I’ve been trying to figure out a way to describe how serious the LIBOR scandal is without resorting to esoteric finance and economics models. LIBOR–the London Interbank Offered Rate–is the rate at which many international banks lend money to other banks. As such, it’s the underlying rate for prime rates around the globe. It is akin to our Fed Funds rate. It’s a rate watched by central banks closely and can be targeted by them. It is not directly under their control but monetary policy can influence it. Many, many loans are attached to the LIBOR rate and changes in the LIBOR rate. As such, it allocates loanable funds to many many projects around the world. It directly allocates funds to projects which–when missed–can lower the economic welfare of many countries. Here’s just a small bit that will give you an idea of how important the rate is from footnoted entries at Wiki.
Libor rates are calculated for ten different currencies and 15 borrowing periods ranging from overnight to one year and are published daily after 11 am (London time) by Thomson Reuters. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the Libor.
Companies will use LIBOR as a base rate for discounting when evaluating capital projects. This means if the rate is too high or too low, it can impact the decision to build a factory, buy a machine, or expand a project. Let’s just say that nearly every financial and economic decision that’s evaluated based on opportunity costs or discounting uses a rate that’s base on the FED funds rate or LIBOR. It’s probably the most important interest rate in the world.
I’ve promised to write on this before. I usually have some time on Saturdays for this kind of analysis and that usually means that it may get passed over too. Last week, there were many discussions on this and most of them had some good explanations of LIBOR basics. Still, you have to really understand financial and economic decision making to really grok how big of a deal the LIBOR rigging scandal is and will be for some time. You also have to understand how much our sophisticated markets depend on trust and effective regulation. Financial markets can be opaque. They are subject to adverse selection, principal-agent issues, information asymmetry and moral hazard. They are also the electricity that runs the real sector. You don’t build a car factory or a levee with out funding from some source sold in a financial market. That’s why you evaluate that decision using cash flow discounting. For every speculator that won the bet on which way the rate would move, there was one that lost that bet too. So, gaming the rate is like fixing the spread on every MLB game including the World Series games.
Over and over, we’ve seen that the financial markets–and the folks that participate in them–are not worthy of trust. We’ve also had some indication that our regulation over them has not been effective. There are many reasons for that. Purposeful deregulation, underfunding, and ideological appointments as well as regulator capture have all played a role.
Now, we now that we have trust issues with our regulators in larger ways than we thought possible. Once again, Timothy Geithner is playing a central role in the questions of what did the NY FED know about the LIBOR gaming and when did they know it? Major newspapers are reporting that the NY Fed was aware of this as early as 2007. This is as scandalous as the rate gaming itself.
Federal regulators had evidence that major banks could be manipulating one of the world’s most important interest rates a year before the practice came to an end, according to documents released by the Federal Reserve Bank of New York on Friday.
As early as 2007, the officials at the New York Fed suspected that this key rate, which serves as the basis for the interest rates that consumers pay on many loans, did not accurately reflect market forces, the documents show. Then, in April 2008, the New York Fed was explicitly warned by an employee of the British bank Barclays that it was participating in a ruse to “fit in with the rest of the crowd,” referring to other major banks.
The documents, released in response to congressional inquiries, add to the mounting questions about whether federal regulators were aggressive enough in addressing irregularities at the heart of the global financial system.
The new disclosures show that the New York Fed shared its concerns about the London-based Libor rate with British regulators. But the Fed offered no evidence that it had taken additional steps, including exercising its own authority as the regulator of some of the largest U.S. financial firms, to address the rigging of the rate.
“The New York Fed helped to identify problems related to LIBOR and press the relevant authorities in the UK to reform this London-based rate,” the Fed said in a statement. The Fed declined to say what other steps it might have taken and is still exploring whether there are more details it can release.
The manipulation by Barclays did not end until some point in 2009, offering the freshest evidence of how regulators struggled to oversee the largest banks during the global financial crisis.
Again, this is appalling. It implies that sitting Secretary of the Treasury Timothy Geithner knew about this. It appears that Geithner made the BOE aware of the situation by memo. How much farther the interaction goes is unknown at this point.
