The American Bear


Freddie Mac Sues More Than A Dozen Banks Over Libor Losses

Mortgage finance company Freddie Mac is suing more than a dozen banks for losses from the alleged manipulation of the benchmark interest rate known as Libor.

Bank of America Corp, JPMorgan Chase & Co, UBS AG and Credit Suisse Group AG are among the banks named as defendants in the lawsuit.

Freddie Mac, which invested in mortgage bonds and swaps tied to U.S. dollar Libor, claims the banks colluded to rig the benchmark from 2007 to 2010, according to the complaint, which was filed March 14 in U.S. District Court for the Eastern District of Virginia.

Freddie Mac sued for undetermined damages.

The inspector general of the Federal Housing Finance Authority, which oversees Freddie Mac and Fannie Mae, said the two government-controlled mortgage companies may have suffered more than $3 billion in losses as a result of Libor manipulation, according to an internal memo obtained by Reuters in December.

In the memo, the watchdog urged the companies’ regulator to consider legal action.

Bank of America, JPMorgan Chase, UBS, Credit Suisse and other banks did not immediately respond to calls for comment or declined to comment.

More than a dozen banks have been under scrutiny by authorities in the United States, Japan and Europe over claims they altered the Libor to hide financial problems and boost profits.

Freddie Mac said it discovered the fraud and collusion when Britain’s Barclays admitted in June it submitted false Libor submissions, according to the complaint. The bank agreed to pay $453 million that month to settle with British and U.S. authorities.

UBS was fined $1.5 billion in December for fiddling with interest rates, and Royal Bank of Scotland Group settled with authorities for $612 million in February.

The case is The Federal Home Loan Mortgage Corporation v Bank of America, U.S. District Court for the Eastern District of Virginia 13-cv-00342.

JPMorgan, UBS Said Among Banks Queried in Libor Probe | Bloomberg

JPMorgan Chase & Co. (JPM) and Barclays Plc (BARC) are among seven banks subpoenaed in New York and Connecticut’s investigation into alleged manipulation of Libor, according to a person familiar with the matter and company filings.

Subpoenas were sent in recent weeks to five of the banks, Deutsche Bank AG (DBK)Royal Bank of Scotland Group Plc and HSBC Holdings Plc (HSBA) in addition to JPMorgan and Barclays, said the person. Citigroup Inc. (C) and UBS AG (UBSN) received subpoenas earlier this year as part of the investigation.

The Way Things Work at the Central Bankers’ Club | Dean Baker

The case of the rigged Libor turns out to be the scandal that just keeps on giving. It reveals a great deal about the behavior of the Federal Reserve Board and central banks more generally.

Last month, Federal Reserve Board Chairman Ben Bernanke gave testimony before Congress in which he said that he had become aware of evidence that banks in England were rigging the Libor in the fall of 2008. According to Bernanke, he called this to the attention of Mervyn King, the head of the Bank of England. Apparently Mervyn King did nothing, since the rigging continued, but Bernanke told Congress there was nothing more that he could do.

The implications of Bernanke’s claim are incredible. There are trillions of dollars of car loans, mortgages, and other debts, in the United States, tied to the Libor. There are also huge derivative contracts whose value depends on the Libor at a moment in time. People were winning or losing on these deals not based on the market, but rather on the rigged Libor rate being set by the big banks.

Bernanke certainly had an obligation as Fed chair to expose and stop this rigging, which was interfering with the proper working of U.S. and world financial markets. But hey, Mervyn King didn’t want to take any action, what could Bernanke possibly do?

Hey, he told the guy. Can we really expect anything more than that? Sure, the rigging went on for four more years, but he’s only the head of the world’s most important and consequential central bank. He’s not a miracle worker.

Read the rest

… there are tools at the ready: sanctions, tribunals, a ban for life for crooked traders. But Libor was meant to be the prime glittering advertisement for the free market. Now it turns out that the whole thing is a fix—a grimy hand all too visible. It’s like the spy in Conrad’s Secret Agent vowing to destroy the first meridian. Is it possible to reform the banking system? There are the usual nostrums—tighter regulations, savage penalties for misbehavior, a ban from financial markets for life. But I have to say I’m dubious. I think the system will collapse, but not through our agency. Alexander Cockburn, Barclays and the Limits of Financial Reform

Europe to Put Interest Rate Fixers in Jail | naked capitalism

Prospectively only, it seems. But we see “criminal” and “banking” in the same sentence so rarely in official circles that this is a welcome development. We’ve pointed out in the past that the Eurozone has been much more willing to talk and even occasionally get tough with bankers. They’ve been more serious about considering transaction taxes and imposed tough rules on private equity funds (most important being limits on leverage, so they will leave fewer bankrupt carcasses in their wake).

From the Independent:

The European Commission is set to make interest rate-rigging a criminal act in the wake of the Libor scandal.

In amendments to the Market Abuse Directive to be announced on Wednesday, it is expected that the Commission President, Jose Manuel Barroso, and financial services commissioner, Michel Barnier, will ensure that anyone caught rate-rigging will be jailed.

There has been frustration that the UK’s Financial Services Authority and the Serious Fraud Office have appeared toothless over the Libor manipulation, which helped Barclays traders hide losses and improve their financial positions. Thus far, only Barclays has been fined, £291m, though FSA chairman Lord Turner is preparing a hard-hitting speech attacking the City’s debased culture on Tuesday.

The European Parliament is also tabling amendments that will focus on making Libor and other potential areas for rigging, such as currency trading, criminal acts. Separately, the commission might also look into whether rate-rigging counted as cartel activity.

