Libor changes the world

  By Mystic | July 1, 2012 - 02:05 |

I use the old `flowing river` analogy for the world flowing in time.
When sitting on a hypothetical rock, looking down the river, into the future; some things look `right` and some look `too odd to be right`.

This `libor thing` could be a very big happening `mid-stream`, that could alter the look of the entire river.

Already it was hard to imagine how the banks could look in the future. No scenario looked `right`.
The libor scandal could be the flow altering thing, that makes some of the `wrong` scenarios start to look possible.

Basically, the world banking (especially European) system was another of those `impossible problems`.
The libor scandal could force Policy Makers to `do something` about them.

Normally, `Policy Makers` are politicians; but politicians favored way of dealing with problems (throwing money at it), may well not be possible as the media play the libor scandal to tax-payers who already lean towards blaming banksters for many of their problems.
So, what can the politicians do, without being able to cover things with tax-payer money~?

The answer may have poked its head out at the end of last week, when Euro pols talked of giving banking supervision over to the ECB.

The libor scandal will hit most all of the major banks of the world. They will be fined billions, sued for billions more and have to lose most of their top people. This is going to be a mega-shake-up.
The banking world may change completely~!

If central banks are going to be handed the baby, they are going to see to it that the baby is baby sized (not Godzilla monster sized). They would separate off the obvious gamblers and make things as boring as possible.

I can see all this in the water. It is possible and looks right.
The thing that bothers me, is that I have to then over-lay (factor in) the rest of the problems (general over-indebtedness) and still have a picture that looks `right`.

That is proving to be a bit tricky.
Any ideas~?!

Written by: Mystic on July 1, 2012.
Tagged . Bookmark the permalink.
  • snedmeister1

    Morning Nick…!! :)

    I’m not sure handing supervision over to the ECB would be `big` enough..???

    After all, Barclays was involved in the UK Libor scandal, how could they also be under supervision by the ECB..???

    I suspect if the ECB held this power, the banks would shift to `Bank friendly` places that didn’t `supervise` as much….

    If we are talking about all central banks supervising their own nations banks, another problem arises, where by there would be an incentive for central banks to reduce `supervision`, to get more banks basing themselves in a given country…??? ( maybe ).

    Probably London and New York, places where they want to encourage growth in that sector…!!??
    Ireland had low business taxes ( if I remember rightly ) to encourage companies to set up `camp` there…

    • http://overthepeak.com/wordpress/ Mystic

       Yes, yes ….. the ECB thing was only an example.
      Banks are `nothing` without a central bank to back them up.  They will need big central banks, for the big back up~!

      I am not saying it is even possible, but if the pols get a whiff that they could be rid of backing the banks, they would take it in a shot.  The only thing would be the balance between the egos of the central bankers and their common sense.

      It is a big mess~!
      But, when it comes down to it – Defaults fall on banks.  Banks fall on Sovereigns and the Sovereigns fall on the central banks ……… I can see them trying to cut out the Sovereign stage.
      (everyone believing that the cb will come up with oodles of fresh air bailout loot~!)

      • snedmeister1

        It reminds me of the phrase “Hot potato”…..

        You could well be right, there is nothing more a politician would want to do, is point his/her finger at someone and appoint blame, when it all goes wrong….

        I see what you are saying, at the moment the potato is in the hands of the Politicians…..
        They will want to pass it on….??!! 

        If it works, they will say “Look what we did, aren’t we super..??”
        If it fails, they will say “Look what you did, you can’t be trusted…!!”

        And as you say, if push comes to shove, I think the central banks may well come up with fresh air bailout loot…!!??
        How that would work in the Eurozone though, I am not sure… Perhaps the ECB would have to do it…???

        Without growth, we can see this has two outcomes….
        Deflation on a big scale, or someone comes up with some `new` money, I suppose….???

        • http://overthepeak.com/wordpress/ Mystic

           I’ll just throw in one extra complication – They want to cut the Banks falling on Sovereign line ………. but, the line runs two ways. …. The Sovereigns (especially in Europe) rely on the banks to buy their debt.  (this has been the yin/yang way of things for centuries)……To break the line one way, maybe to break the line both ways.

          Anyway, the picture is changing fast. 
          (and yes, there is always the `growth` problem growling away in the background~!)

          • snedmeister1

            Hmmm, yes, the two way street….

            I have to admit, that one didn’t cross my mind…
            The only way around that, is to force them, or amalgamate into one ( state and CB )…

            And that kind of defeats the purpose of an independent CB..!!!??
            ( If there is such a thing today ( the boundaries are so grey now ))

            Oh what a tangled web we weave, eh..?? 

