The Libor Scandal Unmasked
Sep 11th, 2012 | By NathanF | Category: Economics, Financial, Top Headline | Print This Article
Over the past few years, the dishonesty and perfidy of the international banking industry have been exposed for all to see. This, of course, has not been enough to convince the governments of the world to blow up the existing financial system and replace it with something more controllable or accountable. Far from it, in fact: when President Obama took office, for financial advice he turned to some of the very same people who were responsible for the financial meltdown of 2008, going so far as to appoint ultra-insider Timothy Geithner, the former head of the New York Federal Reserve, as his Treasury Secretary. In Washington, conventional opinion always rules, even when it has been completely discredited by actual events.
The world’s existing financial system, in its current incarnation, is the biggest Ponzi scheme the planet has ever seen. Everything the largest global banks do is designed to disguise the fact that the world is essentially bankrupt, not because there is a shortage of knowledge, skill, and natural capital, but because the global private banking system, working through central banks such as the Federal Reserve, has captured complete control of the money supply and has enslaved us all in a never-ending downward spiral of debt.
In the summer of 2012, news broke about the latest machinations of the international banksters, who are always coming up with ingenious ways to keep their profits soaring while the rest of us slowly sink into oblivion. In June, it was announced that Barclay’s Bank in England had been fined $450 million dollars by regulators in the United States and the United Kingdom for working behind the scenes to fix a benchmark interest rate called Libor, which stands for London Inter-Bank Offered Rate. This 300-year old bank is just one of the many large financial institutions that have been under investigation for participating in this activity, and all with inside knowledge of this latest financial scandal agree that Barclay’s fall from grace is only the beginning of this story.
Libor: The Insanity Explained
Every morning at 11 a.m. London time in the offices of the British Bankers’ Association, some of the world’s largest and most influential banks are asked to submit their answers to this question: “At what [interest] 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 [London time]?”
Inter-bank lending helps to keep the system functioning, as all banks must have enough money on hand to back their various lending initiatives under fractional reserve rules. Anywhere from six to eighteen banks are involved in the setting of the Libor rates, entering percentage estimates to the above question for ten different currencies at fifteen different lengths of maturity. So each bank will estimate, for example, how much interest they would expect to pay if they borrowed X amount of U.S. dollars for three months, or X amount of German Deutsche Marks for six months, etc., etc. Based on the average of these estimates (the highest and lowest 25 percent of all the numbers are thrown out), an official Libor rate for each currency/maturation combination is established each day, and this highly-influential figure is then used as the benchmark to determine daily interest rate settings all around the world for loans, bonds, or lines of credit with floating (changing) rates of interest, such as mortgage, student, or car loans, credit card balances, and corporate or municipal bonds.
One thing important worth noting here is that the Libor rate is not set based on the rates of interest that banks are actually paying each other for inter-bank lending, but rather based on estimates of what they supposedly think they might have to pay if they were to ask for a loan right at that particular moment. If this seems a little odd, that is because it is, and it gives the banks involved in the process a golden opportunity to quote unrealistically low rates in order to make it seem as if their bank is in a stronger financial position than is actually the case. If banks quoted higher-than-expected numbers, it could be interpreted as a sign of trouble and instability that could scare away potential investors or customers.
In 2008, following the panic that nearly brought the world’s financial system to its knees, it appears that the powerful banks responsible for setting the Libor numbers conspired to keep the rates artificially low in order to protect their own images and to give the public a false perception of the overall health of the financial system. Again, it must be reiterated that even though Barclay’s Bank has been the only mega-bank sanctioned so far, it is only a matter of time before the shenanigans of some of the other big-name banks involved in the Libor-setting process are publicly exposed as well.
When you read stories about the Libor scandal, about what happened and why, many will give great emphasis to whole “protecting our reputation” angle. But in truth, the desire to put a good public face on the troubled state of the banking industry as a whole was not the main motivation for the attempts to fix world interest rates, and those who claim it was are only trying to provide cover for a financial system that is being run by gamblers, crooks, and thieves. The real reason for the ongoing bankster scam to fix the Libor rates, which started before the crash of 2008 and continued right up to the present day even after the worst of the financial disaster had passed, was sheer and unadulterated greed.
Money For Nothing: The Global Derivatives Trade
The largest global banks are no longer in the business of making their money by financing intelligent economic growth. Trading and investment is where the action is now, and since commercial and investment banking are no longer kept separate by law, the giant financial institutions make most of their money these days in the derivatives market.
