Bank rate-fixing scam

The LIBOR scandal may seem distant and unrelated, yet the 3 sentences below place the scam in perspective. The derivative market is more than 4 times World GDP that jeopardizes us all.

World GDP is around $70tn. The market in interest rate derivatives is worth $310tn. The idea that this has grown to such a scale because of the demands of the real economy better to manage risk is absurd.

Bank rate-fixing scandals reveal the rotten heart of capitalism

The magnitude of the banking scam must be realised and tough action taken

• Will Hutton
• The Observer, Saturday 22 December 2012

 

The UBS building in Zurich. Photograph: Michael Buholzer/Reuters

 

This is the year the consensus changed. Around the world, policy-makers, regulators and bankers recognised that the legacy of the 20-year credit boom up to 2008 is more corrosive than all but a few realised at the time. The bankers – and the theorists who justified their actions – made a millennial mistake. Navigating a way out of the mess was never likely to be easy, but it is made harder still by not recognising the magnitude of the disaster and the necessary radicalism involved if things are to be put right.

If there were any last doubts they were dispelled by the record $1.5bn fine paid by the Swiss bank UBS for "pervasive" and "epic" efforts to manipulate the benchmark rate of interest – Libor – at which the world's great banks lend to each other. The manipulation was at the behest of the traders who buy and sell "interest rate derivatives", whose price varies with Libor, so that cumulatively billions of pounds of profits could be made. Nor was UBS alone. What is now evident is that all the banks that made the daily market in global interest rates in 10 major currencies were doing the same to varying degrees.

There was a complete disdain for the banks' customers, for the notion of custodianship of other people's money, that was industry wide. It is hard to believe this culture has evaporated with the imposition of a fine. No banker falsifying the actual interest rates at which he or she was borrowing or lending, or trader who requested that they did so, had any sense that there is something sacred about banking – that the many billions flowing through their hands are not their own. It was just anonymous Monopoly money that gave them the opportunity to become very rich. The UBS emails, which will be used to support criminal charges, could hardly be more revealing. This was about making money from money for vast personal gain.

Interest rate derivatives are presented as highly useful if complex financial instruments – essentially bets on future interest rate movements – that allow the banks' customers better to manage the risks of unexpected movements in interest rates. Whether a multinational or a large pension fund, you can buy or sell a derivative so you will not be embarrassed if suddenly interest rates jump or fall. Bookmakers lay off bets. Interest rate derivatives allow buyers to lay off the risk that their expectations of interest rate movements might be wrong.

What makes your head reel is the size of this global market. World GDP is around $70tn. The market in interest rate derivatives is worth $310tn. The idea that this has grown to such a scale because of the demands of the real economy better to manage risk is absurd. And on top it has a curious feature.

None of the banks that constitute the market ever loses money. All their divisions that trade interest rate derivatives on their own account report huge profits running into billions. Where does that profit come from?

The answer is it comes largely from you and me. Global banking, intertwined with the global financial services and asset-management industry, has emerged as a tax on the world economy, generating much activity and lending that has not been needed, but whose purpose is to make those who work in it very rich. The centre-left thinktank IPPR reports that people with identical skills earn on average 20% more in financial services than in other industries, with the premium rising the higher the seniority. That wage premium does not come from virtuous hard work or enterprise. It comes from how finance is structured to deliver excessive profit.

The Libor scam is an object lesson in how finance taxes the rest of the economy. Plainly, the final buyers of the mispriced interest rate derivatives could not have been other banks, otherwise they would have lost money and we know that they all made profits. In any case, they were part of the scam. The final buyers of the mispriced derivatives were their customers. Some must have been large companies, but many were those – ranging from insurance companies and pension funds to hedge funds – who manage our savings on our behalf.

Here a second scam kicks in. One of the puzzles of modern finance is why the returns to those who buy shares in public stock markets are so much lower than the profits made by the companies themselves. One of the answers is that there are so many brokers, asset managers and intermediaries along the way all taking a cut. Sometimes it is through excessive management fees, but another way is not doing honest to God investing – choosing a good company to invest in and sticking with it – but through churning people's portfolios or unnecessarily buying interest rate derivatives to protect against interest rate risk, while charging a fee for the "service". Many of those mispriced interest rate derivatives will have ended up in the investment portfolios of large insurance companies and pension funds or, more sinisterly, in the portfolios of the banks' clients.


Bank managements are presented as ignorant dolts, fooled by rogue traders. They were no such thing.

