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    Michael Kraten on LIBOR, Accounting and the Public Interest
    news item posted November 13, 2012 by Deirdre Harris, last edited November 13, 2012, tagged 2012, general news 
    1999 Views, 11 Comments
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    Michael Kraten on LIBOR, Accounting and the Public Interest
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    Since the London interbank offered rate (LIBOR) scandal was brought to light months ago, Michael Kraten’s research work has been an important source of information for high-profile media sources including: Bloomberg Businessweek, The Economist and The Wall Street Journal. Even the UK House of Commons discussed the study.

    Rosa M. Abrantes-Metz, Michael Kraten, Albert D. Metz and Gim Seow co-authored “LIBOR Manipulation?”. The authors used their combined expertise in forensic accounting, econometric tools and capital markets to analyze the Libor rates for their article written in 2008.

    “We found that there were unusual patterns in the way that individual banks were submitting quotations that were being utilized to calculate LIBOR. There should be a fair amount of randomness; we failed to see those periods of randomness for an extended amount of time,” Kraten said.

    There were periods of time when the quotations would not fluctuate at all, not even by even a tiny basis point or two. The rate should reflect the banks’ underlying financial strength, which varies day by day, he said.

    There were other periods of time when the rate would fluctuate but not in the direction that the business environment would predict that it would fluctuate, said Kraten. For instance, in the middle of the financial crisis, when global financial markets were doing poorly, the rate would show that the banks were actually strengthening financially.

    The authors made it clear that they did not have proof. There was no way they could look at the quotations and know if the banks were having secret discussions, Kraten said. At the time the academic authors found trends in the data that raised the question whether price fixing might be occurring. They were concerned that there might be illegal manipulation going on based on their quantitative analysis.

    In 2010, Kraten presented their findings at the Public Interest Section’s midyear meeting, which helped increase exposure.

    Fast forward to mid-2012, when news broke that American regulatory agencies found certain email messages from global financial company, Barclays, that did indicate illegal conversations were occurring.  

    It was an American regulator called the Commodities Futures and Trading Commission (CFTC) that went public with the scandal by declaring Barclays guilty of manipulation of the rate and enforcing a $450 million dollar fine.

    On June 28, 2012, Ben Gummer, a member of the UK House of Commons, mentioned a paper circulated around New York University that “raised the issue of manipulation of LIBOR.” You can read the transcript HERE under column 480. 

    “What I suspect happened is that our paper here was first revealed, or first disclosed, if you will, on the floor of the House of Commons during this parliamentary debate, and then people started to ask questions, curiously, about what this paper was, who wrote it and what it said,” said Kraten.

    Colleagues encouraged Kraten to go on the record with recommendations. Kraten co-writes a blog with his wife, Maureen Kraten. The blog is called AQPQ. Micheal Kraten wrote a blog entry called “LIBOR and the Public Interest” and made two recommendations. He said the numbers should be audited, and Britain may want to create a government oversight agency that is similar to the PCAOB to oversee the accounting and the auditors.

    Four days after Kraten’s blog entry posted, Brian Mairs of the British Bankers’ Association (BBA) posted a comment on the blog stating that Kraten had a factual error in his blog post. The BBA collects data and manages the calculation of the LIBOR rate. Mairs wrote that Kraten had stated that the BBA sets LIBOR. Kraten replied that he never said that the BBA sets the rate, and he agrees that the BBA obtains the information from other banks.

    The Federal Reserve Bank of New York released a series of letters between Treasury Secretary Timothy Geithner, head of the Federal Reserve Bank of New York at the time, and Bank of England Governor Mervyn King, proving that the American government knew about problems with LIBOR in 2008. Privately, Geithner gave a set of six major recommendations including that independent accountants needed to audit the Libor rate.

    “As far as I knew, I was the first person to publicly call for external auditors auditing the LIBOR rate. As it turns out, the treasury secretary was privately calling for the same thing for the last four years,” Kraten said.

    We now know that there was significant correspondence between the major American and British regulators. Geithner says that because it was a British matter under British jurisdiction all he could do was bring his concerns to the Bank of England’s attention and make recommendations. King’s response is that Geithner only gave recommendations and observations without any proof of wrongdoing.

    Kraten speculates that they felt that coming out publicly during the financial meltdown with this major global scandal could have shattered public confidence in the banking system.

    Colleagues have asked Kraten if he has spoken with regulators or received offers to speak at banking trade association conferences, but he had not engaged in any conversations with regulators prior to this interview.

    “We are trying as hard as we can to keep the issue alive, to keep our recommendations alive, and to move forward from simply being able to identify that there was a problem, which is what we did in our original paper, to trying to get people to hear our prescriptive solutions that we are proposing.”

    Kraten said that as “guardians of the public trust” it is important for the members of the American Accounting Association to focus on the question: “What should we do to proactively reform the system so that it is operating in the public interest?”

    Michael Kraten is the luncheon speaker for the Public Interest Section Mid-Year Meeting in New Orleans in March 2013.

