The only way to prevent this ever occurring again is to base Libor off of actual trades and not on easy to manipulate estimates.
The best way to base Libor off of actual trades is to require the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.
Market participants can use the information from the liability details to calculate Libor.
With all of the liability details, as opposed to a single trade, market participants are in a better position to establish what are the real funding costs a bank faces. This results in a more trustworthy interest rate.
Barclays Plc (BARC) was fined 290 million pounds ($453.2 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates.
Chief Executive Officer Robert Diamond and three lieutenants will forgo their bonuses as a result, Britain’s second-biggest bank by assets said in a statement today.
Derivatives traders requested the false submissions in the Libor and Euribor setting process, as they were “motivated by profit and sought to benefit Barclays’ trading positions,” Britain’s Financial Services Authority said....
Barclays tried to influence other banks’ Euribor submissions and reduced their Libor submissions during the financial crisis “as a result of senior management’s concerns over negative media comment,” the FSA said. The breaches included “a significant number of employees and occurred over a number of years,” the regulator said....Please re-read the highlighted text as it is an example of how Wall Street tries to benefit from opacity. It is also an example of why ultra transparency is needed.
“Libor and Euribor are critically important benchmark interest rates,” said Lanny A. Breuer, assistant attorney general of the Justice Department’s Criminal Division. “Because mortgages, student loans, financial derivatives, and other financial products rely on Libor and Euribor as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide.”A negative impact on consumers and financial markets, but a positive impact on banker bonuses!
Barclays traders in New York, London and Tokyo attempted to manipulate rates to benefit their trading positions in swaps and futures that were tied to the rates, according to the CFTC.
Traders at Barclays made the requests regularly and sometimes daily from mid-2005 through 2007 and sometimes later until 2009, the agency said in a statement.How much money did Barclays make as a result of manipulating Libor?
“Banks that contribute information to those benchmarks must do so honestly,” David Meister, the CFTC’s director of enforcement, said in a statement. “When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined.”The only way to enforce honesty and maintain the integrity of Libor is by requiring ultra transparency.
Senior Barclays managers told staff to submit artificially low rates to Libor from August 2007 until early 2009 to boost the bank’s financial condition, according to the CFTC....I wonder what a banker has to do to get suspended from working for a financial institution if trying to manipulate Libor results in a slap on the wrist from regulators?
Traders at Barclays also coordinated and abetted with traders at other banks to manipulate Euribor, including affecting rates on specific dates when derivatives contracts are settled or reset, according to the CFTC....
Libor is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. Lenders are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a set number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon.
Employees responsible for Libor submissions have said in interviews with Bloomberg News they regularly discussed where to set the measure with traders sitting near them, interdealer brokers and counterparts at rival banks. The talks became common practice after money markets froze in 2007, they said, making it difficult for individual bankers to gauge the cost of borrowing from other lenders.
Regulators are focusing on the lack of so-called Chinese walls between traders and employees making interest-rate submissions on behalf of their banks, and whether the banks’ proprietary trading desks exploited the information they had about the direction of Libor to trade interest-rate derivatives.As I said, it is time for ultra transparency and cleaning up all the opaque corners of the financial system.