The interest rate derivative market is many times the scale than is warranted by genuine demand precisely because it represented such an effective way of looting the rest of us. The business model of modern finance – banks trading on their own account in rigged derivative markets, skimming investment funds and manipulating interbank lending, all to underlend to innovative enterprise while overlending on a stunning scale to private equity and property – is not the result of a mistake. It represents a series of choices made over 30 years in which finance has progressively resisted any sense it has a duty of custodianship to its clients or wider responsibilities to the economy. It was capitalism allegedly at its purest. We now understand it was capitalism at its most rotten. It needs wholesale reform.

The government's proposals to ringfence investment banking from the rest of a bank's activities, following the proposals from Sir John Vickers, is a start. But it is only that. Last week, Conservative MP Andrew Tyrie's cross-party parliamentary commission proposed " electrifying" the ringfence with the threat of full separation if malpractice continues. It also considered banning banks from trading in derivatives on their own account. But while tough, the commission should extend its brief.

The issue is to create a financial system in its entirety that serves individuals and business alike, makes normal profits and, above all, embeds its public duty of custodianship in the bedrock of what it does. The government fears that more upheaval will unsettle banking and business confidence. It could not be more wrong. Reform is the platform on which a genuine economic recovery will be built.

http://www.guardian.co.uk/commentisfree/2012/dec/23/banking-reform-ubs

LIBOR simplified! And Another One!

Worth reading for the next economic collapse --

The Biggest Banking Scandal this Summer (HINT: It's not LIBOR

Published: Friday 20 July 2012

Just over a month ago the Federal Reserve quietly released a proposal to implement Basel III, an international agreement signed by twenty-seven nations aimed at ensuring the global economy’s resilience against financial disintegration.

This is the simplest explanation of what banks did --




Published on Jul 11, 2012 by DJKucinich

"Late last month, Barclay's Bank, a multinational bank and financial institution based in the United Kingdom, admitted to regulators that it tried to manipulate something called "Libor" before and during the financial crisis in 2008. "Libor" is an acronym for London Interbank Offered Rate. It is a rate used as a benchmark for the cost of lending throughout the financial system, and it is also used as a reference rate for a wide range of financial products like car loans, adjustable-rate mortgages, student loans and credit cards.

"The Libor is not based on an objective measure of the interest for bank-to-bank loans. It is the average of a daily poll of the Association's member banks, who give an estimate of the interest rate they think they would pay if they sought to borrow from another bank.

"It is supposed to be the way the financial system assesses the overall health of the financial system, because if the banks being polled feel confident about the state of things, they report a low number, because they assume that if they had to borrow from another bank, their cost of borrowing would be low. If member banks feel a low degree of confidence in the financial system, they report a higher interest rate. And from that the Libor is calculated, affecting the interest rate on financial products around the globe.

"What has emerged from the Barclay's Bank inquiry is evidence that banks may have in fact been deliberately manipulating Libor rates for years. The evidence so far is that one arm of a bank responding to the Libor poll would change their number based on what another arm of the same bank wanted—and that other arm could consist of the bank's traders who make their money on whether the rate goes up or down. This means that millions of consumers, investors and businesses have been paying the wrong interest rate. Or rather, they haven't been paying an interest rate that is set according to some legitimate benchmark. Instead they are paying a rate based on a gentlemen's agreement at financial institutions, a method that practically incentivizes those banks to game the system to maximize their profits.

"And remember, the British Bankers Association, the group that is responsible for setting the rate, is not a government agency. It is just a trade group of big banks-- Bank of America, JPMorgan Chase and Deutsche Bank and others--whose decisions on such a crucial number are not based on honest accounting or rules or regulatory oversight, but on a gentlemen's agreement of honesty.

"We don't know just how deep this scandal goes. But the fact is that if a fundamental component of our financial system has been or is being manipulated, we have the right to know about it. Banks are not above the law and they should not be allowed to operate in secrecy, especially when they have a history of taxpayer bailout and when we are forced to rely on them to provide capital for economic growth."

Sweet Justice

Sweet Justice
Couple Foreclose On Bank of America

Video By CBS News

Collier County, Florida -- Have you heard the one about a homeowner foreclosing on a bank?

Well, it has happened in Florida and involves a North Carolina based bank.

Instead of Bank of America foreclosing on some Florida homeowner, the homeowners had sheriff's deputies foreclose on the bank.

