Friday Fun : Send lawyers, guns & money !!
The start of the silly season, always the perfect time for scandals and conspiracy theories of all kinds. And this year we got a great treat from the financial sector with Morgan Stanley bribing Moody’s to obtain a perfect AAA score on a pile of dodgy mortgages sized 23 bio USD. But closer to home, we have now the unraveling of li(e)bor-gate : big time manipulation - so the story goes - of a vital instrument being the London interbank market rate, a key market instrument for pricing numerous financial products(derivatives, swaps, short term money market funding etc). And so far, the blog sphere has been rather modest about this, something in the style of “what’s new, a big yawn and let’s carry on”. Well, not entirely and it reminds me a bit of the Catelina conspiracy case in ancient Rome, involving Cicero, Cato the younger and Julius Caesar.
On the one hand we have the Julius Caesar approach, he himself implicated in the Catelina conspiracy and defending or downsizing the seriousness of the coup d’état attempt in the senate. And it resembles a bit to what the lawyer approach would be in case of for example defending war criminals: “Your honour, when we look at all the crimes at stake, we should sentence the accused with 200 times life or 50 times death sentence. That makes no sense, let’s just restrict ourselves with 25 years imprisonment”. Now this is the line people like Cullen Roach advocate in the present Libor Gate casus :
“In more than 99% of cases, libor very much shadowed the central bank policy rate so if manipulation was at stake, they did a very bad job in doing so. Furthermore, Barclays – even if a member of a cartel of rate setters – couldn’t have pulled this trick alone. Basically, everybody knew about it so what’s the big fuzz?”
The “everybody knew about it” is of course always a killer. In this case however, everybody is restricted to everybody with knowledge in the sector and with knowledge over libor. But let’s take it a little bit further with Cato the younger, making an attempt to plea for capital punishment. Robert Reich, former member of the Clinton administration, gives his arguments as follows:
There are really two different Libor scandals. One has to do with a period just before the financial crisis, around 2007, when Barclays and other banks submitted fake Libor rates lower than the banks’ actual borrowing costs in order to disguise how much trouble they were in. This was bad enough. Had the world known then, action might have been taken earlier to diminish the impact of the near financial meltdown of 2008. But the other scandal is even worse. It involves a more general practice, starting around 2005 and continuing until – who knows? it might still be going on — to rig the Libor in whatever way necessary to assure the banks’ bets on derivatives would be profitable. This is insider trading on a gigantic scale. It makes the bankers winners and the rest of us – whose money they’ve used for to make their bets – losers and chumps.
Hummmm, not bad, not bad. Now who is right and who is wrong ? Well, the thing is, actually Reich might be a bit wrong as well and Cullen Roach in his final argument emphasizes the hypocrisy surrounding this case:
On one side of the aisle you have Conservatives perpetually complaining about “manipulation” in overnight rates due to the Central Bank and on the Left you now have people complaining about “manipulation” over the LIBOR rate set by private banks. One side generally hates financial capitalism and the other side generally hates capitalism manipulated by government intervention of any kind. Maybe it’s time to just accept the fact that central banks manipulate rates and banks key their rates off this rate?
Whatever the arguments, the accused – bankers, brokers, Bank of England and HM Treasury - will have a tough time ahead in parliamentary hearing commissions and court. In the US, it seems that class action is lining up because a lot of mortgage (re)financing is dependent on London rates as well. And here the fun part is complete : Yesterday, Morgan Stanley - remember the one from the AAA dodgy mortgages at the start of our little conspiracy story - came out with the following study : the 16 banks being probed for attempting to rig the libor rates could face 6 bio USD of related litigation cost (of course Morgan Stanley is not involved). In addition, they may also lose 4% to 13% in 2012 earnings per share from regulatory fines. Greetings from a market colleague !
And then it’s high time to send in big time lawyers, big time money and may be who knows, even guns! So we make some room for good old Warren Zevon. Of the following song, a nice acoustic version can be retraced from http://www.youtube.com/watch?v=PjVbypiUOHA in which he explains the inspiration (taking a vacation in Hawai - The Hula Hula Boys !!). This version however is recorded during a live session with sax player David Sanborn. In Dead Poet Society terms, it sounds more "sonore". It starts with Warren going home - as usual with a waitress - and then suddenly it all went wrong. Hiding in Honduras, a desperate man, send lawyers guns and money, the sh!?t has hit the fan !!
Cheers and have a nice weekend