    -- Lindsay Peters, AAA

    Comment

     

    • Robert E Jensen

      Bigger Than Enron
      "Libor Lies Revealed in Rigging of $300 Trillion Benchmark," by Liam Vaughan & Gavin Finch, Bloomberg News, January 28, 2013 ---
      http://www.bloomberg.com/news/2013-01-28/libor-lies-revealed-in-rigging-of-300-trillion-benchmark.html

      "The LIBOR Mess: How Did It Happen -- and What Lies Ahead?" Knowledge@Wharton, July 18, 2012 ---
      http://knowledge.wharton.upenn.edu/article.cfm?articleid=3056

      "Lies, Damn Lies and Libor:  Call it one more improvisation in 'too big to fail' crisis management," by Holman W. Jenkins Jr., The Wall Street Journal, July 6, 2012 ---
       http://professional.wsj.com/article/SB10001424052702304141204577510490732163260.html?mod=djemEditorialPage_t&mg=reno64-wsj

      Jensen Comment
      Crime Pays:  The good news for banksters is that they rarely, rarely, rarely get sent to prison ---
      http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

      Bob Jensen's threads on Rotten to the Core ---
      http://www.trinity.edu/rjensen/FraudRotten.htm

    • Robert E Jensen

      Teaching Case
      From  The Wall Street Journal Accounting Weekly Review on June 14, 2013

      CRU, After LIBOR Scandal, Audits Steel Prices Index
      by: John W. Miller
      Jun 05, 2013
      Click here to view the full article on WSJ.com
       

      TOPICS: Assurance Services, Auditing, Auditing Services

      SUMMARY: CRU Group compiles steel prices and issues a report every Wednesday. "The compiler...said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. The move is believed to be a first by a commodity-price-index firm to audit information provided to it."

      CLASSROOM APPLICATION: The article may be used in an auditing or other assurance services class to discuss non-audit services, audit planning for a first-of-its-kind engagement, and determination of materiality in such a setting.

      QUESTIONS: 
      1. (Introductory) What does Commodity Research Unit Group (CRU) do? Who uses the information that the group prepares?

      2. (Advanced) What service has CRU hired KPMG LLP to conduct? Be specific in stating a type of service to be provided and the type of report that you think may be issued under U.S. assurance service requirements.

      3. (Advanced) What is the significance for assurance work planning of the fact that this engagement is apparently the first by a commodity-price-index firm to audit information provided to it?

      4. (Advanced) Suppose you are an audit manager planning an engagement for KPMG to examine steel prices. What factors will you consider in deciding on materiality of amounts to examine?
       

      Reviewed By: Judy Beckman, University of Rhode Island

      "CRU, After LIBOR Scandal, Audits Steel Prices Index," by John W. Miller, The Wall Street Journal, June 5, 2013 ---
      http://online.wsj.com/article/SB10001424127887324069104578527632400988350.html?mod=djem_jiewr_AC_domainid

      A key price compiler in the global steel industry said it will begin auditing its data providers, part of an effort to address concerns about transparency in price indexes following the Libor rate-fixing scandal.

      The compiler, Commodity Research Ltd., said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. Much of these steel types are destined for the U.S automotive market.

      The move is believed to first by a commodity-price-index firm to audit information provided to it. CRU, based in London and Pittsburgh, has hired KPMG LLP to conduct the audits, according to a person familiar with the matter. KPMG didn't respond to a request for comment.

      Glenn Cooney, London-based head of operations for CRU Indices, which publishes price data on 75 commodities in metals, mining and fertilizers, said it would look at auditing other data providers in other sectors to bolster industry transparency.

      Currently, CRU collects price and volume data on spot transactions from steel producers and buyers, who submit their prices voluntarily to a CRU website. CRU publishes an index price based on the submissions every Wednesday.

      CRU officials say they hope the move will lend it added credibility at a time of concern about indexes. Three banks in Europe have agreed to pay over $2 billion in settlement fees to U.S. and U.K. regulators after they were caught manipulating the London interbank offered rate, or Libor, the interest rate banks charge to borrow from each other. Josh Spoores, a Pittsburgh-based steel analyst for CRU, said the company started receiving more requests for improved transparency after the Libor scandal.

      The company also hopes it will be able to reassure several major U.S. steel mills, which in April said they would no longer link some contracts to CRU's steel indexes because they felt prices quoted weren't an accurate reflection of the market. The steelmakers that stopped using the indexes include ArcelorMittal, MT +3.34% U.S. Steel Corp. X +5.23% and Nucor Corp. NUE +3.01%

      Grant Davidson, general manager for sales at ArcelorMittal's Dofasco mill in Canada, said big steel companies would welcome more transparency. "We're for what's most accurately reflecting the price in the market," he said.

      Michael Steubing, vice president of global procurement for Mauser USA LLC, which makes steel drums and barrels, said an audited index would help guarantee that he can sell his product at a competitive price. He sells barrels to big chemical companies that use CRU to help determine how much they will pay for the barrels. "So we'd like that (CRU) to be as accurate as possible," he said.

      CRU, which is used by the Chicago Mercantile Exchange and says its prices are used to settle steel contracts with an annual global value of over $20 billion, faces more competition from Platts, a division of McGraw Hill Financial Inc., MHFI +0.97% which two years ago bought price compiler The Steel Index.