It started five months ago when Bank of America filed foreclosure papers on the home of a couple, who didn't owe a dime on their home.

The couple said they paid cash for the house.

The case went to court and the homeowners were able to prove they didn't owe Bank of America anything on the house. In fact, it was proven that the couple never even had a mortgage bill to pay.

A Collier County Judge agreed and after the hearing, Bank of America was ordered, by the court to pay the legal fees of the homeowners', Maurenn Nyergers and her husband.

The Judge said the bank wrongfully tried to foreclose on the Nyergers' house.

So, how did it end with bank being foreclosed on? After more than 5 months of the judge's ruling, the bank still hadn't paid the legal fees, and the homeowner's attorney did exactly what the bank tried to do to the homeowners. He seized the bank's assets.

"They've ignored our calls, ignored our letters, legally this is the next step to get my clients compensated, " attorney Todd Allen told CBS.

Sheriff's deputies, movers, and the Nyergers' attorney went to the bank and foreclosed on it. The attorney gave instructions to to remove desks, computers, copiers, filing cabinets and any cash in the teller's drawers.

After about an hour of being locked out of the bank, the bank manager handed the attorney a check for the legal fees.

"As a foreclosure defense attorney this is sweet justice" says Allen.

Allen says this is something that he sees often in court, banks making errors because they didn't investigate the foreclosure and it becomes a lengthy and expensive battle for the homeowner.

CBS News

Every once in a while ....

the two devoted readers of my blog get bored and require a bone to be tossed to rectify their boredom with a new topic. For the New Year, here goes --

Democracy for sale to the highest bidder!

In Money-Changers We Trust
http://www.truthdig.com/report/item/in_money-changers_we_trust_20101228/
By Robert Scheer

Two years into the Obama presidency and the economic data is still looking grim. Don’t be fooled by the gyrations of the stock market, where optimism is mostly a reflection of the ability of financial corporations—thanks to massive government largesse—to survive the mess they created. The basics are dismal: Unemployment is unacceptably high, the December consumer confidence index is down and housing prices have fallen for four months in a row. The number of Americans living in poverty has never been higher, and a majority in a Washington Post poll said they were worried about making their next mortgage or rent payment.

In a parallel universe lives Peter Orszag, President Barack Obama’s former budget director and key adviser, who even faster than his mentor, Robert Rubin, has passed through that revolving platinum door linking the White House with Wall Street. The goal is to use your government position to advance the interests of your future employer, and Orszag and Rubin’s actions in the government and then at Citigroup provide stunning examples of the synergy between big government and high finance.

As Bill Clinton’s treasury secretary, Rubin presided over the dismantling of Glass-Steagall, the New Deal legislation that would have prohibited the creation of the too-big-to-fail Citigroup. He was rewarded with a $15-million-a-year job at Citigroup, where he became a leader in the bank’s aggressive move into high-risk ventures. An SEC report in September claimed that Rubin as Citigroup chairman was aware that the bank failed to disclose $40 billion it held in subprime mortgages before the collapse.

During those years at Citigroup, Rubin financed the Brookings Institution’s Hamilton Project, an economic policy program, and named Orszag, a Clinton economic adviser, as its director. The Hamilton Project continued to celebrate Rubin’s deregulation philosophy up to the point of utter embarrassment. Clearly, Orszag is not easily embarrassed, for upon taking his new job recently he boasted “I am pleased to be joining Citi, with its unmatched global platform and dedication to providing clients with service and advice.”

The most damning comment on this corrupt syndrome was offered by former Citigroup co-chief executive John Reed, who had worked with Rubin to get Glass-Steagall reversed and now is a sharp critic of the result. “We continue to listen to the same people whose errors in judgment were central to the problem,” Reed told Bloomberg News. “I’m astounded because we basically dropped the world’s biggest economy because of an error in bank management.” Reed estimated that the financial deregulation proposals contained in the Dodd-Frank bill and other reforms of the Obama administration represent only 25 percent of the change needed.

The failure to provide serious regulation of the financial industry to avoid future downturns is documented in devastating detail in that Dec. 28 Bloomberg report, written by Christine Harper: “The U.S. government, promising to make the system safer, buckled under many of the financial industry’s protests. Lawmakers spurned changes that would wall off deposit-taking banks from riskier trading. They declined to limit the size of lenders or ban any form of derivatives.”

