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7/5/12

What better fun on Independence Day than to watch Bob Diamond, former CEO of Barclays Bank, before British lawmakers to explain why his bank actions were different from the Bank of England’s.  After all that is the accusation isn’t it?

Barclay’s traders made trades based on the London Inter-Bank Offered Rate (LIBOR).  This is the interest rate that banks pay each other to borrow funds overnight.  LIBOR is set by tallying the rates turned in by the largest banks.  The high and low rates are tossed out then the others rates are averaged.  This average interest rate fixes rates for the next business day.

Banks have an interest in making their business look good, so the tendency it to low-ball the rate they have to pay.  Mr. Diamond made this point yesterday.  During the worst of the credit crisis in 2008, his bank didn’t want competitors to question the solvency of Barclays if they turned in a high interest rate they had to pay.

During that time, one commentator said LIBOR was the interest rate banks didn’t have to pay each other because banks were not lending to each other.  LIBOR rates are on loans without collateral.  During the worst of the credit crisis, credit froze because banks would not lend to another out of fear they would go bankrupt overnight.

No one knew how many credit derivatives and mortgage backed securities on dodgy debt other banks had on their books.  Many were considered the “walking dead.”  Barclays admits to submitting low quotes during the latter half of 2007 and part of 2008 because they were concerned other banks perception of Barclays if they turned in a high (accurate) quote.

LIBOR is important because it is used as a reference rate for many loans around the world.  Adjustable rate loans may be indexed to the LIBOR on the day they adjust.  CNN estimates up to $10 trillion in loans worldwide are influenced by LIBOR.  Many hedge funds and institutional investors may trade against the LIBOR to reduce volatility in their portfolio.

Barclays paid $453 million in a settlement with U.K and U.S. regulators to settle charges they submitted false data in their LIBOR quotes.  The problem was that traders at Barclays that traded the LIBOR sought to have the bank submit certain numbers to influence the next day's quote.  This allowed them to “front run” the announcement.

Bob Diamond sought to deflect some criticism of Barclays yesterday by admitting guilt and sought to have the politicians recognize that Barclays was the first to do so.  Financials are down today as other banks are under investigation.

UBS told CNN they are providing information to regulators.  They have asked for conditional immunity and leniency.  Barclays claims in a statement they alerted U.S. and U.K regulators about suspicious LIBOR submissions by other banks in 2008.  The bank was “disappointed the no effective action was taken.”

U.K lawmakers were dramatic in their public repudiation of Barclays.  This morning the Bank of England (Britain’s central bank) kept interest rates at 0.5% and increased their Quantitative Easing 50 billion pounds to 375 billion pounds.  Wouldn’t this be to keep interest rates lower for borrowers?  Didn’t the Bank of England (BOE) want low interest rates in 2007 and 2008?  Maybe Barclays should be given an award rather than a fine!

Tell me again, what is the difference between what they did and the BOE, or our Federal Reserve?  You could easily say “well the BOE announced it and did it in public.”  Ok, but does that mean they always do?  Does the Federal Reserve announce interventions in equity markets or precious metals markets?  We wonder why Barclays didn’t defend themselves that they were acting in the best interest of England and in support of the BOE.

We are still waiting for hearings in Washington to explore the Federal Reserve's manipulation of markets.

Editor’s note:  Thank you to all who wrote they enjoyed the War of 1812 article on Tuesday.  I try to research and share some information we all can use to be better citizens.  To know the history of our country is to more fully appreciate the sacrifices and conviction required to deliver this ‘grand experiment.

Quotes:
The preservation of the sacred fire of liberty…is finally staked, on the experiment entrusted to the hands of the American people.---George Washington

I believe that there are more instances of the abridgment of the freedom of the people by gradual and silent encroachment of those in power, than by violent and sudden usurpations.---James Madison

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