      Joe Innace, Platts's editorial director for metals, said Platts would continue its phone survey for its Platts industry newsletter independently of The Steel Index and wouldn't use audits because he said it has enough verifications, such as checking that prices match the types and volumes of steel appropriate to the index, in place.

      Steve Randall, who founded The Steel Index in 2006, said it had no plans to audit data providers. "We run all our data through a series of screenings," he said. He declined to provide details about the screening procedure.

      Continued in article

      "Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:   The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There's no price the big banks can't fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
      http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

      Bob Jensen's LIBOR fraud threads ---
      http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

      Bob Jensen's threads on LIBOR are under the C-terms at
      http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

      Bob Jensen's threads on LIBOR and other derivative financial instruments frauds (timeline) ---
      http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
      This is so huge it's better to do a word search for LIBOR

    • Robert E Jensen

      LIBOR --- http://en.wikipedia.org/wiki/LIBOR

      From the CFO Journal's Morning Ledger on June 21, 2013

      Libor case ensnares more banks
      Employees of some of the world’s largest financial institutions conspired with a former bank trader to rig benchmark interest rates, British prosecutors alleged, a sign authorities have their sights on an array of banks and brokerages. The U.K.’s Serious Fraud Office charged former UBS and Citigroup trader Tom Hayes with eight counts of “conspiring to defraud” in an attempt to manipulate Libor, the WSJ reports. The charges read in court Thursday accuse Mr. Hayes of conspiring with employees of eight banks and interdealer brokerage firms, as well as with former colleagues at UBS and Citigroup. Mr. Hayes, who was charged with similar offenses by the U.S. last December, hasn’t entered a plea in either country.

      "Libor Case Ensnares More Banks U.K. Prosecutors Allege Staff From J.P. Morgan, Deutsche Bank and Others Tried to Fix Rates," by David Enrich, The Wall Street Journal, June 20, 2013 ---
      http://online.wsj.com/article/SB10001424127887323893504578556941091595054.html?mod=djemCFO_h

      Employees of some of the world's largest financial institutions conspired with a former bank trader to rig benchmark interest rates, British prosecutors alleged Thursday, a sign authorities have their sights on an array of banks and brokerages.

      The U.K.'s Serious Fraud Office this week charged former UBS AG UBSN.VX +0.43% and Citigroup Inc. C -3.40% trader Tom Hayes with eight counts of "conspiring to defraud" in an alleged attempt to manipulate the London interbank offered rate, or Libor. Mr. Hayes appeared in a London court Thursday, where prosecutors for the first time detailed their allegations against him, including a list of institutions whose employees Mr. Hayes allegedly conspired with.

      Mr. Hayes, who was charged with similar offenses by the U.S. last December, hasn't entered a plea to either country's charges. He wrote in a January text message to The Wall Street Journal that "this goes much much higher than me."

      The charges read in court Thursday accuse Mr. Hayes of allegedly conspiring with employees of eight banks and interdealer brokerage firms, as well as with former colleagues at UBS and Citigroup. Each of the eight charges accused Mr. Hayes of "dishonestly seeking to manipulate [Libor]…with the intention that the economic interests of others would be prejudiced and/or to make personal gain for themselves or another."

      The banks include New York-based J.P. Morgan Chase JPM -2.04% & Co.; Germany's Deutsche Bank DBK.XE +0.78% AG; British banks HSBC Holdings HSBA.LN +1.34% PLC and Royal Bank of Scotland Group RBS.LN -3.06% PLC; and Dutch lender Rabobank Groep NV. Prosecutors alleged Mr. Hayes also worked with employees of ICAP IAP.LN +4.74% PLC, Tullett Prebon TLPR.LN -0.07% PLC and R.P. Martin Holdings Ltd., which are London-based interdealer brokers that serve as middlemen between bank traders.

      An ICAP spokeswoman said the firm has provided information to British prosecutors and continues to cooperate. A Rabobank spokesman said the bank continues to cooperate with investigators and is likely to eventually reach a settlement. In a statement, Tullett said it is "cooperating fully" with prosecutors' requests for information. Representatives for the rest of the named institutions declined to comment.

      The list of banks and brokerages named at Thursday's court hearing underscores the breadth of institutions that remain under government scrutiny. So far, only three banks—UBS, RBS and Barclays BARC.LN +0.30% PLC—have reached settlements with U.S. and British authorities. Authorities hope to hammer out settlements with additional institutions, including Rabobank, in coming months, according to a person familiar with the investigation.

      The list that prosecutors read Thursday included at least one institution that has said it wasn't involved in the Libor scandal. After UBS settled rate-rigging allegations last December, Tullett Prebon spokeswoman Charlotte Kirkham said the firm didn't help UBS manipulate rates and that no Tullett employees had been disciplined in connection with Libor. In April, Tullett said it stood by that statement.

      In a statement Thursday, Tullett disclosed for the first time that it has been asked to provide information to various regulators and government agencies in connection with Libor investigations. In addition to saying it is cooperating with the requests, the firm reiterated it hasn't been informed that it or its brokers are under investigation in relation to Libor. A spokesman declined to comment further.