The reason for that failure is obvious from the president’s choice of advisers featuring Rubin acolytes from the Clinton years. Harper writes: “While Obama vowed to change the system, he filled his economic team with people who helped create it,” referring to, among others, Timothy F. Geithner, who had gone from the Clinton Treasury Department to head the New York Fed, where he presided over the salvaging of Citigroup and AIG. As Obama’s treasury secretary he was quick to appoint a Goldman Sachs lobbyist as his chief of staff. Geithner’s subservience to Wall Street was reinforced by White House top economic adviser Lawrence Summers, Rubin’s deputy and then replacement in the Clinton administration who pushed through the repeal of Glass-Steagall and fought against the regulation of derivatives.

And with the decisive assistance from both a Republican and Democratic president, all has worked out just as planned for the banks. Harper reports: “The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America Corp., JPMorgan Chase & Co., Citigroup, Goldman Sachs Group Inc., and Morgan Stanley, according to data compiled by Bloomberg.”

It’s all wonderfully bipartisan. Recently it was announced that Carlos Gutierrez, commerce secretary under George W. Bush, had been named to a high position at Citigroup. For President Obama, there’s no cause for worry about the loss of indispensable talent from his administration. Orszag’s replacement as head of the Office of Management and Budget, Jacob J. Lew, was both a member of Rubin’s Hamilton Project and a former Citigroup executive—thus ensuring that government of the banks, by the banks, for the banks shall not perish from the Earth.



New consumer agency is frightfully necessary — and late


No one has missed the headlines: Haphazard and possibly illegal practices at mortgage-servicing companies have called into question home foreclosures across the nation.
The latest disclosures are deeply troubling, but they should not come as a big surprise. For years, both individual homeowners and consumer advocates sounded alarms that foreclosure processes were riddled with problems.

While federal and state investigators are still examining exactly what has gone wrong and why, two things are clear.

First, several financial services companies have already admitted that they used “robo-signers,” false declarations, and other workarounds to cut corners, creating a legal nightmare that will waste time and money that could have been better spent to help this economy recover. Mortgage lenders will spend millions of dollars retracing their steps, often with the same result that families who cannot pay will lose their homes.

Second, this mess might well have been avoided if the Consumer Financial Protection Bureau had been in place just a few years ago.

The new consumer agency is one of the signature accomplishments of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama this summer.

The new agency will take on oversight responsibilities that had been scattered among several federal agencies, and it will be a new cop on the beat that will end big loopholes in the regulatory system.

For the first time, banks and non-bank lenders (such as payday lenders, check cashers and mortgage brokers) will be subject to the same federal oversight to ensure that they are all playing by the same rules-no more turning sideways and slipping through the regulatory cracks.

Lost in much of the back-and-forth over wrongful foreclosures is the question of whether the scandal could have been prevented. The answer is yes.

The practices now under investigation took root and grew because there was no single federal regulator with both the responsibility and the tools to look out for consumers.

Had it existed, the new consumer agency could have stopped these problems before they multiplied. Many of the failures already admitted were not sophisticated scams that had been carefully concealed. By enforcing existing laws and involving state authorities early on, the agency could have made sure that the law was respected. No one would need to wonder whether the world of borrowing and lending works only one way: Families have to follow the legal rules, but the rules are optional for big banks.


Once it is fully operational, the new consumer agency will have supervisory authority over all large mortgage servicers. It will be able to examine them on a regular basis to make sure they follow the rules. If those servicers decide it is cheaper or faster to circumvent federal law, the consumer agency will have the tools to hold them accountable.

No one will be allowed to break the rules without triggering a strong and prompt federal response.

Currently, the federal interagency foreclosure task force, including the members of the Financial Services Oversight Council, is working along with the state Attorneys General to get to the bottom of these problems. The implementation team for the new consumer agency is also working to assemble and coordinate teams to deal with servicing and other issues.

These efforts are critical, but there is more work to do: We must ensure this kind of scandal-or some close cousin-does not happen again.

A mortgage is the biggest financial commitment most Americans will make in a lifetime, and the toll on Florida has been especially heavy and the need for oversight particularly apparent. A few weeks ago, I watched proceedings in a Fort Lauderdale foreclosure court and saw firsthand the painful outcomes for numerous families.

Unfair servicing practices can worsen a family’s already difficult economic situation, and the injury echoes from the family to the community and ultimately throughout the economy. Cops on the beat can stop problems before the damage spreads. If there ever was any doubt that the new consumer agency is necessary, the latest foreclosure developments should put that to rest.


Such a deal!