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Libor scandal


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Libor scandal

  1. 1. Roshankumar S PimpalkarEmail: Libor scandal
  2. 2. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comWhat is Libor?•The Libor is an average interest rate calculated throughsubmissions of interest rates by major banks in London.•Libor underpins approximately $350 trillion inderivatives.•It is controlled by the British Bankers Association(BBA).
  3. 3. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comThe banks are supposed to submit the actual interestrates they are paying, or would expect to pay, forborrowing from other banks.The Libor is supposed to be an overall assessment ofthe health of the financial system because if the banksbeing polled feel confident about the state of things, theyreport a low number and if the member banks feel a lowdegree of confidence in the financial system, they reporta higher interest rate number.
  4. 4. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comWhat is Libor Scandal?•The scandal arose when it was discovered that banks were falsely inflating ordeflating their rates so as to profit from trades, or to give the impression thatthey were more creditworthy than they were.•Because Libor is used in U.S. derivatives markets, an attempt to manipulateLibor is an attempt to manipulate U.S. derivatives markets, and thus a violationof American law.•Since mortgages, student loans, financial derivatives, and other financialproducts often rely on Libor as a reference rate, the manipulation ofsubmissions used to calculate those rates can have significant negative effectson consumers and financial markets worldwide.•In June 2012, multiple criminal settlements by Barclays Bank revealedsignificant fraud and collusion by member banks connected to the ratesubmissions, leading to the scandal.
  5. 5. Roshankumar S Pimpalkar Email:“Hi Guys, We got a big position in 3m libor for the next3 days. Can we please keep the lib or fixing at 5.39 forthe next few days. It would really help. We do notwant it to fix any higher than that. Tks a lot.”Barclays Bank trader in New York to submitter
  6. 6. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comOn 29 May 2008, The Wall Street Journal (WSJ)released a controversial study suggesting thatsome banks might have understated borrowingcosts they reported for the Libor during the 2008credit crunch that may have misled others aboutthe financial position of these banks.
  7. 7. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comThe BBA claimed that the Libor continued to bereliable even in times of financial crisis.
  8. 8. Roshankumar S Pimpalkar Email: "Although the integrity of the U.S. dollar Libor-fixing processhas been questioned by some market participants and thefinancial press, it appears that U.S. dollar Libor remains anaccurate measure of a typical creditworthy bank’s marginalcost of unsecured U.S. dollar term funding.“Global Financial Stability ReviewBy International Monetary FundOctober 2008
  9. 9. Roshankumar S Pimpalkar Email: "It is in many ways the rate at which banks do not lendto each other, ... it is not a rate at which anyone isactually borrowing.“Mervyn KingThe Governor of the Bank of England
  10. 10. Roshankumar S Pimpalkar Email:•The New York Federal Reserve in July 2012, releaseddocuments dating back to 2007 which showed that they wereaware that banks were lying about their borrowing costs whensetting Libor and chose to take no action against them at thattime.•Released minutes from the Bank of England indicated similarlythat the bank and its deputy governor Paul Tucker were alsoaware as early as November 2007 of industry concerns that theLibor rate was being underreported.
  11. 11. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comIn one 2008 document a Barclays employee told a New York Fed analyst,"We know that we’re not posting an honestLIBOR, and yet we are doing it, because if we didn’t doit, it draws unwanted attention on ourselves."
  12. 12. Roshankumar S Pimpalkar Email:•In court documents, a trader from the Royal Bank of Scotlandclaimed that it was common practice among senior employees athis bank to make requests to the banks rate setters as to theappropriate Libor rate, and that the bank also made on occasionsrate requests for some hedge funds.•One traders messages from Barclays Bank indicated that foreach basis point (0.01%) that Libor was moved, those involvedcould net “about a couple of million dollars”.
  13. 13. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comOn 27 June 2012, Barclays Bank was fined•$200 million by the Commodity Futures TradingCommission,•$160 million by the United States Department of Justice•£59.5 million by the Financial Services Authority forattempted manipulation of the Libor and Euribor rates.
  14. 14. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comEarly estimates are that the rate manipulationscandal cost U.S. states, counties, and localgovernments at least $6 billion in fraudulentinterest payments
  15. 15. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comIn a released transcript of a 21 August 2007 chat, Jezri Mohideen, who was the head ofyen products in Singapore, asked to have the Libor fixed in a conversation with othertraders:Mohideen: “What’s the call on the Libor?”Trader 2: “Where would you like it, Libor that is?”Trader 3: “Mixed feelings, but mostly I’d like it all lower sothe world starts to make a little sense.”Trader 4: “The whole HF [hedge fund] world will be kissingyou instead of calling me if Libor move lower.”Trader 2: “OK, I will move the curve down 1 basispoint, maybe more if I can.”
  16. 16. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comStatistical analysis indicated that the Libor roseconsistently on the first day of each month between2000 and 2009 on the day that most adjustable-ratemortgages had as a change date on which newrepayment rates would "reset".
  17. 17. Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.comDuring the analysed period, the Libor rate rose onaverage more than two basis points above theaverage on the first day of the month, andbetween 2007 and 2009, the Libor rate rose onaverage more than seven and one-half basispoints above the average on the first day of themonth.