      The interdealer brokers' alleged involvement in attempts to rig Libor has rocked the industry in recent months. Two R.P. Martin employees were arrested along with Mr. Hayes in December but not charged. The U.S. Justice Department and the Commodity Futures Trading Commission also are investigating brokers as part of their Libor probes, according to people familiar with those investigations.

      Mr. Hayes, a 33-year-old British citizen, was a derivatives trader in Tokyo from 2006 through 2010, the period during which prosecutors allege he attempted to manipulate Libor. He is the only person the Serious Fraud Office has charged in their nearly yearlong Libor investigation, although an agency spokesman said this week that more arrests and charges are possible.

      Mr. Hayes, wearing beige trousers and an untucked, navy dress shirt, didn't respond to the charges at court Thursday. Standing behind a glass partition in the courtroom, he was mostly silent aside from telling the judge his name, address and date of birth. At one point, the judge asked him to take his hands out of his pockets.

      Continued in article

      Bigger than Enron and Rotten to the Core:  The LIBOR Scandal
      Bob Jensen's threads on the LIBOR Scandal ---
      http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking


      Teaching Case
      From  The Wall Street Journal Accounting Weekly Review on June 14, 2013

      CRU, After LIBOR Scandal, Audits Steel Prices Index
      by: John W. Miller
      Jun 05, 2013
      Click here to view the full article on WSJ.com
       

      TOPICS: Assurance Services, Auditing, Auditing Services

      SUMMARY: CRU Group compiles steel prices and issues a report every Wednesday. "The compiler...said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. The move is believed to be a first by a commodity-price-index firm to audit information provided to it."

      CLASSROOM APPLICATION: The article may be used in an auditing or other assurance services class to discuss non-audit services, audit planning for a first-of-its-kind engagement, and determination of materiality in such a setting.

      QUESTIONS: 
      1. (Introductory) What does Commodity Research Unit Group (CRU) do? Who uses the information that the group prepares?

      2. (Advanced) What service has CRU hired KPMG LLP to conduct? Be specific in stating a type of service to be provided and the type of report that you think may be issued under U.S. assurance service requirements.

      3. (Advanced) What is the significance for assurance work planning of the fact that this engagement is apparently the first by a commodity-price-index firm to audit information provided to it?

      4. (Advanced) Suppose you are an audit manager planning an engagement for KPMG to examine steel prices. What factors will you consider in deciding on materiality of amounts to examine?
       

      Reviewed By: Judy Beckman, University of Rhode Island

      "CRU, After LIBOR Scandal, Audits Steel Prices Index," by John W. Miller, The Wall Street Journal, June 5, 2013 ---
      http://online.wsj.com/article/SB10001424127887324069104578527632400988350.html?mod=djem_jiewr_AC_domainid

      A key price compiler in the global steel industry said it will begin auditing its data providers, part of an effort to address concerns about transparency in price indexes following the Libor rate-fixing scandal.

      The compiler, Commodity Research Ltd., said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. Much of these steel types are destined for the U.S automotive market.

      The move is believed to first by a commodity-price-index firm to audit information provided to it. CRU, based in London and Pittsburgh, has hired KPMG LLP to conduct the audits, according to a person familiar with the matter. KPMG didn't respond to a request for comment.

      Glenn Cooney, London-based head of operations for CRU Indices, which publishes price data on 75 commodities in metals, mining and fertilizers, said it would look at auditing other data providers in other sectors to bolster industry transparency.

      Currently, CRU collects price and volume data on spot transactions from steel producers and buyers, who submit their prices voluntarily to a CRU website. CRU publishes an index price based on the submissions every Wednesday.

      CRU officials say they hope the move will lend it added credibility at a time of concern about indexes. Three banks in Europe have agreed to pay over $2 billion in settlement fees to U.S. and U.K. regulators after they were caught manipulating the London interbank offered rate, or Libor, the interest rate banks charge to borrow from each other. Josh Spoores, a Pittsburgh-based steel analyst for CRU, said the company started receiving more requests for improved transparency after the Libor scandal.

      The company also hopes it will be able to reassure several major U.S. steel mills, which in April said they would no longer link some contracts to CRU's steel indexes because they felt prices quoted weren't an accurate reflection of the market. The steelmakers that stopped using the indexes include ArcelorMittal, MT +3.34% U.S. Steel Corp. X +5.23% and Nucor Corp. NUE +3.01%

      Grant Davidson, general manager for sales at ArcelorMittal's Dofasco mill in Canada, said big steel companies would welcome more transparency. "We're for what's most accurately reflecting the price in the market," he said.

      Michael Steubing, vice president of global procurement for Mauser USA LLC, which makes steel drums and barrels, said an audited index would help guarantee that he can sell his product at a competitive price. He sells barrels to big chemical companies that use CRU to help determine how much they will pay for the barrels. "So we'd like that (CRU) to be as accurate as possible," he said.

      CRU, which is used by the Chicago Mercantile Exchange and says its prices are used to settle steel contracts with an annual global value of over $20 billion, faces more competition from Platts, a division of McGraw Hill Financial Inc., MHFI +0.97% which two years ago bought price compiler The Steel Index.

      Joe Innace, Platts's editorial director for metals, said Platts would continue its phone survey for its Platts industry newsletter independently of The Steel Index and wouldn't use audits because he said it has enough verifications, such as checking that prices match the types and volumes of steel appropriate to the index, in place.

