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My initial diagnosis is this: whether formally or informally, you have two groups of banks submitting rates for LIBOR.  One group is trying to pull LIBOR up, the other is trying to pull LIBOR down.  Statistically, if I add up their intercept terms from the first table, they both sum to 0.23%, one positive, the other negative.  Even if LIBOR were a simple average, which it is not, this is a colossal game of tug of war, with two equal teams.
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The Canadian regulator also sets out clearly for the first time how its investigators believe bank employees may have managed to game a system used to set costs for financial products around the world, with the alleged aim of increasing their trading profits.


The yen London Interbank Offered Rate, or Libor, is calculated by Thomson Reuters under the auspices of the British Bankers' Association and is based on data submitted daily by a 16-bank panel. Around 11 a.m. London time every day, each bank submits estimates of what rates it would pay to borrow from other banks for different time periods. The top four and bottom four quotes are then discarded, and Libor is calculated using an average of the middle eight quotes.


The Canadian watchdog said lawyers acting for the cooperating bank had told it that traders at six banks on the yen Libor panel—Citigroup Inc., Deutsche Bank AG, HSBC Holdings, J.P. Morgan Chase & Co ., Royal Bank of Scotland Group and UBS entered into agreements to submit artificially high or artificially low" quotes, according to the court documents.

The traders used emails and instant messages to tell each other whether they wanted "to see a higher or lower yen Libor [rate] to aid their trading position(s)," according to a court filing. Each of the traders would then "communicate internally" with the person at their bank who was responsible for submitting the Libor quote, before letting each other know if this attempt to influence the quote had worked. "Not all attempts to affect Libor submissions were successful," the regulator said in the court filing.


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In the case of Barclays, two very different sorts of rate fiddling have emerged. The first sort, and the one that has raised the most ire, involved groups of derivatives traders at Barclays and several other unnamed banks trying to influence the final LIBOR fixing to increase profits (or reduce losses) on their derivative exposures. The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars. In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America’s Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions. Risibly, Bob Diamond, its chief executive, who resigned on July 3rd as a result of the scandal (see article), retorted in a memo to staff that “on the majority of days, no requests were made at all” to manipulate the rate. This was rather like an adulterer saying that he was faithful on most days.


Barclays has tried its best to present these incidents as the actions of a few rogue traders. Yet the brazenness with which employees on various Barclays trading floors colluded, both with one another and with traders from other banks, suggests that this sort of behaviour was, if not widespread, at least widely tolerated. Traders happily put in writing requests that were either illegal or, at the very least, morally questionable. In one instance a trader would regularly shout out to colleagues that he was trying to manipulate the rate to a particular level, to check whether they had any conflicting requests.

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Congress starts inquiry into US Libor links



The Federal Reserve Bank of New York on Tuesday said it became aware of “problems” with Libor following the onset of the financial crisis in late 2007 and subsequently recommended reforms. Tim Geithner, US Treasury secretary, led the New York Fed at that time. His office did not immediately respond to a request for comment.



In his letter to the New York Fed, Mr Neugebauer noted that Bob Diamond, former Barclays chief executive, told UK lawmakers last week that his bank “repeatedly” raised concerns about Libor with US regulators. Mr Diamond pointed to 12 contacts between his bank and officials at the New York Fed related to the lender’s Libor submissions.


Mr Neugebauer wants the documents by Friday.


The New York Fed said that it received “occasional anecdotal reports from Barclays of problems with Libor” in 2007. Following the failure of investment bank Bear Stearns in March 2008, the Fed asked Barclays for additional information on Libor submissions.

“We subsequently shared analysis and suggestions for reform of Libor with the relevant authorities in the UK,” said the New York Fed.


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Barclays' Euribor admissions: 'tipping point' for new class action




In its settlements last month with the U.S. Justice Department, the Commodity Futures Trading Commission and the British Financial Services Authority, Barclays admitted that traders and bank executives underreported the bank's daily borrowing rate to the authorities that calculate Libor, either to improve Barclays' position on derivative swaps or to make the bank look healthier than it was. But Barclays did not admit that it conspired with other banks to manipulate Libor, and last week its co-defendants in the consolidated Libor antitrust class actions argued that the cases can't proceed without evidence of a conspiracy to fix the rate. "Nothing in the Barclays settlement alleges any agreement among (U.S. dollar) Libor panel banks to maintain USD Libor at a suppressed level," the banks said in a motion to dismiss the suits.


That defense won't fly in the Euribor case because Barclays has already provided regulators with evidence that it worked with other banks to manipulate the rate. The Euribor complaint cited a filing in the CFTC's case against Barclays, which disclosed a 2007 scheme, coordinated by Barclays senior euro swaps traders and extending to "traders at multiple banks," to fix Euribor rates to improve the traders' futures positions.

