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Tuesday's Top 10 with NZ Mint: LIBOR firestorm engulfs City of London; 'Culture is what you do when you think no one is looking'; 'The euro-zone dinosaur is still there'; China's falling star; Dilbert

Posted in Opinion

Here's my Top 10 links from around the Internet at 12.15 pm today in association with NZ Mint.

We welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must watch today is #4. This LIBOR story is so ugly.

1. 'Nuthin to do with me' - FT.com reports that Barclays CEO Bob Diamond has told staff in a memo he's angry and disappointed that a minority have blackened Barclays' good name in the LIBOR scandal.

This story will run and run and run.

Diamond will be lucky to survive.

The firestorm of protest in Britain is extraordinary.

As it should be.

It turns out the Bank of England may well have known and implicitly encouraged the lying.

About 20 institutions are under investigation by regulators on three continents in connection with interbank lending rates including HSBC, Royal Bank of Canada and Royal Bank of Scotland.

It emerged on Sunday that Mr Diamond had in 2008 discussed Barclays’ submissions to the Libor process with Paul Tucker, deputy governor of the Bank of England. 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.

2. This could turn septic - Now FT reports Diamond could implicate the Bank of England if he comes under too much pressure when being quizzed by parliamentarians this week...

The gall of the guy to think he can bully the parliament into not asking some questions. He needs to have a chat with Rupert Murdoch about how difficult motivated parliamentary inquiries can be.

According to two people close to Mr Diamond, the Barclays chief executive is furious that he and the bank have been blamed for “lowballing” the rates at which Barclays said it could borrow from rivals at the height of the financial crisis in 2007 and 2008. Bankers insist the authorities knew these rates were inaccurate but did not object at the time because of fears it could further destabilise already panicked markets.

“[Regulators] knew perfectly well those rates were not the ones where banks were prepared to lend to each other,” said one senior banker at another institution. “They had all the evidence.”

3. What Bob thought culture meant - This speech from Bob Diamond in 2011 explains just why the sense of betrayal and anger in Britain right now is so visceral.

It's a very personal thing, but throughout my career - from my time as a teacher, to my time as a banker - I have seen just how important culture is to successful organisations.

Culture is difficult to define, I think it's even more difficult to mandate - but for me the evidence of culture is how people behave when no-one is watching.

Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.

But it's not just about how we behave towards our customers and clients. It's also about how we work together with our colleagues, because if you have to deliver for customers with 150,000 colleagues around the world, as we do, you better be able to work as a team.

As far as I'm concerned, if you can't work well with your colleagues, with trust and integrity, you can't be on the team.

Culture truly helps define an organisation.

4. 'How I manipulated the bank borrowing rate' - Here's the Telegraph with an anonymous insider explaining how the LIBOR scandal happened. As I said, this will run and run and run.

Read this below and realise that The City of London's banking culture is broken. This is what they were doing when they thought that no one was watching, or more correctly, everyone was doing it and no one was watching.

It was during a weekly economic briefing at the bank in early 2008 that I first heard the phrase. A sterling swaps trader told the assembled economists and managers that "Libor was dislocated with itself". It sounded so nonsensical that, at first, it just confused everyone, and provoked a little laughter.

Before long, though, I was drawing up presentations to explain the "dislocation of Libor from itself" for corporate relationship managers. I was deciphering the subject in emails, internally and externally. And I was using the phrase myself openly with customers of the bank.

What I was explaining was that the bank was manipulating Libor. Only I didn't see it like that at the time.

What the trader told us was that the bank could not be seen to be borrowing at high rates, so we were putting in low Libor submissions, the same as everyone. How could we do that? Easy. The British Bankers' Association, which compiled Libor, asked for a rate submission but there were no checks. The trader said there was a general acceptance that you lowered the price a few basis points each day.

According to the trader, "everyone knew" and "everyone was doing it". There was no implication of illegality. After all, there were 20 to 30 people in the room – from management to economists, structuring teams to salespeople – and more on the teleconference dial-in from across the country.

5. Why Europe is still in crisis - Hugo Dixon from Reuters nails it in this article in NYTimes.

“Upon waking, the dinosaur was still there.”

This extremely short story by the Guatemalan writer Augusto Monterroso sums up the state of play on the euro crisis. The summit meeting last week took important steps to stop the immediate panic. But the big economies of Italy and Spain are shrinking and there is no agreed long-term vision for the zone. In other words, the crisis is still there.

6. There is no shame - Bloomberg reports the JP Morgan exec behind the 'Whale' trade has gone, but not before collecting US$21.5 million in stocks and options.