      Steve Randall, who founded The Steel Index in 2006, said it had no plans to audit data providers. "We run all our data through a series of screenings," he said. He declined to provide details about the screening procedure.

      Continued in article

      "Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:   The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There's no price the big banks can't fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
      http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

      Bob Jensen's LIBOR fraud threads ---
      http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

      Bob Jensen's threads on LIBOR are under the C-terms at
      http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

      Bob Jensen's threads on LIBOR and other derivative financial instruments frauds (timeline) ---
      http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
      This is so huge it's better to do a word search for LIBOR

       

    • Robert E Jensen

      "Who's Manipulating Derivative Indexes and Why:  How to think about the Libor scandal and its astonishingly proliferating offspring," by Holman W. Jenkins Jr., The Wall Street Journal, June 21, 2013 ---
      http://online.wsj.com/article/SB10001424127887323893504578559282047415410.html?mod=djemEditorialPage_h

      Is Ewan McGregor, who played Nick Leeson in the movie about the Barings bank bust, available for a sequel? He would find an oddly similar character in Tom Hayes, the former UBS UBSN.VX -1.93% and Citibank employee charged in this week's latest financial scandal of the century.

      Let's try to sort it out. As with Libor, or the London interbank offered rate, a benchmark for loans world-wide, allegations are floating that traders manipulated other widely used benchmarks. Three big banks—Barclays, BARC.LN -2.26% UBS and Royal Bank of Scotland RBS.LN -7.24% —have already paid $2.5 billion in fines and penalties in the Libor caper. Now the focus has turned to suspected manipulation of fuel-market indexes, loan-market indexes in Japan and Singapore, and indexes used in pricing interest-rate swaps.

      Said Europe's Competition Commissioner Joaquin Almunia last month: "Huge damages for consumers and users would have been originated by this."

      Well, maybe. A basic schematic would go like this: Some enterprising soul decides it would be useful to publish a daily price benchmark by surveying market participants about certain transactions that don't take place on a central exchange. Somebody else decides it would be useful to create tradable derivatives whose price would vary based on changes in these benchmarks—that is, would let participants bet on how a survey of themselves in the future will come out.

      Libor involved questioning bank traders about the pricing of loans—and Libor derivatives let these same traders bet on the answers they would give in the future. The invitation here now seems rather obvious. Mr. Hayes, a baby-faced yen-derivatives trader in Tokyo at the time, is charged with orchestrating attempts to rig a similar Tokyo-based benchmark called Tibor.

      All this proves one thing: Financial professionals can't be counted on to do the right thing when self-interest beckons so we must turn power over to government officials who always do the right thing regardless of self-interest.

      Or maybe not. The Libor scandal broke only because London banks, in cahoots with regulators, put out transparently fake reports about their borrowing costs during the 2008 panic. That led to the discovery of a long history of everyday manipulation of their Libor borrowing costs. Traders now fessing up say they learned the practice from their predecessors who learned it from their predecessors, and so on.

      As they drain this swamp, investigators like to allege enormous damage to the public by multiplying small discrepancies by the number of transactions in the market. Treat these claims with skepticism. Whatever the extent of mispricing in downstream transactions, it is a smidgeon compared to the rake-off brokers used to earn in pre-electronic days. It is a smidgeon compared to the margins that middlemen could extract before published surveys were available to shed light on transactions previously invisible to most market participants.

      It is also a smidgeon compared to the margins that would have to be built into prices if not for Libor hedges and other risk-sharing inventions.

      A kick in the pants has been delivered to publishers of price indexes. They need to make their products more manipulation-proof. Where markets are thin and surveys are the only way to glean market intelligence, publishers already exercise a visible hand to expel questionable or anomalous data. A further solution might be to poll a larger number of traders and randomly exclude most of their answers so no trader would have any certainty of influencing the index.

      To understand why such opportunities exist in the first place is to understand something about a generic condition of our world, in which technology has drastically reduced transaction costs and cheap money has vastly increased leverage available even to low-ranking bank employees, magnifying the return to small bits of illicit or licit information, including insider information.

      Continued in article

      Bigger than Enron and Rotten to the Core:  The LIBOR Scandal
      Bob Jensen's threads on the LIBOR Scandal ---
      http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

    • Robert E Jensen

      "Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:   The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There's no price the big banks can't fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
      http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

      "NYSE Euronext to Take Over Libor British Authorities Started Looking for New Owner Last Year," by David Enrich, Jacob Bunge, and Cassell Brian-Lo, The Wall Street Journal, July 10, 2013 ---
      http://online.wsj.com/article/SB10001424127887324507404578595243333548714.html?mod=djemCFO_h

      Libor, the scandal-tarred benchmark owned by a British banking organization, is being sold to NYSE Euronext, NYX -0.61% the U.S. company that runs the New York Stock Exchange. The deal is the British government's latest attempt to salvage Libor's integrity, after multiple banks acknowledged trying to profit by rigging the rate.

      While Libor underpins trillions of dollars in financial contracts and generates about £2 million a year in revenue, a person familiar with the deal said the benchmark rate was sold to NYSE for a token £1—a sign of the heavy toll inflicted by the rate-rigging scandal.