Derivatives are financial products that essentially involve placing bets on whether interest rates, stocks, bonds, currencies, or commodities prices will go up or down, and the peculiar thing about this market is that it has created financial liabilities that are eight to ten times larger than the entire global economy. Overall, the derivatives market is now humming along to the tune of over $500 trillion dollars annually, and it is the world’s largest banks that are in possession of most of these non-productive profit-making instruments. Before, the biggest banks relied on the time-tested principles of usury to siphon money away from the men and women who do all of the actual work in this world, but now they have come up with a whole new method for making money off of money that contributes absolutely nothing in the way of useful goods and services while putting the whole global economy at risk.
While there are a wide variety of subcategories in derivatives, interest-rate swaps are king. Fully 82 percent of the revenues from derivatives come from this particular type of financial product, and it was this market that was distorted by the global banks’ plan to suppress Libor. Artificially low Libor rates meant that those who had taken out loans or had outstanding credit card debts paid lower rates, while creditors on the other end of these debts received lower payments that they would have if Libor rates had been pegged at a more realistic level.
Which actually doesn’t sound so bad for the average person. But you must be thinking, wait a minute: why would banks resort to nefarious and illegal methods to keep interest rates low knowing that they would receive less money in loan repayments as a result? The answer to this question is that the mega-banks who control the banking industry now make significantly more profits in the derivatives trade than they do in commercial banking, and traders connected to the banks who conspired to keep Libor low were actually betting on what they knew to be the winning hand.
Yes, that’s right – the banks responsible for setting the Libor rate and influencing the direction of interest rates on various financial products were actually investing their money in interest-rate swaps on the side they were guaranteeing would win, and that is the nuts and bolts of what the Libor scandal is really all about. Smaller community banks, which often play constructive roles to the towns and neighborhoods they serve, lost out big time on the artificially low interest rates, but for the big banks, the money they made playing the derivatives market more than offset any losses they may have accrued on lower debt repayments.
Who Were The Real Losers? (Who Do You Think?)
While the big banks were raking it in, the big losers in the interest-rate swap game here in the United States were state, country, and municipal governments, universities, hospitals, and other institutions that relied on the bond market to secure funds for various projects related to services or infrastructure expansion. Artificially low interest rates made it harder to sell bonds to fund such initiatives in the first place, but making things worse was the fact that non-profit organizations and local governments planning large scale projects had been conned by the banks into getting heavily involved in the interest-rate swapping game as a way to protect themselves against future bond rate increases. Three-fourths of all city governments in the U.S., for example, arranged interest-rate swaps where they paid the banks a fixed rate in return for a floating rate on what the banks would pay back to them, but when interest rates went down instead of up as was anticipated, the cities ended up taking huge losses – which of course were passed on to their citizens in the form of higher property taxes and cuts in services.
Ultimately, every institution both public and private that lost money in the interest-swap market thanks to Libor fixing has already passed on those losses to their customers and/or constituents – you and I, in other words – because that is the way it is, and that is the way it always works out. In the end, the banks involved in the interest rate con game robbed taxpayers and consumers blind in order to pump up their profit margins substantially. The banks that were involved in this scam – which includes the three largest and most powerful U.S. banks, JP Morgan Chase, Citibank, and Bank of America – were practicing reverse Robin Hood economics in its purest form, and now that the game has been exposed, they will have to face serious consequences for their actions.
The Coming Failure Of “Too Big To Fail”
Or will they? While there will no doubt be a few indictments handed out against a handful of bank managers (the scapegoats), under the principles of “too big to fail,” it is highly likely that outside of having to pay a few fines that are miniscule in comparison to their profit margins, the giant global banks themselves, as institutions, will ultimately emerge from this scandal largely unscathed, with just as much power, wealth, and influence as they had before. This is what happened after their mortgage-related Ponzi scheme nearly destroyed the U.S. economy back in 2008, and there is every reason to believe this is what will happen again once the Libor brouhaha passes.
The Libor system will either be reformed or scuttled in its entirety—that is true. But this only means that the global banking cartel will have to come up with some other type of complicated scheme that will allow them to fatten their profit margins at the expense of working people and the real economy, which for them should be a piece of cake. Eventually, however, when one of these schemes comes crashing down, as they always do, the results are going to be so catastrophic that it really will bring down the whole world economy. But until that fateful day of reckoning comes, the banksters will continue to find ways to get richer and richer while the rest of us continue to get poorer and poorer, weighed down by public and private debts we cannot possibly hope to repay and financial obligations that we cannot possibly hope to meet.
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