            • http://overthepeak.com/wordpress/ Mystic

               I guess this is what happens when you have a hot pile of poo to play with~!?

  • CSArichardo
  • CSArichardo

    AS indicated in the article below Libor should be set by actual the rates from transactions.

    “The Libor rate is under the direction of the British Bankers Association (BBA) but they subcontract to Thompson Reuters the actual process of fixing the rate. This is done by 16 large banks submitting the lending rate they think would apply of they needed to borrow a olarge capital sum at short notice. Of the 16 estimates, the lowest and highest four are scrapped and an average of the remaining eight is used to set the Libor rate that is used to govern an astonishing £353 trillion worth of financial transactions, many of which impact on ordinary households across the globe through mortgage, credit card and loan rates.

    The process of setting the Libor rate has always been a private practice, but the BBA as well as many economist and financial commentators now believe the government needs to take control and work out a more transparent and prudent way of managing it. The BBA has said that the rate should be set based on actual transactions to limit the possible manipulation. The Governor of the Bnak of England, Sir Mervyn King said: “We will make sure that this system that was rigged in favour of at least one institution and possibly others will be changed. We will end up with a new regime based on actual transactions.”

    http://www.myfinances.co.uk/savings/2012/07/01/government-launch-libor-rate-review-after-barclays-scandal

    • http://overthepeak.com/wordpress/ Mystic

       Look……a mayfly on the water there~!

      • CSArichardo

        The Mayfly died a few days (maybe hours) after it was born.  You probably see the carcass on the water !

  • CSArichardo

    A comment by Ganesh from 2009

    Fed Funds is the U.S. rate established by the Federal Reserve for banks to lend to other banks with U.S. operations. It is an artificial rate set by the Fed. LIBOR is the rate at which the world’s banks lend and borrow dollars outside of the U.S. to each other. It is essentially market-based as it is set by about 16 large institutions LIBOR is a couple of basis points higher than Fed Funds because there is huge demand for cash in dollars by the world’s banks.
     LIBOR will trade somewhat higher than Fed Funds due to a higher risk premium normally demanded by dollar holders to deposit outside the U.S. The current wide spread is due to the fact that all banks worldwide need cash in dollars to service debt (there is not enough low risk collateral left for banks to accept to lend dollars).
     U.S. banks are getting liquidity at lower rates or through the discount window because the Fed is stepping in and allowing risky collateral to be accepted for the credit U.S. banks need right now

    http://www.linkedin.com/answers/financial-markets/bond-markets/MKT_BON/503517-1707772

  • StephenSimpson

    I began thinking, what if the central banks issued debt-free “hot
    potato money” to bail out the banks. With this money, the holder has to pay a
    certain amount each month to keep it valid. I think there was a local currency
    version of this in Germany in the early thirties.

    I imagined banks feverishly collecting the “hot potato money” to
    right off their losses. Then I imagined investors looking for long-term
    projects to spend their hot potato money, rather than pay the central banks to
    keep it valid. When I tried to consider how this might be implemented I got a
    headache.

    SS

    • http://overthepeak.com/wordpress/ Mystic

       I don’t see anything enough `reality based` here to be worth getting a headache over.

  • Dumber

    Why would banks need to borrow or lend from other banks?

    • http://overthepeak.com/wordpress/ Mystic

       That is a good question.
      I don’t have a good answer (I have been looking for that answer for a long time now).

      I am not sure on how much banks mix the money up on both sides of their balance sheet.
      That is to say – They get `money in` (liabilities) via deposits and borrowing.
      Balance sheets must balance, so there is a corresponding entry on the (asset) side.

      They then grow the asset side by lending or buying assets.
      Here we bump into the famous `fresh air money loans` (boosting both asset and liability side).
      They can make loans from deposits.
      They can make loans from borrowed money (from other banks for instance) if the rate is low enough to `make the spread` between borrowing cost and the loan rate.
      They can buy assets with any of the above with the same criteria.

      All in all …….. they don’t `need` to borrow and lend from/to other banks, but have done so, on enormous scale, in the past; because it was profitable to do so. 

    • windman3

      Mostly in order to cover short term, usually over a day to a week or so, liquidity requirements.
      Banks operate using maturity transformation, where the banks take in short term funds, such as demand accounts and savings, and lend out long term. The loans are on the asset side of the balance sheet and the customers cash deposits are on the liability side. Being a balance sheet it has to balance.