      Libor: What You Need to Know

      What it is: Libor—the London interbank offered rate benchmark—is supposed to measure the interest rates at which banks borrow from one another. It is based on data reported daily by banks. Other interest rate indexes, like the Euribor (euro interbank offered rate) and the Tibor (Tokyo interbank offered rate), function in a similar way.

      Why it's important: More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans, including auto and home loans, according to the Commodity Futures Trading Commission. Even small movements—or inaccuracies—in the Libor affect investment returns and borrowing costs, for individuals, companies and professional investors.

      MoneyBeat

      The deal means that the City of London will lose one of the institutions most closely associated with its rise as a global financial hub in recent decades. The new owner will be the institution that is most closely associated with Wall Street.

      For NYSE, the deal is part of a recent effort by exchanges to take over benchmarks like Libor in the hopes of converting them into new business opportunities in the derivatives markets. NYSE itself is in the process of being acquired by IntercontinentalExchange Inc., ICE -1.14% an Atlanta-based company that is one of the world's largest operators of derivatives exchanges. Libor and similar benchmarks are components of interest-rate derivatives that are heavily traded on exchanges in the U.S. and Europe.

      British authorities last year started looking for a new owner for Libor, after concluding that the British Bankers' Association shouldn't be responsible for administering a key benchmark. After a competitive bidding process, a government-appointed commission picked NYSE, which will formally take over Libor early in 2014.

      Sarah Hogg, who headed the U.K. commission that ran the Libor sale process, said Tuesday that handing the benchmark to NYSE "will play a vital role in restoring the international credibility of Libor." While Libor's new parent company will be American, the rate will be administered by a British subsidiary that will be regulated by the U.K.'s Financial Conduct Authority.

      The deal immediately encountered criticism. It is "far from ideal," said Bart Chilton, one of the commissioners who runs U.S. regulator the Commodity Futures Trading Commission. "Whenever there's a profit motive involved in setting [these benchmarks], I get suspicious."

      Mr. Chilton, who added he would have preferred a "neutral third party" to take over Libor, said it would be misleading to suggest the deal would resolve all the problems that have bedeviled Libor. "I'm not swallowing that."

      Some British officials decried the loss of an important institution to a rival financial center. Following the Libor sale, "the French and the Germans will be rubbing their hands with glee at the prospect of stealing other financial markets from the U.K.," said John Mann, a Labour Party lawmaker.

      The BBA launched Libor in the 1980s as a way for banks to set interest rates on syndicated corporate loans. The rate is based on daily estimates by banks about how much it would cost them to borrow from other banks. Libor eventually morphed into a ubiquitous cog in the financial system, and today serves as the basis for rates on everything from residential mortgages to derivatives.

      Doubts about Libor's reliability surfaced in 2008 after a series of Wall Street Journal articles highlighted apparent problems with the rate. But governments and central banks balked at regulating Libor, and the BBA failed to stop banks from continuing to skew the rate. Only last summer, after Barclays BARC.LN +0.31% PLC admitted trying to rig Libor, did British authorities launch a process to overhaul the benchmark.

      Part of that process involved finding a new home for Libor. In addition, following a U.K. regulatory panel's recommendation, the BBA earlier this year phased out certain variations of Libor that were especially vulnerable to manipulation. Also, the British government recently made it a crime to rig Libor.

      Martin Wheatley, head of the Financial Conduct Authority, said he expects NYSE "to develop further the oversight and governance of Libor." The chief executive of the NYSE Liffe derivatives exchange, Finbarr Hutcheson, said the company would continue "the process of restoring credibility, trust and integrity in Libor as a key global benchmark."

      At least initially, NYSE is expected to continue the current process for calculating Libor, according to a U.K. Treasury official. That will be supplemented by cross-checking those submissions against market transactions, the official said.

      The new owner plans to work with market participants and regulators to "evolve how Libor is calculated" to bring it in line with recommendations last year from another U.K. commission, the official said.

      Among other bidders for Libor were Thomson Reuters, which currently compiles Libor every day on the BBA's behalf, and Markit, a data provider specializing in derivatives, said people briefed on the process.

      NYSE plans to continue licensing Libor to other parties for use in financial products, according to a person familiar with the deal. The benchmark is expected to keep its current name.

      Analysts said the deal will give NYSE bragging rights as owner of a benchmark that is central to the market for a variety of derivatives. Exchanges in recent years have gravitated toward derivatives trading because the markets bring higher fees than trading in stocks.

      But NYSE could face years of regulatory, legal and political scrutiny as it tries to repair Libor's battered reputation.

      Continued in article

      Bigger Than Enron:  Bob Jensen's Threads on the LIBOR Scandal ---
      http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

      Search for LIBOR

    • Robert E Jensen

      "The Best Way to Reform Libor: Scrap It:  The market, and not a single private entity, should determine this crucial interest-rate benchmark," by Richard S. Grossman, The Wall Street Journal, July 24, 2013 ---
      http://online.wsj.com/article/SB10001424127887324348504578606041056905794.html?mod=djemEditorialPage_h

      The British have learned nothing from the recent Libor scandal. One year after the news broke that banks were manipulating this vitally important interest rate, an independent committee appointed by the government has decided to hand over responsibility for Libor to NYSE Euronext . This is madness.