The Federal Reserve and the U.S. government knew back in 2008 that Barclays was filing false reports about Libor, the interest rate that international banks charge one another for short-term loans, according to documents released Friday. The documents show that a staffer at the U.K.-based bank told the New York Federal Reserve—which was then run by current Treasury Secretary Timothy Geithner—more than four years ago about the false reports before the admission was circulated through the federal government.
Barclays has been fined about $450 million for its role in fixing the rate. The Libor (London Interbank Offered Rate) scandal has swept through the banking world, with other institutions, including Citigroup, JPMorgan Chase, the Royal Bank of Scotland and Deutsche Bank, all acknowledging that they are being investigated.
The House Financial Services Committee will get a private tutorial next week on the LIBOR scandal a day before Federal Reserve Chairman Ben Bernanke is expected to be pressed by lawmakers about the central bank’s role in overseeing Wall Street giants being investigated for possibly manipulating the benchmark interest rate.
Reps. Spencer Bachus and Barney Frank, the committee’s top Republican and Democrat, have set up a July 17 briefing for staff with the Congressional Research Service, according to a memo obtained by POLITICO that was circulated Friday to members of the Financial Services Committee.
Bernanke will testify before the committee on July 18 in a regularly scheduled hearing on monetary policy.
Some liberal lawmakers have privately been agitating for a separate hearing focused solely on the rate setting scandal instead of simply being given an opportunity to quiz officials when they come before the committee for other business.
According to a Democratic lawmaker, Rep. Maxine Waters (D-Calif.) had started to circulate a letter demanding a hearing on LIBOR but she was encouraged not to send it to Bachus and Frank.
The decision to at least temporarily forego a hearing comes as allegations of international banks manipulating the LIBOR benchmark interest rate hit Washington, D.C., this week. A newly released memo revealed that Treasury Secretary Timothy Geithner had expressed concerns about the problem as far back as 2008 during his tenure as president of the New York Federal Reserve.
The memo, sent to the head of Bank of England, Mervyn King, Geithner had made recommendations on ways to “improve the integrity and transparency of the rate-setting process.”
The big question is did the FED investigate or look into the role of its member banks in the rigging scam? This scandal hopefully will allow us to look at the huge money center banks again and their monopoly power over so many markets. I’ll be following this closely.
I hate to tell you this, but there is another Republican debate tonight at 8PM, hosted by CNN in Jacksonville, Florida. We’ll be live blogging, as always. Being the twisted individual I am, I’m still enjoying watching the Republicans commit mass suicide, so I’ll be listening and updating even if no one else shows up. But I hope some people do! Now let’s see what’s in the news today.
I missed this in the run up to the SOTU last night: Speaker tells members what not to wear
Just seconds after an emotional tribute to Arizona Democratic Rep Gabby Giffords in the House of Representatives Wednesday, House Speaker John Boehner – who got a little choked up in the moment – suddenly felt the need to remind members that there’s a dress code on the House floor.
Boehner recovered his composure after embracing Giffords, who had just handed him her resignation letter. He looked around the chamber, and announced, “the chair would remind all members to be in proper business attire when you come to the floor of the House.”
Apparently enforcing the House dress code is one of the duties of Speaker that Boehner takes very seriously.
On Monday night, Boehner ran through some of basic rules of decorum on the floor, including the one about proper dress. “Members should wear appropriate attire however brief their presence might be,” the speaker said. And to the wardrobe offenders, Boehner said, “you know who you are.”
I know everyone has heard the news that Tim Geithner doesn’t expect President Obama to ask him to stay on as Treasury Secretary for a second term.
“He’s not going to ask me to stay on, I’m pretty confident,” Geithner said in an interview with Bloomberg Television today. “I’m confident he’ll be president. But I’m also confident he’s going to have the privilege of having another secretary of the Treasury.”
Ralphb commented on the SOTU live blog that Geithner “looked like he’d been gut punched” when Obama spoke about making banks pay fees on “transactions to pay for mortgage relief/refinancing.” Apparently Geithner wasn’t clued in about that ahead of time.
