015 Newsmax Finance. All rights reserved.

LIBOR Rate Manipulation

Barclays Bank settles LIBOR manipulation probe.

Source:  St. Louis Federal Reserve Bank

The difference between the LIBOR rate and the OIS rate (Overnight Indexed Swap) represents the default risk of banks as perceived by the market.  That is,  LIBOR is the rate that banks will lend funds to other banks, while the OIS represents a nearly risk free investment.

Historically, this spread has been roughly 10 basis points (1/10 of 1%).  By September 2007 it was 1% – in October 2008 it reached 3.5%.

This suggests the LIBOR rate was severely under reported for many years.  It  permitted banks, such as AIG, to borrow funds at artificially low rates, thereby enhancing profits and transferring risk and losses to counterparties and taxpayers.

Given the extreme volatility of this rate spread, coordination among LIBOR participating banks may have occurred.

US Treasury Secretary Timothy Geithner suggests he learned of the LIBOR anomaly in late 2007 in his capacity as The New York Federal Reserve President.  However, it is not apparent that any action was taken to rectify the situation.

Recently, Barclays Bank agreed to pay $453 million to the US and UK to settle allegations that it manipulated interest rates.  Seven additional banks are currently under investigation.