Barclay's LIBOR manipulation

John_Pierpoint

I am a little bit confused about how this LIBOR has been calculated.
People have been stressing that it stands for London Inter Bank OFFER Rate.

So every morning someone contacts Barlays and says "Has anyone offered you any money today? If so at what rate? and the Barclay's person replies £1 @ 4% and £100,000,000 @ 5% !!
OK I'll put Barclay's down as 4.9999999%

or

Does it work the other way.
Good morning Barclays what is your price for offering me money?
- Who are you ?
I'm pretending to be the Bank of England.
- OK how much do you want to borrow?
£100,0000,0000
- Well in theory I could do that for £5.0001% but between you and me I'm not lending to anyone at the moment - you cannot trust any other bank and we are all s*** scared of a bank run.
OK mate I'll put you down as 4%, that might help keep the wolf from the door, while we all cobble together some money from somewhere. I hear tell that "Fred" North of the boarder is selling his bank to the Government via the "Old Lady".
- OMG - that is a fate worse than death - strictly entre nous I would prefer to pay the desperate sand dune dwellers 13% and keep my job. Remember there are no problems only opportunities.

Generali

A surveyor from the British Bankers Association (BBA) calls and asks for various currencies and loan durations:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”


The 'offer rate' referred to is other banks' offers to you.

CLAPTON

Generali wrote: »

A surveyor from the British Bankers Association (BBA) calls and asks for various currencies and loan durations:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”


The 'offer rate' referred to is other banks' offers to you.

interesting

maybe the question ought to be

what rate did you actually borrow at yesterday?

pqrdef

CLAPTON wrote: »

what rate did you actually borrow at yesterday?

But as David Buik pointed out this morning, the 3m LIBOR was a fiction during the credit crunch, because nobody was lending for 3 months anyway.

This is all just a distraction from what was going on earlier, when the derivatives traders were fixing for profit.

John_Pierpoint

Can anyone remember how it was that the word got out that nobody would lend more wholesale money to Northern Rock bank at any price?

There was a historic thread on here, which may well have gone to cyberspace heaven/hell now, where someone sat all day, presumably at the window of his office and blogged the events outside the City of London branch of NR in the autumn of 2007.

Was it simply that the club did not feel the need to close ranks over a year earlier and were happy to see an upstart going down?

It would be interesting no know what measures the "tripartite" regulators put in place during the following year.

NR had expanded hugely by using wholesale money, rather than that annoying folding money, slipped across the counter in a pass book by "Doris".

purch

John_Pierpoint wrote: »

I am a little bit confused about how this LIBOR has been calculated.

In Ye Olden Days (i.e. when I worked in the City) LIBOR actually was a measure of the Interbank Offered Rate.

In the money market, lets say 3 months GBP, the market might be 5 3/8 - 1/4, that means the rate the majority will lend at is 5 3/8, and the majority will borrow at is 5 1/4. Of course probably all the business actually occurs in between these rates, at 5 5/16, 5 11/32 or 5 9/32. Only a Bank with a poor rating would need to "pay up" to borrow at 5 3/8 in normal circumstances.

But the LIBOR is 5 3/8 as that is the rate that good size will be lent at. In those days one or maybe two of the panel Banks may have set a LIBOR higher or lower than this, if they had a large interest in the period, but overall the LIBOR could easily be predicted.

LIBOR was LIBOR, and LIBID was LIBID. No real argument.

Of course, when the derivative scum required a benchmark to settle their wagers, they decided that LIBOR was way too boring and predictable, so they forced the BBA to change the way that LIBOR was calculated, so that nowadays it is more the rate where transactions are happening, not the actual offer rate.

Thus now each Bank is asked where they could easily borrow a market sized amount, and of course this will differ between establishments.

In reality LIBOR is not the correct acronym for the rate anymore.

It should really be called London InterBank Transaction Rate, but unfortunately LIBTR is less catchy.

purch

P.S. And it was also virtually impossible to manipulate LIBOR too, as everyone knew what it was going to be at 8AM in the morning, and probably at 5PM the day before as well.

worldtraveller

Just about the only person we haven't heard from yet in this whole farce is, yes, you guessed it, Gordon Brown!

Gordon Brown texture like dun
Lays us down with the banks he runs
Supported the fools
No need for rules
Never a frown from Gordon Brown

Every time just like the last
Bankers betting that it’ll last
To distant lands
Lend with both hands
Never a frown from Gordon Brown

Gordon Brown built a big mess
!!!! flies quickly out of the West
From far away
Sub prime USA
Stocks all crash down with Gordon Brown

Jobs all go down
Cheers Gordon Brown!
Pensions go down
Thanks Gordon Brown!

The original - The Stranglers

John_Pierpoint

Well I sat through the whole ghastly three hours of the cross examination.

During the credit crisis melt down it was obvious that the figures being put in by the banks scooped into the life boat by the government, could not afford to lend anything to other banks. Still independent Barclays was trying to get to the bottom of the top band of fictitious quotes so as not to "show out" when trying to raise huge sums from the Arabs at rates over 10%.. while getting its submission dropped from the calculation and thus avoiding nasty questions about its accuracy.

Am I right in thinking that 20 basis points is 0.2% ?
I loved the little scene unravelled by the CSA where Barclays Treasury was in effect quoting: "Borrow from us at LIBOR and the lend it back to us at LIBOR + 0.20% ".

The nearest I have come to the inside view of Barclays, was having a friend who got a job with Mercantile Credit - Barclays sub-prime loans company and football sponsor.
Say no more.

Somehow I think the "compliance" office is about a powerful in the hierarchy, as the "health and safety" officer. "We have got one because the legislation says we have to comply".

worldtraveller

Interesting article in Bloomberg regarding the potential liability (especially in the U.S.) for the banks involved in the LIBOR scandal. One view being that Barclays could face liability from claims of "hundreds of millions into the billions":

Bank of America Corp., Citigroup Inc. (C), Royal Bank of Scotland Group Plc and UBS AG (UBSN) are among the lenders whose participation in setting the London and Europe interbank offered rates, known as Libor and Euribor, are under investigation. None of the banks would say if they set aside reserves to cope with potential liabilities and, if so, how much.......

"The two-year investigation into banks rigging Libor, which has taken a toll on Barclays, has the potential to hurt Citigroup, JPMorgan and Bank of America," Mike Mayo, an analyst at CLSA Ltd. in New York, wrote in a July 2 research note. The banks face risks of fines, lawsuits, negative news and new regulations, according to Mayo......

The regulatory fine is just the beginning for London-based Barclays, which is a defendant in some of the 24 interrelated Libor lawsuits that have been aggregated before U.S. District Judge Naomi Reice Buchwald in Manhattan federal court.

"The global quantity of claims against Barclays as a result of it having manipulated Libor, it could stretch from the hundreds of millions into the billions," said Robert Hickmott, an attorney with Los Angeles-based Quinn Emanuel Urquhart & Sullivan LLP. He said litigation in London may follow soon........

U.S. liabilities may be higher because American plaintiffs are allowed to ask for punitive damages for bad conduct, while the British are limited to compensatory awards, Hickmott said......

Yahoo/Bloomberg