LIBOR Inquiry

The inquiry into manipulation of LIBOR rates is going relatively unnoticed by the street.  But in the words of VP Joe Biden, “It’s a big f@@$%^g deal.”

Why is it such a big deal?  The LIBOR rate is the rate of interest banks charge each other on short term loans.  If banks are understating the rates that they are actually paying, it has a ripple effect through other markets, like credit default swaps, the stock market, the price of gold, and rates charged for munis and corporate bonds.  Lower LIBOR rates should stimulate lending.  At least $300 Trillion in underlying contracts are tied to the LIBOR.

You might say, “300 trillion is an awful big number, how did you get there?”

The entire US mortgage market is tied to LIBOR.  As adjustable rate mortgages are reset, where the rate is will have a huge impact on homeowners.  The Obama administration is threatening to force banks to renegotiate mortgages, and cram down provisions that would extend or decrease payments.  Banks have an economic incentive to try and manipulate the rate down.

The $CME trades Eurodollars, which is the regulated listed futures contract on LIBOR.  The Eurodollar contract trades more in notional value in one day, than the entire NYSE does in a year.  That’s a big market.

If the rate were understated, it would mean trillions of dollars in all kinds of contracts when the true price was used on a rate reset. Everyone would be affected.

There seems to be a disconnect with actual economic activity on the ground, and the velocity and turnover of money.  It’s not happening, and according to many in the Federal Reserve, they are still fighting deflation, not inflation.  High money velocity would trigger inflation.

Barclays, Citibank, UBS, and B of A have been subpoenaed.  But, it would not surprise me if the cabal was bigger.

This goes to the heart of a lot of things that I have written about.  There is no honor among thieves, and the big banks in many instances have acted the part.  The entire regulatory and trading apparatus of the SEC regulated side of the capital markets are corrupt. I am not a lone voice in the wilderness having this opinion.  There are plenty of other bloggers out there with similar views.

The problem is that in the short run, there isn’t a lot of harm.  In the long run, the big banks threaten to undermine faith in the capitalistic system. When truly evil organizations like the SEIU threaten to undermine the system and attack a company like JP Morgan, the general populace will become obsequious and follow.

The banks are playing an extremely dangerous game of chicken.

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