Sunday, July 15, 2012

- The DOJ Libor Shakedown

Front page, above the fold of the Sunday NYTimes... "US Is Building Criminal Cases in Fixing of Interest Rates". Well... not really. Near the end of the piece you get the real story:

The investigation into the global banks is unusually complex and it could continue for years, and ultimately end in settlements rather than indictments, said the officials close to the case. For now, regulators are building investigations piecemeal because the facts of the cases vary widely. That could make it difficult to compile a global settlement, although some banks would prefer an industrywide deal to avoid the harsh glare of the spotlight, said a lawyer involved in the case.

Unless the DOJ can prove collusion between bank A and bank B (and I'm almost certain they can't) then the banks have done absolutely nothing wrong. But the political hacks at the DOJ know that the banks are weak and wounded, so they can't resist the urge to take a bite. It's raw, blatant political opportunism aggressively promoted by New York Times reporters who are sick with envy at the wealthy banking execs. And although the lefty reporters and regulators think they'll get the banks to pay, it will be the people who need loans who will inevitably bear the cost of this apple cart being tipped over and set on fire.

This Libor thing can be made to sound bad to those who don't know the banking industry. That's probably why the Times has been promoting the story so aggressively. On Squawk box every morning the exasperation of Andrew Ross Sorkin becomes evident every time another industry insider fails to see this story as worth his time. Even so, the phrase "fixing of interest rates" is easily misunderstood if you don't understand banking any better than a New York Times reporter. And if you're one of those people who doesn't trust market forces to constrain people's actions in the first place, then this might seem like a real story.

But there wasn't any wrongdoing ... at least ... up to the point that the DOJ got involved. What will happen now though is that the DOJ (along with the idiot bank regulators and their cheerleaders at the Times) in an effort to get the banks a little further under their thumbs, will define a new (more political) process for 'fixing Libor rates'. That process will be far more easily gotten around than the dynamic forces of the market currently in place, so the next time someone wants to cheat things a little they'll be able to. The net result of all of this is that it will become much harder to get an accurate valuation for credit risk, which is what Libor is supposed to define in the first place.

Which may be exactly what the regulators wanted all along.

We've entered very dangerous ground here. If the political worker bees at the department of Justice think they can do a better job of designing how international banking works than what has grown up naturally over the last three hundred years, we're in for a lot of trouble. They are fiddling with dials and switches they don't understand, in the belief that whatever consequences come of this will be minor and blamed on someone else. But the best analogy for this is a &$& full of innocent people. If they just shove the flight crew out of the way and start testing things to see how they work, only bad things can come of it - and not just for the flight crew.

Of course, it will be the regulators along with their confederates at the Times are the ones who decide who get's blamed when the plane strikes the mountainside, so I can see why they think it's OK to muck around a little. But this is delicate and dangerous machinery that they should leave to the people who really understand it, or someone (probably everyone) is going to get hurt.

the banks are not the problem here. The US Department of Justice is the problem here. And we had better get these people back under control.


Tom said...

BTW (since I expect it to come up) even with this travesty ongoing I still don't believe "we are toast". I never believe "we are toast".

By way of explanation, one of my favorite lines from a movie comes from a scene from "We Were Soldiers". During a training run, Col. Hal Moore says to his troops "There is no such thing as 'three strikes and you're out'... there is ALWAYS something more you can do."

Maybe it's a mental illness on my part, but I find I just can't lay down and accept that "we are toast". You may be toast... but I'm not, and never will be. there is always something more I can do.

I'll end up being one of those guys on the last boat out when the New York Times reporters and Columbia Law professors begin crucifying bankers in times Square for their invented misdeeds. But I'll fight them all the way, in any way I can... right up until the time they kill me. Then I'll stop... but not one second before.

What they're doing is wrong. It's a bad idea done for bad reasons. No justice will come out of this. And I won't pretend it's right just because they may be coming for me next.

Chess said...

Hmmm. A preemptive W.A.T. note...
I didnt understand LIBOR in 08 and I got whacked really well not understanding it and the freezing up of credit.Now I watch it daily...
Jim Grant the other day told Maria this was no big deal. She tried to get him to bite and he wouldnt He said central bankers manipulate interest rates daily.
My problem with LIBOR is why do we tie ourselves to this. Why not use our 10 yr. I know its manipulated now by Bernanke and qe and by the flight to safety trade but its at least our own rate. Let other countries use theirs. Simplistic I am sure.

chess said...