Drew, 55, oversaw the London traders responsible for a $2 billion loss on credit derivatives that Chief Executive Officer Jamie Dimon said “violated common sense.” Shares of the largest U.S. bank have plunged 19.1 percent since Bloomberg News first reported on April 5 that JPMorgan was having trouble unwinding illiquid bets on credit derivatives. While Dimon told lawmakers in separate hearings this month that the company could claw back two years of bonuses, Drew’s pay probably won’t be affected, according to compensation consultants.

7. Why the Euro-zone package will fail - Belgian economists  Paul De Grauwe writes at VoxEu why the European leaders deal on Friday will fail to bring down Spanish and Italian bond yields.

The ESM has financial resources amounting to €500 billion. Compare this with the total government bonds outstanding of close to €2,000 billion in Italy and of about €800 billion in Spain and it is immediately evident that the ESM will be unable to stem a crisis involving one of these two countries, let alone the two countries together.

In fact it is worse. As soon as the ESM starts intervening, it will quickly destabilise the government bond markets in these two countries. The reason is the following.

Suppose a new movement of fear and panic, triggered for example by the deepening recession in Spain, pushes up the Spanish government bond rate again.
• To stem the tide the ESM starts buying Spanish bonds. Suppose it buys €200 billion worth of Spanish bonds.

At the end of the operation it will be clear for everybody that the ESM has seen its resources decline from €500 billion to €300 billion. Less will be left over to face new crises.

  • Investors will start forecasting the moment when the ESM will run out of cash.

They will then do what one expects from clever people.

  • They will sell bonds now rather than later.

The reason is not difficult to see. Anticipating the moment the ESM runs out of cash forcing it to stop its intervention, they expect bond prices to crash. To prevent making large losses, they will have an incentive to bring their bond sales forward to the present rather than wait until the losses are incurred. Thus the interventions by the ESM will trigger crises rather than avoid them.

8. No easing of Chinese property curbs any time soon - Reuters reports Chinese Vice Premier Li Keqiang saying China won't be easing those property curbs that have slowed its economy down any time soon.

Li, widely seen as premier in waiting, was quoted by Xinhua news agency as saying that speculative and investment purchases of homes in China must be curbed. Li made the remarks at a recent conference, Xinhua said, without being more specific.

The comments make Li the most senior Chinese official to directly rebut first-time-ever calls from government advisers last month for Beijing to relax property curbs and might dampen market speculation that home purchase restrictions are about to be lifted.

9. 'Get ready for a hard landing' - Barron's has a cover story this week titled 'Falling Star' which says China's economy is slowing fast.

It's packed full of compelling detail.

After three decades of annual growth averaging 10%, China's bullet-train economy is slowing markedly. Economic problems in Europe and the U.S. are stunting export growth, long the primary driver of China's economic miracle. Growth in industrial production has likewise been decelerating for months. This year growth in gross domestic product could slip to 8%—and it may get a lot worse from there. Though recently announced interest-rate cuts and a ramp-up in the government's already massive infrastructure spending could postpone the day of reckoning, to us it looks like the Great China Growth Story may be falling apart.

10. Totally a ballet of Russian tanks. You saw it here first. A lot of mud is churned and an awful lot of petrol/diesel is burned.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

24 Comments

Do we have no moral and

Do we have no moral and ethical standards ?
Accepting handshake payment of 1.750’000.- for the Telecom chief, should be good enough for a 6 months jail term for all persons involved in that deal.

I am confused by the LIBOR

I am confused by the LIBOR manipulation. I thought the suggestion was that the rate had been inflated to suck more interest from borrowers on a margin over LIBOR and that might have included our banks.
Todays story says the rate was set artificially low by the banks to disguise their own true cost of borrowing and make their solvency/ profitability look better than it was. That is a problem for regulators, lenders to banks and shareholders but it does not affect anyone here does it? If anything we got a free ride.

Exactly. People with

Exactly. People with borrowing costs "tied to LIBOR" would've benefitted if the rate was published lower than it should have been. This is often overlooked, amid the "outrage". 

The fixed receiver in an

The fixed receiver in an interest rate swap contract would have been under paid as longer tenor swaps are composed of a stack of FRAs and yet paid a lower floating rate leg whereas a fixed payer would have paid less but received floating at a lower rate. 
 
As banks are usually net receivers the fixing banks could hardly have taken much advantage in the USD 350 trillion interest rate derivatives market  for swaps but could have enjoyed a distinct payoff in the FRA  and depo market. buy enjoying lower credit risk costs than were justified. 
 
I wrote my only client power point  primer to create synthetic swaps utilising the libor futures proxy -  eurodollars. Live pricing feeds from the relavant exchanges into excel spreadsheets generated real time swap prices for reference and T note trading purposes.