I’m wondering if they’ve been leaving him out of some of the meetings since Confidence Men revealed that Geithner was dismissive of presidential orders. Check out the facial expressions and body language in the above photo taken after the speech (I made it big so you could see detail). To me that doesn’t look like a friendly greeting. What do you think?
According to Business Week (see above link) two possible candidates to replace Geithner are Catfood Commission co-chair Erskine Bowles and North Dakota Senator Kent Conrad–both horrible choices IMO.
Conrad, 63, chairman of the Senate Budget Committee who said a year ago he won’t seek another term, is “a serious budget hawk on the left, well-liked and respected,” Calabria said.
Bowles, 66, is the former co-leader of Obama’s commission that drafted a plan to reduce the federal government’s debt.
President Obama had another difficult interaction on Wednesday when he met wacky Arizona Governor Jan Brewer at Phoenix-Mesa Gateway Airport. From the Chicago Tribune:
During their brief encounter on the tarmac, intended to be a ceremonial welcome, Obama told Governor Jan Brewer that he disagreed with an account she had given of a meeting they had at the White House two years ago.
“He was a little disturbed about my book, ‘Scorpions for Breakfast,'” Brewer told reporters after the conversation. At one point during their chat, she pointed a finger at the president.
Brewer, who has differed with Obama over immigration policy in the past, handed him a letter asking him for a meeting to talk about Arizona’s economy when she greeted him. A White House official said the subject of the book came up after Brewer gave Obama the letter.
“The president said he’d be glad to meet with her again, but did note that after their last meeting, a cordial discussion in the Oval Office, the governor inaccurately described the meeting in her book. The president looks forward to continuing taking steps to help Arizona’s economy grow,” the official said.
I didn’t know she had written a book. In fact, I didn’t know she could read…. ABC News provides a little more detail on what the squabble was about.
Brewer complains in Scorpions for Breakfast that she and her staff were treated coldly by White House aides, prevented from taking pictures in the holding room outside the Oval Office and that their cell phones and cameras were “confiscated” by Secret Service.
“Too bad we weren’t illegal aliens, or we could have sued them,” she writes.
During her meeting with the president, Brewer said Obama was “condescending” and professorial, “lecturing” on his efforts to promote comprehensive immigration reform.
“It wasn’t long before I realized I was hearing the president’s stump speech,” she said. “Only I was supposed to listen without talking. Did he care to hear the view from the actual scene at the border? Did the opinions and observations of the people of Arizona mean anything to him? I didn’t think so.”
“He was patronizing,” she said. “Then it dawned on me: He’s treating me like the cop he had over for a beer after he bad-mouthed the Cambridge police, I thought. He thinks he can humor me and then get rid of me.”
After the interaction, Obama apparently walked away before Brewer finished giving him a piece of her mind (or what’s left of it), but she said she would “regroup.” I guess that means “get over it.”
In the run-up to tonight’s debate, Mitt Romney and Newt Gingrich have been lustily attacking each other. Romney must be doing something right, because he’s now running neck and neck with Newt (36% for Romney and 34% for Gingrich) after being behind the former Speaker by 9 points a couple of days ago. Santorum is trailing at 11% and Paul 9% CNN reports:
Gingrich…disparaged Romney’s personal wealth when asked about the former Massachusetts governor’s call for illegal immigrants to deport themselves.
“I think you have to live in a world of Swiss bank accounts and Cayman Island accounts and automatic, you know, $20 million a year income with no work to have some fantasy this far from reality,” Gingrich said at a “Meet the Candidates” forum in Miami, later adding: “For Romney to believe that somebody’s grandmother is going to be so cut off that she is going to self-deport, I mean this verges — this is an Obama-level fantasy.” [….]
Romney….said in the candidate forum, hosted by the Spanish-language network Univision, that such attacks were “unbecoming” for a presidential hopeful….”It’s very sad for a candidate to resort to that kind of epithet,” Romney said of the pulled ad. “There are differences between the candidates on these issues but we don’t attack each other with those kind of terrible terms.”
Newt Gingrich was heckled about his work for Freddie Mac at a rally in Coral Springs, Florida yesterday.
It was quite a scene as a scrum of journalists ignored the candidate and turned to Cara Jennings, who heckled Gingrich in the face of intimidation from his campaign workers, threats from nearby supporters, and the two police officers who showed up to flank her.