Just because W.A.T. and this article is just another nail in the coffin doesnt mean I wont go down fighting. Its exactly why Id rather have it now rather a decade from now.. At least I am of some use now at 58..
These idiots want a stronger economy but also want to have a banking system that cant get off the canvass.Cant have em both boys...
Dodd-Frank should have been 3 pages to start with... First raise alot of capital and we will see how things are in a year.. Let the banks heal. But they just cant help themselves and thus the economy sucks..Libs just cant help themselves.
We may be able to muddle along but demographics in too many nations are going the wrong way. The day that the Japanese people stop buying 99% of their own debt their interest rates wil shoot up to a whopping 1.5% and theyl explode.They spend more on Depend diapers than baby diapers. A dead society..Demos in China also going wrng way. And here??? wrong way. ! person 1 vote. Latiniqua has 8 votes at her apt ..Tom you have ?1.. Call me when the fighting begins. Fomo and Fubar(thanx Ikaika)

Tom said...

In some ways the idea of an interest rate 'fixing' is archaic. It was designed for a time when there wasn't 24/7 futures trading. But what Libor is designed to reflect is the difference between lending in a 'risk free' environment (like the US 10y) and lending to a credit exposed counter party like a bank. In a sense, it's the bottom level of the credit spread. In truth, we could probably do away with the fixing entirely now. Credit derivatives give a much more efficient description of credit risk, and with 24/7 trading, the live market is always there.

But that's not what the regulators and reporters want to do. They want to use this politically to get the banks 'in line' with their agenda. So don't be surprised if someone suggests a new Libor mechanism that takes racial quotas into account, or has some other 'political' component in its process. The new mechanisms will have a "low income" factor, or a "subprime" (although they won't call it that) factor. Libor will be non specific and based on the role you play in the political landscape.

The feds and the Times want to make this more 'fair'... and by fair, I mean 'unfair'. Think of it as permanently encoding affirmative action into the financial landscape by making less a reflection of objective reality and more a reflection of the politics of the moment.

chess said...

Thanx Tom. That is an excellent wrap up of what I fear bout libs and this country.. Someday I think the shit will get so bad here that the Latinos and even some Blacks will cross over to our side but I think by then we will be on Life support..Fomo with BHO may get us there really fast.
Problem is a libtard media are the ones asking the libtards experts? the questions. When Krugman says 800 billion wasnt big nuff stimulus no one then asks what bout the other 5 tril of deficit spending in the past 4 yrs?? Doesnt that mean we have spent 5.8 tril with BHO and this is the result???
They have stuck their nose in Healthcare. Banking system.We all need both of those so they dam near got us.

chess said...

When they ban my huge grease dripping "fritter" every Sunday am thats when you will see me on the national news.
Maybe my Waterloo will be over a chunk of deep fried dough.Ahhhh.

Tom said...

I think it depends on what you fry it in.

chess said...

LOL...I guess if I am a prepper I had better find a way to store real fat with real trans fats..

Real men dont fry in trans free oil!!!

chess said...

Just read the full article. Jesus.. I have to come to the conclusion that to understand BHO and Eric Holder you need only to rent all the seasons of The Sopranos.

frithguild said...

The real story is in the middle:

The case gained further traction in early 2010, when the agency’s enforcement team engaged the Justice Department. The department’s criminal division, led by Mr. Breuer, agreed that regulators had a strong case. The investigation continued until January 2012, when the trading commission notified Barclays lawyers that they were entering the final stages before deciding about an enforcement action.

The writers clearly have been talking to the DOJ Criminal Division, headed up by Lanny "Deep in the Cheese" Breuer. The writers also threw the spin in:

The criminal investigations come at a time when the public is still simmering over the dearth of prosecutions of prominent executives involved in the mortgage crisis. The continued trouble in the financial sector, including the multibillion-dollar trading losses at JPMorgan Chase, have only further fueled the anger of consumers and investors.

Today Obama is out there saying that Romney is not qualified because at Bain his job was not to create jobs - "He invested in companies that have been called pioneers of outsourcing"

So here you have it leaping up into the news today - price fixing by foreign bankers and Obama will do something about it. What would Romney do?

This stuff doesn't just happen when it happens.