NC readers should also be cheered by the report in this piece that the efforts of the banksters to have an international settlement are pretty certain to go nowhere.

LIBOR Scandal Jumps Pond: US Banks, Regulators Face Grilling over Manipulation of Baseline Interest Rate


Though the Libor interest rate scandal that has rocked the financial world in the UK — forcing the resignation of the Chairman, CEO, and COO of banking giant Barclays last week — the furor over the scheme has yet to garner similar media coverage or public outrage in the United States.

That may change as Americans learn more about how manipulation of Libor has impacted their own finances and as US lawmakers begin to make inquiries about the level of complicity by US banks and the shortcomings of financial regulators.  The controversy showed some evidence of catching fire in Washington on Tuesday as members of the powerful US Senate Banking committee indicated that US Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke will be expected to testify about what and when US regulators knew about the Libor manipulation and bank malpractice.

“I am concerned by the growing allegations of potential widespread manipulation of LIBOR and similar interbank rates by some financial firms,” Senate committee chairman Tim Johnson said in a statement. “At my direction, the Committee staff has begun to schedule bipartisan briefings with relevant parties to learn more about these allegations and related enforcement actions.”

“It is important that we understand how any manipulation may impact American consumers and the U.S. financial system,” he said.

News reports at the end of last week indicated that US banks JP Morgan Chase, Citigroup — and possibly Bank of America — were the primary focus of inquiries by government investigators.

The Libor rate is used as a baseline interest rate for a range of financial products across the world, from US credit cards and student loans to European mortgages and more complex instruments. In total, Libor is estimated to set the price of lending for over $550 trillion in loans, securities and derivatives.

According to Reuters, “By manipulating Libor, banks could have made profits or avoided losses by wagering on the direction of interest rates. During the enormous liquidity problems in the financial crisis they could, by reporting lower than actual borrowing costs, have signaled that they were in better financial health than they really were.”

(Source: jayaprada)

When the rest of this scandal comes out, and it turns out that up to 15 more of the world’s biggest banks (including Chase, Bank of America, and Citi) were doing the same thing as Barclays, our regulators better start “inflecting their eyebrows” pretty damn vigorously. Because if it comes out that these other banks were all involved with this scandal (and it will come out that way, almost for sure), and their CEOs and COOs get to keep their jobs, that’ll be a sure sign that the fix is in. Let’s hope Ben Bernanke, Eric Holder, and Tim Geithner are listening. Matt Taibbi

The Drowning Pool | James Howard Kunstler

News that that a swarm of termites deep inside the British banking system have been fiddling the interbank interest rates (LIBOR) for years in order to systematically vacuum a few billion pence off the exchange floors for themselves is the latest blow to the credibility of the global money system - and probably a fine overture to a looming climactic implosion of the gigantic, creaking, smoldering, reeking, duck-taped edifice of broken promises, booby-trapped hedge obligations, counterparty follies, central bank euchres, sovereign flim-flams, and countless chicanes too various, dark, and deep to smoke out. Next, we’ll probably hear that Lloyd Blankfein over at Goldman Sachs has been tinkering with the rotation of the earth in order to gain a few micro-milliseconds of advantage in his firm’s high frequency trading rackets. After all, back in 2008 Lloyd himself claimed to be “doing God’s work.”

In short, world banking is now hopelessly pranged, and I am not at all sure the project of civilization (modern edition) can continue by other means. The impairments of capital formation are now so profound that no one and nothing can be trusted. Not only are all bets off, but nobody will want to make any new bets - and by that I mean venture to invest accumulated wealth (capital) in some useful project designed to sustain human well-being. What remains is just the desperate hoarding of whatever remains in assets uncontaminated by the pledges of others to pony up.

All this points to a dangerous new period of political history, a deadly Hobbesian scramble to evade the falling timber in a burning house as the rudiments of a worldwide social contract go up in flames. Such is the importance of legitimacy: the basic condition for governance, especially among supposedly free people. You can meddle in a lot of distributory issues - who gets what - but when you mess with the most basic operations of money to the extent that no one is sure what it’s really worth, or what it represents, then you are deeply undermining society. This is now the condition that is set to blow up republics. [++]

Yes, Virginia, the Real Action in the LIBOR Scandal Was in the Derivatives | Yves Smith

As the Libor scandal has given an outlet for long-simmering anger against wanker bankers in the UK, there have been some efforts in the media to puzzle out who might have won or lost from the manipulations, as well as arguments that they were as “victimless” or helped people (as in reporting an artificially low Libor during the crisis led to lower interest rate resets on adjustable rate loans pegged to Libor; what’s not to like about that?)

What we have so far is a lot of drunk under the streetlight behavior: people trying to relate the scandal to the part that is most visible and easy to understand, meaning the loan market that keys off Libor. As much as that’s a really big number ($10 trillion), it is trivial compared to the relevant derivatives. Fromthe FSA letter to Barclays:

The Eurodollar futures contract traded on the CME in Chicago (which is the largest interest rate futures contract by volume in the world) has US dollar LIBOR as its reference rate. The value of volume of that contract traded in 2011 was over 564 trillion US dollars.

This is only one blooming exchange contract, albeit a monster of a contract. There are loads of OTC contracts in addition to that:

Interest rate derivative contracts typically contain payment terms that refer to benchmark rates. LIBOR and EURIBOR are by far the most prevalent benchmark rates used in euro, US dollar and sterling OTC interest rate derivatives contracts and exchange traded interest rate contracts.