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New LIBOR antitrust complaints: Lots of charts, few juicy specifics



No fewer than nine enforcement and criminal agencies are investigating alleged LIBOR manipulation, including the U.S. Department of Justice, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. All of the new filings cite juicy disclosures in the Singapore and Canada proceedings. In Canada, affidavits from an official in the criminal antitrust department revealed that one bank -- later reported to be UBS -- is actively cooperating with investigators and has provided records and testimony in the conspiracy probe. The Canadian affidavits include some of the detailed allegations of collusion between traders at different banks that can make or break an antitrust case. Similarly, in the Singapore wrongful termination case, a former Royal Bank of Scotland trader claims that he was scapegoated for manipulating LIBOR rates, when the bank itself condoned and encouraged the practice. The complaints also point to news stories about investigations of LIBOR collusion by officials in Japan, the European Union, among other places.


But those are the only detailed and specific allegations of an actual conspiracy in the complaints -- thanks to the banks' successful effort to block the private antitrust plaintiffs from getting their hands on evidence the banks have turned over to U.S. investigators. That evidence was the subject of a quick but furious exchange of letter briefs to U.S. District Judge Naomi Reice Buchwald in February. All of the plaintiffs' lawyers made a joint pitch to Buchwald to order the banks to provide them "the documents they have already produced to U.S. regulators investigating the alleged manipulation of LIBOR." If the judge ordered the production before the plaintiffs filed their amended complaints, the lawyers argued, there would be no need to waste time with subsequent pleadings when the government's evidence eventually came to light.


The banks' lawyers countered that the plaintiffs' "extraordinary and unduly burdensome" demand was improper unless and until the plaintiffs filed amended complaints and got past defense motions to dismiss.



We'll never know how much stronger the LIBOR plaintiffs' amended complaints might have been with the government's evidence because Buchwald sided with the banks and denied the production request.


It's not easy to survive a motion to dismiss in antitrust litigation after Bell Atlantic v. Twombly. There are billows and billows of thick black smoke in the new LIBOR complaints. We'll have to wait and see if the judge believes there's enough fire as well.


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The analysis also puts a value on the potential risk from class action lawsuits. Each of the banks named would pay an average $400m, with individual charges ranging from $60m to $1.1bn, depending on the size of their derivatives books.


The analysis assumes most of the other 11 banks will admit to roughly similar behaviour and will not receive the same discount as Barclays for early co-operation.


Some banks say privately that they do not have to cope with emails as stark as those sent by the Barclays’ traders promising bottles of Bollinger in return for specific rate quotes.


But Peter Wright, a former enforcement lawyer, said: “Barclays was not accused of conducting its business with a lack of integrity. If this is an allegation that is being pursued against other institutions . . . the financial penalty would be substantially higher.”


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The FED documents



There is just not a lot of secrecy here: Barclays talked about Libor as a manipulated fiction in mass-distribution emails to money market product clients and regulators, in a way that makes it clear that they thought they were just stating the obvious. This is not a “we have some evidence that Libor is wrong” research report. This is a throwaway line, “of course Libor is manipulated but let’s look at it anyway,” in a daily update going to basically everyone in the money market.


Of course it wasn’t going to everyone who used Libor: nobody told Nassau County “hahahaha you’re getting screwed on your swaps because Barclays doesn’t want to look bad.” But I think these Fed documents make it hard to share the collective amnesia of thinking that Libor was the most important and trusted thing in the world until it was broken by a secretive coterie of bankers and nobody knew about it. Everybody knew about it.


One thing that they knew specifically was that Libor, in Mervyn King’s great phrase, was “the rate of interest at which big banks don’t lend to each other”: it had to be fudged, because there often weren’t any actual trades from which to determine the rate at which banks borrow from each other.** So banks had to submit Libors that were, like the man said, “within pre-established price testing thresholds around external ‘mid-market’ benchmarks,” except without the thresholds.


This seems to have been clear to everyone – banks, money-market investors, regulators, the BBA, academics, everyone – during the financial crisis, and they understood that that would mean the potential for fudging, and they further understood that the direction of fudging would be down. And they were okay with that, it seems to me, for reasons not unrelated to why they were okay with things like lower Fed target rates, or bans on short sales of banks, or very slow and incremental credit-ratings downgrades of banks. They thought the fudging would make the crisis better.


Now of course things look worse in part because memories are short, in part because so are statutes of limitations, and in part because the people affected negatively by lower Libor rates are starting to figure out what everyone else knew in 2007. But I suspect that, just as it was in the JPMorgan restatement, the real question is about intent.


These NY Fed documents actually don’t sound that bad: they sound like thoughtful people trying to report reasonable borrowing rates while being mindful of market stability, and discussing that balancing act openly with their regulators. The earlier Barclays emails, in which derivatives traders asked Libor submitters to change their rates to help the swap book, sound terrible: market manipulation for high-fives and profit. Mis-marking within a reasonable range is not necessarily a scandal; in some sense it’s most of what most traders do most of the time. It only becomes a scandal when you do your mis-marking for nefarious purposes, with “hiding trading losses” and “screwing derivatives counterparties” being reasonably obvious nefarious purposes. “Keeping our name out of the FT and our stock price out of the crapper” is a gray area: it doesn’t seem to have looked that nefarious in 2007-2008, but now maybe it does.


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