      This can give rise to balance sheet issues if, for example, savers decide to withdraw their money, leaving the bank short of funding. This shortage can be covered by borrowing from the money market (MM) or the central bank, which will currently supply endless reams of moneys overnight at zero percent. When the MM dried up, we had the liquidity crisis, as the banks that relied on MM funding, for example that bunch of bastards at Northern Rock, could no longer borrow from the MM.

      If the bank cannot borrow the money, then it would have to start flogging off assets, such as its loan book. 

      This could depress the price of the assets and create another issue of imbalance if the assets were marked to the market price. (That’s why assets are currently market to “fantasy”, to prevent the balance sheets looking bad or have been repo’ed onto the books of the central banks).

      —

      If the banking system was a perfect closed loop, then the loans created on the asset side would be covered by the deposits created on the liability side. With multiple banks in the system, there will always be banks with either too much cash or banks with too little. Banks with too much liquidity will then lend it out short term via the MM to those who need a bit of cash.

      —

      • CSArichardo

        I think it also has something to do with maintaining a reserve requirement.  Because banks continuously create loans they need to have sufficient reserves a few days later and this can be made up with borrowing the cash from each other as opposed to first having depositors before they can lend a fraction of it out.

        • windman3

          There is a lot of confusion about “Bank’s reserves”.

          You really have to define what “reserves” you are talking about.

          I am not sure what “reserves” you are addressing here.

          When a bank creates a loan it needs to fund that loan either from deposits or the Money Market or the Central Bank. This is done after the event of making the loan.

          If there was just a single bank in the whole system, then by creating a loan and bunging the cash into a customer’s deposit account, essentially the funds for the loan have been created from the debt. So there is no problem in funding the loan.

          This gives rise to the “money from nothing” and the “debt based economy” stuff we see bantered around.

          There is through the Basel II and III agreements a “Capital Reserve Requirement” on banks to have a certain amount of reserves against the loan books. But I don’t think these are the “reserves” you were mentioning, which sound more like “funds”.

    • snedmeister1

      Evening D,

      In a couple of lines, it is because they issue credit first, and then have to ensure a reserve requirement afterward.

      If Bank A issues credit to enough people, and those people deposit it in bank B, then Bank A may need to borrow the excess reserves held by the bank B, to meet its reserve requirements….

      Why Banks issue credit though, as apposed to just lending out their reserves to everyone, I do not know for sure…. It is probably  because it is/ was the most profitable method….

      ie, issue credit, expand the balance sheet, and do other `things` with the excess reserves….
      Like buy Bonds…!!!
      ( As apposed to just lend out what they have, and just make on the interest due from loans )

  • windman3

    BIS report

    http://www.bis.org/publ/arpdf/ar2012e5.pdf Page 62″Another is for governments to be especially prudent in good times, building appropriate fiscal buffers, to be able to provide support for the financial system if needed without denting their creditworthiness (see the previous section)”

    For a government to build fiscal buffers it surely means that the tax payer will be stumping up more cash than necessary, ie the country runs a surplus budget. I can’t see this ever happening. Governments just don’t do that sort of thing, except for massive net-exporters where a sovereign wealth fund is built up.

    The ongoing and future liabilities in the UK, Europe and the US are simply not going to be dealt with except by deficit budgets and more QE, in whatever form it takes.

    And I find it immensely cheeky of the Big Boy of Banking to tell the governments that they need to build up ‘fiscal buffers’ from tax payers’ cash ready for the next round of bailouts. The bloody banks should build up their own fiscal buffers and not expect bailouts because all of the buffers have gone in bonuses and gambling.

    • http://overthepeak.com/wordpress/ Mystic

       Yes indeed …….. you tell ‘em Windy. 
      Really jolly cheeky of the BIS~!

  • windman3

    To the manipulation of LIBORhttp://www.economicpopulist.org/content/leapin-libor-banks-busted-manipulating-interbank-interest-rates I don’t quite follow why only the period 2006 to 2009 is covered. Did the bastards lie during this period only, or is it maybe the only period investigated? Have they stopped yet?And how about clawing back all the profits and bonuses made during this period? I wonder just what percentage of the profits claimed were simply eithera. skimming customers’ accounts through chargesb. fraudulent market manipulationc. lies and cheatingAh, twas once a time where the Bankers were considered respectable Pillars of Society able to sign passport applications. Now they are all frauds, cheats and salesmen flogging bogus products.—Next year Merv takes over responsibility for the regulation of the UK banks. I hope that his recent refreshing attitude to honesty, “We don’t friggin know”, will continue.Over the LIBOR mess he has already come out with some ideas about the calculation. For example it should be based on actual transactions and not what the bankers think is best for them to report.I will be very annoyed if the UK banks come along and ask for more bailouts…http://uk.reuters.com/article/2012/06/29/uk-banks-cash-buffers-idUKBRE85S0GV20120629 500 billion in short term liquid deposits indeed.

