Although there has been a great amount of attention focused on Wall Street "scandals" lately there has been little to no press coverage of a potential scandal involving many banks that are being investigated in the United States, United Kingdom, and Japan. It is being called The Wall Street multibillion-dollar scandal no one is talking about:
Consider what went on here. Banks took a rate that they artificially set themselves, and then went out and convinced municipalities and pension funds and others to bet against them on the rate. LIBOR rates were supposed to be set by bank treasurers reflecting what it cost them to borrow from other banks. But reportedly a number of bank treasurers consulted traders when deciding what rate to report to the organization in London that collected and posted the rates.
What does it say about the state of Wall Street that several institutions were (allegedly) conspiring to alter LIBOR? Will more illegal/unethical scandals come to light?
(LIBOR stands for the London InterBank Offered Rate) What's more, traders at a number of banks were given access to the systems that bank officials used to enter the rate so they could overwrite the rates with ones that would better suit them. When the rate went the way Wall Street traders programed it to do, the banks cashed in millions.
The intentional manipulation of a benchmark rate that affects $350 trillion of financial products is a huge crime on an even bigger scale leading some to question how it took so long to realize LIBOR was being manipulated, and what this means for the future:
“It would have been nice to think that there are just a few bad apples out there. But what we are seeing as more and more cases come out is a systematic pattern of unethical and often illegal behavior in the pursuit of profit at clients’ expense. If this continues, lack of trust will fundamentally change the industry. People will look for simplicity, and any kind of sophisticated product will be rejected on the grounds [that it is] trying to rip you off.”
Will there be a lack of consumer trust in Wall Street? If so, will it hurt the industry?
i have met the SEC and CFTC enforcement monkeys. they are completely outgunned in terms of resources and brainpower.
it is possible that it is being investigated. I was once at a firm that was investigated by the CFTC and was called to testify more then a year after the incident. I had assumed the investigation was long over. Sometimes these things move very very slowly especially when its not 100% straightforward.
Greed is good ?
The sooner people realize that everything too complicated to understand is probably set up to be that way, the better.
Pretty much everyone who has any relationship to a Rates desk knows that this is common practice. LIBOR is far from the real average rate at which those 8/12 banks borrow money.
However it's not that easy to make money out of it. Bear in mind that the published rate is the mean of the 50% middle values. So if you post a rate of 3000% it wouldn't be considered for the calculation. Also, banks have many positions in their books with all kinds of relationships with LIBOR, so it's not like they just go over to a mutual fund and "convince" them to bet against it and make a billion dollars. That's just ridiculous. Besides, LIBOR is a benchmark rate, not an actual rate. And IB counterparts are affected by its movement too, so it would also affect their borrowing and lending rates. Again, it's not that simple, you can't reduce the world rates market to a single trade.
The real reason banks report fake numbers is to avoid showing weakness. It happens specially during credit crunches. People can see the individual rates reported from each bank. Now imagine that yours is much higher than the rest of them, because you're having trouble. The rest of the market would see that and think "Hey, if this guy is paying so much to borrow money he must be screwed. I'm going to avoid trading with him or charge him much more than anyone else because of his credit risk". This would make you enter a vicious circle that ends up with you not being able to borrow money from other banks, not being able to fund your trades and books and therefore being totally fucked. So it's just easier to post a number that is pretty much the same as the rest.
So if everyone is reporting fake numbers couldn't that potentially end badly and/or hurt the banks and general economy? Is there any way to end the incentive for LIBOR collusion?
I think certain people (like some in the article) legitimately fear the widespread illegal behavior with seemingly no fear of retribution. Although this case didn't lead to anything that hurt people badly, if people are willing to break laws on Wall Street they could hurt people in the future in a different illegal scheme. Is that fair to say or am I wrong?
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