“Do you work for the people or Freddie Mac?” Jennings shouted at the former speaker, who was on a platform in a parking lot about 50 feet away.
“I work for the people,” Gingrich responded.
The woman kept shouting, and Gingrich implored her to give others a chance to hear him. But Jennings kept it up, and Gingrich continued engaging her.
Mitt Romney, feeling pressure over the low taxes he pays, tried to claim that his “real tax rate is closer to 45-50 percent.” Think Progress provides a transcript from Romney’s interview with Univision’s Jorge Ramos:
RAMOS: You just released your tax returns. In 2010 you only paid 13 percent of taxes while most Americans paid much more than that. Is that fair?
ROMNEY: Well, actually, I released two years of taxes and I think the average is almost 15 percent. And then also, on top of that, I gave another more 15 percent to charity. When you add it together with all of the taxes and the charity, particularly in the last year, I think it reaches almost 40 percent that I gave back to the community. One of the reasons why we have a lower tax rate on capital gains is because capital gains are also being taxed at the corporate level. So as businesses earn profits, that’s taxed at 35 percent, then as they distribute those profits as dividends, that’s taxed at 15 percent more. So, all total, the tax rate is really closer to 45 or 50 percent.
RAMOS: But is it fair what you pay, 13 percent, while most pay much more than that?
ROMNEY: Well, again, I go back to the point that the, that the funds are being taxed twice at two different levels.
Sorry Mitt, but you’re not a corporation, and besides, as Think Progress points out, most corporations don’t pay 35 percent taxes–in fact many corporations pay no taxes. Romney constantly tells out and out, bald-face lies. Is that de rigueur for the Mormon church, or does he get a dispensation because of all the money he contributes to them?
Brainwashed cult member Rick Santorum, whose campaign is going nowhere in Florida, appeared at a Baptist church in Naples, Florida. He told the audience that “the left” uses college education to “indoctrinate” young people.
“It’s no wonder President Obama wants every kid to go to college,” said the former Pennsylvania senator. “The indoctrination that occurs in American universities is one of the keys to the left holding and maintaining power in America. And it is indoctrination. If it was the other way around, the ACLU would be out there making sure that there wasn’t one penny of government dollars going to colleges and universities, right?”
He continued: “If they taught Judeo-Christian principles in those colleges and universities, they would be stripped of every dollar. If they teach radical secular ideology, they get all the government support that they can possibly give them. Because you know 62 percent of children who enter college with a faith conviction leave without it.” [….]
“I’ll bet you there are people in this room who give money to colleges and universities who are undermining the very principles of our country every single day by indoctrinating kids with left-wing ideology,” he said. “And you continue to give to these colleges and universities. Let me have a suggestion: Stop it.”
Santorum attended Penn State and went on to earn an MBA from the University of Pittsburgh and a law degree from Dickinson School of Law. But he’d rather have the proles stay uneducated so they’ll buy his crazy theocratic bullsh*t.
Santorum did have a license to practice law, but it has been suspended because he didn’t bother to pay his $70.00 per year fee to keep it active. He stopped paying in 1994 and was suspended in 2010. Maybe he decided being a lawyer was the devil’s work?
OK, that’s it for me. What are you reading and blogging about today?
What is it about Elizabeth Warren that makes Republicans foam at the mouth and turn apoplectic? Surely her tenure as a presidential adviser and creator of the Consumer Financial Protection Bureau brought her into direct fire and criticism for anyone singing the corporate/banker tune. Though the Bureau was presumably a joint venture with Treasury, it soon became apparent that Timothy Geithner was a less than enthusiastic partner in Warren’s brainchild, an agency to protect consumer interests from confusing, often unfair financial contracts.
To many in the public, Elizabeth Warren was and has been a vocal advocate of the 99% before the 99ers were a twinkle in anyone’s eye. She had famously said she would fight for the Bureau’s legitimacy and was willing to leave “blood and teeth on the floor” to make that happen. That attitude and her frank support for middle-class, every-day concerns made her wildly popular in the public arena.