    • http://overthepeak.com/wordpress/ Mystic

       In real reality, I doubt the banks made more than pin-money out of the Libor thing, but that will make no difference ………… they made something out of it ………… and are going to get kicked to death for it.

      • windman3

        We’ll never know how much they made, but all depositors lost money, due to the suppression of interest rates. And investors lost money as the true costs of the banks’ borrowing was not correctly reported.
        http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9368430/Libor-scandal-How-I-manipulated-the-bank-borrowing-rate.html 

        They lied and have lost more faith.

        There is a shed load of transactions involved.

        http://www.ft.com/intl/cms/s/0/801848ea-c40a-11e1-9c1e-00144feabdc0.html#axzz1zSoMkot9 

        “Barclays said that this conversation had been “mistakenly” interpreted by managers as permission to submit artificially low estimates to Libor, which is the reference point for $360tn in contracts worldwide. ”

        And on the same subject of fixing, why do we still have the Gold Fix? Surely the spot price is enough?

        http://www.goldfixing.com/ 

        And guess who is there, “fixing” the gold price. Yep, our proud “Price fixer of the day” Barclays.

        • http://overthepeak.com/wordpress/ Mystic

           I can only repeat ……….. `they are going to get killed for this~!`

        • http://www.alda-architects.co.uk/ Alan

           It would be instructive to know the magnitude of gain. A small percentage on large sums, over a sustained period, can add up.

          In relation to financial fraud generally, do the fines actually punish in any real sense? It may be a bit like a bank robber, who filched 10 million in swag, being fined 1 million. Unless you know the magnitude of the gain how do you start placing the penalty?

          As Mystic has said they have crossed the Rubicon on this, the tone of debate has changed.

  • Emmazedbend

    Isn’t it true that the reason the banks are in this mess is that over the past 40 years real wealth has not been forth coming (Peak Oil in USA 1970, the steady decline of manufacturing in the West) so they (bankers) all ‘had’ to start gambling essentially to make a living? LIBOR is just one incident in a long line of scandals (see anything by Matt Taibbi/Michael Hudosn for details)?.

    • windman3

      Libraries have been written over this.

      If I could put it in one sentence, I would say that it is the arrogance of the bankers uncoupled from the constraint of the gold standard and the subsequent relaxation and removal of regulations, for example the Glass-Steagall act, with the certain knowledge that governments would step in and socialise any losses, whilst they could privatise all the profits.

    • http://overthepeak.com/wordpress/ Mystic

       Banking is gambling. 
      They ran short of `easy bets`, so had to make more speculative bets (and create some rigged games).

  • http://www.alda-architects.co.uk/ Alan

    To establish some basic trust all markets need regulation, and to set standards which are effectively enforced. It is not necessarily negative. A country that introduced effective regulation could attract inward investment and trade. It may lose the dodgy second had car dealers and similar spivs, but is that necessarily a disadvantage? Well I suppose if it is 11% of your economy it is a bit of a hit, but is it really if much of the activity is parasitic?

    How do we effectively regulate banks? If a group of countries decide to introduce a major overhaul could the Banks simply move elsewhere given the interrelationship between them, governments and central banks?

    Governments could fall on Banks, and their assets if they had a reason to do so, and the will. Apart from that just how mobile are Banks if a number of countries decide to take action against them and block their trades if they don’t comply? Can they afford to ignore large markets?

    What would the consequences for the countries be? How long would it take for compliant Banks to grow and fill the gap?

    Politically it is advantageous to look tough on Banks, but it has gone beyond mere political posturing. IMO the balance of power rests with Governments, and if I were in Banking I would be making all sorts of moves to appear responsive.

    Over indebtedness, means it cannot be repaid. That is the reality. Governments owe most so they will do what they have always done. Consequences should be higher inflation (eventually) and weaker currency, but everyone seems to want to seek trading advantage by manipulate their currency.

    I can never get my mind round the role of interest and how it drives the need for expansion. Is interest a problem in a finite world? If you can’t expand to pay do you then have to inflate and depreciate to do so?

  • sean

    i have been wondering why TPTB have chosen to investigate libor now, when (see below link)
    http://www.ritholtz.com/blog/2012/07/have-banks-been-manipulating-libor-for-decades/
    this reminds me of slightly reminds me of the B Madoff , the regulators were aware of him for years, the only chose to act as what seem like to use him as a scape goat for the 2008 credit crises.