      The London interbank offered rate, which is calculated by averaging banks' self-reported estimated cost of borrowing funds from other banks, plays a crucial role in the world financial system. It serves as a benchmark for some $800 trillion in transactions—everything from complex derivatives transactions to relatively simple adjustable-rate home mortgages.

      Because so much money is riding on Libor, banks have an incentive to alter submissions—up or down, depending on the situation—to improve their bottom lines. Many in the financial community had long known about Libor manipulation. As early as 2008, then-president of the Federal Reserve Bank of New York Timothy Geithner warned the Bank of England that Libor's credibility needed to be enhanced. E-mails between bankers that have come to light since the scandal broke almost a year ago prove conclusively that cheating was commonplace.

      And yet, knowing of Libor's troubled past and its potential to be tampered with, British authorities earlier this month granted a contract to run the index to NYSE Euronext, a company that owns the New York Stock Exchange, the London International Financial Futures and Options Exchange, and a number of other stock, bond, and derivatives exchanges. NYSE Euronext is scheduled to be taken over by IntercontinentalExchange, a firm which owns even more derivatives markets.

      In other words, the company that will be responsible for making sure that Libor is set responsibly and fairly will be in a position to profit like no one else from even the slightest movements in Libor.

      British authorities have searched for ways to rescue Libor, perhaps in a bid to maintain London's prestige as a financial center. Last autumn, Martin Wheatley, a British financial regulator, issued a report suggesting a number of reforms to how Libor is set. He suggested some sensible reforms, including reducing the number of rates and currencies represented, and increasing the number of firms contributing to the index. But these were the equivalent of hunting big game with a water pistol.

      NYSE Euronext is, of course, confident in its ability to clean up the mess. Its press release following the announcement trumpeted the firm as "uniquely placed to restore the international credibility of Libor." The company argues that it "will be able to leverage NYSE Euronext's trusted brand, long regulatory experience and market-leading technical ability to return confidence to the administration of Libor."

      That's all well and good, but coming just five years after the eruption of the worst crisis in the financial system since the Great Depression, there is a much better way to fix Libor: Scrap it.

      The British government should announce that, six months from today, Libor will cease to exist. The British Bankers' Association, which technically owns the interest-rate index, has been so wounded by the scandal that it has been willing to follow the government's lead and will no doubt agree.

      And how will markets react? The way they always do. They will adapt.

      Financial firms will have six months to devise alternative benchmarks for their floating rate products. Given the low repute in which Libor—and the people responsible for it—are held, it would be logical for one or more market-determined rates to take the place of Libor.

      A number of alternative benchmarks exist or could be easily created. One often mentioned candidate is the GCF Repo index published by the Depository Trust & Clearing Corp. This index is based on actual repurchase agreement transactions, and is thus a better indicator of the cost of funds than banks' internal estimates—even if those estimates were unbiased. Another option might be some newly constructed index based on credit-default swaps transactions, corporate bonds and commercial paper. Either of these alternatives would remove the possibility of cheating by making the benchmark dependent on observable, market-determined rates, rather than the "estimates" of a dozen or so bankers.

      For already existing contracts that rely on Libor, the British Bankers' Association should define some market-determined rate, in consultation with the government, as the official successor to Libor starting six months from now.

      Most people still put their faith—rightly, in my view—in market-based economies, believing that they are more likely to deliver a higher standard of living than any other economic system that the world has ever known. Politicians need to be aware that the public's faith in—and patience with—the market has its limits.

      The incentive to game an benchmark rate such as Libor is just too high to risk putting it in the hands of a single private entity, however committed that entity may be to restoring its credibility. Replacing Libor with a transparent, fair, market-based alternative is the only sensible solution.

      Mr. Grossman is professor of economics at Wesleyan University in Connecticut and a visiting scholar at Harvard. His book, "WRONG: Nine Economic Policy Disasters and What We Can Learn from Them," will be published by Oxford University press in November.

       

      Who's Manipulating Derivative Indexes and Why:  How to think about the Libor scandal and its astonishingly proliferating offspring," by Holman W. Jenkins Jr., The Wall Street Journal, June 21, 2013 ---
      http://online.wsj.com/article/SB10001424127887323893504578559282047415410.html?mod=djemEditorialPage_h

      Is Ewan McGregor, who played Nick Leeson in the movie about the Barings bank bust, available for a sequel? He would find an oddly similar character in Tom Hayes, the former UBS UBSN.VX -1.93% and Citibank employee charged in this week's latest financial scandal of the century.

      Let's try to sort it out. As with Libor, or the London interbank offered rate, a benchmark for loans world-wide, allegations are floating that traders manipulated other widely used benchmarks. Three big banks—Barclays, BARC.LN -2.26% UBS and Royal Bank of Scotland RBS.LN -7.24% —have already paid $2.5 billion in fines and penalties in the Libor caper. Now the focus has turned to suspected manipulation of fuel-market indexes, loan-market indexes in Japan and Singapore, and indexes used in pricing interest-rate swaps.