Well, that was then and this is now. Warren would not receive a permanent position to head the Bureau she created and breathed into life. That would have entailed a fight from this Administration, something for which President Obama has shown little talent or willingness.
Instead, as we all know Elizabeth Warren is running for the US Senate in Massachusetts, the seat held by Ted Kennedy for nearly 47 years, now occupied by Scott Brown, who was swept into office primarily over Obama’s botched healthcare plan.
I suspect that the GOP’s real problem with Ms. Warren is she did not go quietly into that good night, otherwise known as: back off and shut up. Not only is she running for the Senate but she’s giving talking tours, explaining the current financial crisis and serving up some very inconvenient truths about what Bush’s eight-year stint of failed economic policy actually did to the country. Remember? Cut taxes; run two, hideously expensive, unfunded wars; and create a Medicare drug program out of thin air and magic money.
Ms. Warren’s unforgiveable sin is simply this:. Tell the truth. Not only that, but then suggest the rich have an obligation to pay their fair share, to give back to the society that made their success possible. Known as pay it forward. And if you’re going to go to Hell, why not go out in true glory? Warren went on to suggest that no one who has become rich did it all on their own. Her statements went viral.
Republican and Libertarian heads exploded in short order. Blasphemy must be punished, they screamed. Bring the woman to heel.
The new Republican assault is as predictable as it is laughable. Elizabeth Warren is now charged with a ‘collectivist agenda.’ She is an enemy of free enterprise, a threat to capitalism [which needs redefining because as I recall Banana Republic economies are hardly free, nor dedicated to capitalism]. And so we come to the rather pathetic campaign ad that declares Ms. Warren is calling for violence, the overthrow of the State itself.
She is the Woman Who Would Throw Rocks.
Personally? I hope her aim is deadly.
Boston Boomer has been updating me on the shenanigans pulled by Timothy Geithner via Ron Suskind’s “Confidence Men”. I’m hoping she’ll outline all the stuff in a post soon. I’m sure you remember how Geithner approved Wall Street Executives giving themselves bonuses after receiving TARP funds. There’s substantial evidence that Geithner blocked plans to remove CEO Vikram Pandit and dismantle Citibank. He evidently had incredible issues with Sheila Bair, is known for throwing screaming fits when his pet Wall Street Banker friends are threatened and evidently ignored the President’s orders to get tougher on Wall Street early in the administration. Again, I”ll let Boomer flesh it out for you but there’s some really heady information out there about Geithner and his incredible coziness with the shadow banking industry.
Given that context, color me surprised by this Politico headline: Geithner: Action against Wall St. coming.
Asked on CNBC about the Occupy Wall Street movement’s frustrations over the lack of criminal charges related to the financial crisis, Geithner said action is on the way.
“You’ve seen very, very dramatic enforcement actions already by the enforcement authorities across the U.S. government, and I’m sure you’re going to see more to come. You should stay tuned for that,” he said.
Geithner Friday said the Obama administration had moved swiftly after the crisis to put into place new protections for consumers and investors.
“We moved very quickly to put in place a much stronger set of rules of the game across the financial sector. Now, we’re now facing a lot of resistance to those rules, but we’re going to make sure that we deliver the promise of those reforms, which is a much tougher set of rules across the system against risk-taking and much stronger protections for consumers,” he said.
Geithner responded to the Occupy Wall Street demonstrations by asserting that their unhappiness was due to the sluggish pace of overall economic growth.
“What you see is a general sense across the country of concern that the U.S. economy is not growing faster, you’re not seeing incomes rise more rapidly, and people want to make sure that the government, Washington, is acting to make things better now. As part of that, they want to see us deliver much stronger protections for consumers and investors as an economy as a whole,” Geithner said on CNBC.
The Treasury Secretary added that the domestic focus was to ensure that Congress would take steps that would encourage economic growth and lower the deficit.
“What we’re focused on is trying to make sure that we are doing everything to encourage Congress. … to take some steps now that can make growth stronger in the United States, and tie that to reforms to bring down our long-term deficits,” he said.
Something tells me that the deteriorating political scenario for the President has something to do with this conversation. However, I will believe it when I see it happen. Talk show chatter comes so cheap.