The Genesis Of The LIBOR Crisis

Rob Kirby/ Gold Seek

The roots of the LIBOR crisis can be found in the broad based sub-prime FRAUD in America circa 2000 – 2007.The sub-prime fraud involved American investment banks securitizing [bundling] poor mortgage credits into “pools” – then working hand-in-hand with credit rating agencies like S & P and Moodys – having these pooled securities rated AAA.

In Q1/2007 American investment bank – Bear Stearns, a major player in this sub-prime securitization – had a number of these sub-prime pools FAIL to perform.

The failure of AAA credit – up till then – was UNHEARD of in modern finance and precipitated a GLOBAL CREDIT CRISIS where banks became UNWILLING TO LEND – even to one another.The sanctity of triple “AAA” credit had been violated.

So by August 2007, Global Credit Markets were “locked up” – Commercial Paper markets, which function on “creditworthiness” – are the oil that greases the wheels of world industry.These critical markets were brought to a standstill.

America Panicked

In response to Global Credit Markets being locked up – the U.S. Treasury [Hank Paulson] in conjunction with the U.S. Federal Reserve [Benjamin Bernanke] undertook EXTREME MEASURES – via 7.5 TRILLION of off-balance sheet, OTC [over the counter] Derivatives Trades done with J.P. Morgan Chase.

The reason we definitively know this is EXACTLY WHAT HAPPENED is that Morgan’s “less than 1 year” portion of their OTC swap book grew by 7.5 Trillion in Q3/2007 only to contract by virtually the same amount in Q4/2007 [data available at the OCC's Quarterly Reports].FRA’s are the ONLY OTC Swap instrument at allows a bank to grow their book by such an amount in one quarter and have it reverse itself in the following quarter.Given the fact that banks were not lending or extending creditto anyone at the time – and FRA’s require TWO WAY CREDIT – the notion that Morgan could put 7.5 Trillion in these instruments on in such a short period of time TELLS US that their counter party in this trade was NON BANK.From here, it’s academic – who has the motive and means to conduct such trade??? The Answer is a universe of ONE!!!!!!

Acting for the U.S. Treasury was the Exchange Stabilization Fund [ESF] – a clandestine division of the U.S. Treasury which is beyond oversight/supervision by Congress and U.S. Law.The trades the ESF engaged in were “brokered” by the N.Y. Federal Reserve [Turbo Timothy Geithner] and specifically targeted to J.P. Morgan Chase to “compel” them to purchase TRILLIONS in short dated U.S. Government T-bills [maturities of 1 yr. and less].Procedurally, this is how this worked:

In Q3/07, the U.S. Treasury [ESF] gets the N.Y. Fed to ask the treasury at J.P. Morgan to place multi-Trillion dollar bets on what 3 month LIBOR will be in one or two months in trades called Forward Rate Agreements [FRA’s].If you purchase a FRA you are “synthetically borrowing money”.Morgan showed a price [bid] at a yield less than the yield on 3 month T-bills.When the U.S. Treasury “hit” Morgan’s bid – at say .28 basis points – J.P. Morgan hurriedly went into the T-bill market to purchase virtually unlimited quantities of 3 month T-bills – at say .33 basis points to “lock in” perhaps a 5 basis point risk free profit on their gargantuan trade.THIS DID HAPPEN!!!

These trades were undertaken/administered in a defibrillator like fashion to “jolt the frozen credit markets” into once again purchasing commercial paper.This practice worked “in part” but only gained “traction” when the U.S. Treasury/Fed introduced a host of ‘swap programs’ where holders of illiquid commercial paper were allowed to “freely” swap their dubious paper for the “perceived safety” of U.S. Government Securities [T-bills].

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