      Said Europe's Competition Commissioner Joaquin Almunia last month: "Huge damages for consumers and users would have been originated by this."

      Well, maybe. A basic schematic would go like this: Some enterprising soul decides it would be useful to publish a daily price benchmark by surveying market participants about certain transactions that don't take place on a central exchange. Somebody else decides it would be useful to create tradable derivatives whose price would vary based on changes in these benchmarks—that is, would let participants bet on how a survey of themselves in the future will come out.

      Libor involved questioning bank traders about the pricing of loans—and Libor derivatives let these same traders bet on the answers they would give in the future. The invitation here now seems rather obvious. Mr. Hayes, a baby-faced yen-derivatives trader in Tokyo at the time, is charged with orchestrating attempts to rig a similar Tokyo-based benchmark called Tibor.

      All this proves one thing: Financial professionals can't be counted on to do the right thing when self-interest beckons so we must turn power over to government officials who always do the right thing regardless of self-interest.

      Or maybe not. The Libor scandal broke only because London banks, in cahoots with regulators, put out transparently fake reports about their borrowing costs during the 2008 panic. That led to the discovery of a long history of everyday manipulation of their Libor borrowing costs. Traders now fessing up say they learned the practice from their predecessors who learned it from their predecessors, and so on.

      As they drain this swamp, investigators like to allege enormous damage to the public by multiplying small discrepancies by the number of transactions in the market. Treat these claims with skepticism. Whatever the extent of mispricing in downstream transactions, it is a smidgeon compared to the rake-off brokers used to earn in pre-electronic days. It is a smidgeon compared to the margins that middlemen could extract before published surveys were available to shed light on transactions previously invisible to most market participants.

      It is also a smidgeon compared to the margins that would have to be built into prices if not for Libor hedges and other risk-sharing inventions.

      A kick in the pants has been delivered to publishers of price indexes. They need to make their products more manipulation-proof. Where markets are thin and surveys are the only way to glean market intelligence, publishers already exercise a visible hand to expel questionable or anomalous data. A further solution might be to poll a larger number of traders and randomly exclude most of their answers so no trader would have any certainty of influencing the index.

      To understand why such opportunities exist in the first place is to understand something about a generic condition of our world, in which technology has drastically reduced transaction costs and cheap money has vastly increased leverage available even to low-ranking bank employees, magnifying the return to small bits of illicit or licit information, including insider information.

      Continued in article

      Bigger than Enron and Rotten to the Core:  The LIBOR Scandal
      Bob Jensen's threads on the LIBOR Scandal ---
      http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

       

    • Robert E Jensen

      "UK Banks To Pay Out 1.3 Billion In Massive Credit Card Compensation (for fraudulent ID theft insurance policies)," by Rupert Jones, Business Insider, August 22, 2013 ---
      http://www.businessinsider.com/uk-banks-to-pay-out-13-billion-in-massive-credit-card-compensation-2013-8

      Jensen Comment
      The pay outs are coming from the usual U.K. organized crime banks --- Barclays, HSBC and Royal Bank of Scotland. These are the same banks paying out billions because of LIBOR fraud conspiracies.

      Bob Jensen's Fraud Updates ---
      http://www.trinity.edu/rjensen/FraudUpdates.htm

    • Robert E Jensen

      LIBOR --- http://en.wikipedia.org/wiki/Libor

      "Dutch Rabobank fined $1 billion over Libor scandal, by Sara Web, Reuters, October 29, 2013 ---
      http://www.reuters.com/article/2013/10/29/us-rabobank-libor-idUSBRE99S0L520131029

      Bob Jensen's Fraud Updates ---
      http://www.trinity.edu/rjensen/FraudUpdates.htm

    • Robert E Jensen

      "Barclays Manipulated Gold as Soon as It Stopped Manipulating Libor," by Matt Levine, Bloomberg View, May 23, 2014 ---
      http://www.bloombergview.com/articles/2014-05-23/barclays-manipulated-gold-as-soon-as-it-stopped-manipulating-libor

      Libor Fraud (bigger than Enron) ---
      http://en.wikipedia.org/wiki/Libor

      Jensen Comment
      The London banks may be the most fraudulent of the global banks (with the exception of enabling global tax evasion in Swiss, Cayman Island, and Luxemburg banks).

      Bob Jensen's Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

    • Robert E Jensen

      LIBOR Reliability and Scandal --- https://en.wikipedia.org/wiki/Libor

      From the CFO Journal's Morning Ledger on July 8, 2015

      No fix for Libor: benchmark still broken, regulators say
      http://www.wsj.com/articles/libor-reform-has-not-gone-far-enough-says-regulator-1436195584?mod=djemCFO_h
      A top U.K. regulator says efforts to overhaul the London interbank offered rate, or Libor, haven't gone nearly far enough. The U.S. Federal Reserve says Libor is no longer fit to serve as the market’s main benchmark. And Intercontinental Exchange Inc.,  which is in charge of reforming Libor, says it is struggling to get enough support from the industry to make the benchmark better.

      Jensen Comment
      This is an enormous problem for hedge accounting, especially when implementing FAS 138
      Illustrations in Bob Jensen's Tutorials --- http://www.cs.trinity.edu/~rjensen/138EXAMPLES.htm