You might have to help me

You might have to help me with this one Stephen.
Presume an FRA is a fixed rate agreement. Are you saying that the banks involved in understating LIBOR would have cost themselves something as receiver in the contracts by depressing the floating rate that applied? On the other hand the cost of the Credit Default Swaps they needed to purchase to hedge the transaction was lower than it otherwise would have been because their borrowing cost looked lower?
Any idea where the net gain was?
Does most of this go back to occasions when the credit markets were very sticky and short term borrowing costs got very high from time to time for some participants?

I have no practical

I have no practical experience with CDS  contracts (I retired in 1998 before their inception) and thus how they price in relation to libor. Swaps and CDS may be related but I doubt it unless counterparty default is an issue and in this case the collateral demands just increase against OTC interest rate derivatives positions.
 
Libor is a market credit instrument so in times of perceived liquidity or insolvency issues rates should generally rise. Individual banks may experience varying costs depending on their particular circumstances. 

You might have to help me

You might have to help me with this one Stephen.
Presume an FRA is a fixed rate agreement. Are you saying that the banks involved in understating LIBOR would have cost themselves something as receiver in the contracts by depressing the floating rate that applied? On the other hand the cost of the Credit Default Swaps they needed to purchase to hedge the transaction was lower than it otherwise would have been because their borrowing cost looked lower?
Any idea where the net gain was?
Does most of this go back to occasions when the credit markets were very sticky and short term borrowing costs got very high from time to time for some participants?

No.3  I wonder, when your

No.3
 I wonder, when your firm's culture is one of dishonesty, how you interview prospective employees.  If you don't get it right you have whistle blowers.

Banking  is a bit like

Banking  is a bit like politics.......only in reverse. ..tis a fraud.
Cannot have one without the other.
In politics you start out with a lot of conviction, but end up with being convinced, there is no conviction, just a little self.......................interest.
 

some Libor Party eh ?    at

some Libor Party eh ?    at least it   makes a change from housing up bah blah Roost report down blah blah housing crisis blah blah cantabrians unite blah blah

Ewen Macdonald found not

Ewen Macdonald found not guilty
whodunnit then?

Who cares? Tom and Katie are

Who cares? Tom and Katie are getting Divorce should we talk about that too?

O J Simpson

O J Simpson

Another problem for Greece,

Another problem for Greece, money to buy oil.
"At present, of all the European countries, it's Greece that has the biggest problem," explains the Munich-based oil expert Volker Blandow from the Association for the Study of Peak Oil and Gas (ASPO). "Greece had contracts with Iran which had decoupled delivery and payment." This meant that Greece received oil on credit, and could pay for it later. Now, however, Greece will have to go to an oil exchange to meet its requirements, says Blandow"
http://www.energybulletin.net/stories/2012-07-03/energy-july-3
regards

Aren't oil shipments from

Aren't oil shipments from Iran to the EU going to stop soon anyway due to the US sanctions?  I may be a bit out of date on that - haven't actively looked for news on the subject recently and it doesn't seem to be in the popular media.
 

Bob Diamond has resigned- is

Bob Diamond has resigned- is prison next? Probably not.
British media in a frenzy
Who will be safe- all the banks were at it- thats how it worked

May be the Brits will do what

May be the Brits will do what the Yanks could not do to bankers...proceed with criminal charges, instead of just fines to settle the charges...Some expample may be educative to these bad bankers ?

He was held  in such high

He was held  in such high regard, vey intense guy, how far you can fall very quickly

Interesting article aboot the

Interesting article aboot the Laffer Curve.....sumpin' the tax-the-rich bozos are finding out aboot the hard way....

It never produced anything

It never produced anything but deficits after Ronnie Reagan was lured in by the self serving spin.

Euro Crisis Breakthrough

Euro Crisis Breakthrough Breakdown - Nigel Farage - YouTube
 
The applause is interesting. Is there a growing recognition in the European Parliament that Farage may be correct?
 

That's a symptom of something

That's a symptom of something that signals the end to Hugh's hopes. Interesting to see him still cheering.

It is all a

It is all a Gambol.
First...The ponzi for a pokie lover.
The Sky's .....the limit.
http://money.cnn.com/2012/07/02/news/companies/poker-ponzi/index.htm?iid=HP_LN
 
Or ..secondly.
Maybe you prefer to be part of the Drug Culture for your kicks and the big bucks.
 
http://money.cnn.com/2012/07/02/news/companies/GlaxoSmithKline-settlement/?iid=EL
 
Either way.....it is with.....what is that TV cop show called???.....Criminal In------
 
Yet one may go to court and the other just pays out...and out...and out...It is fine with them.
(They are still in business, 1st off.)
Buy the way...whatever happened to all those perpetrators of the Finance Company Rorts...??...and the Securities Ommission...
Maybe I should have been a lawyer...or a Financial Watch dog, with no teeth.
Business must be booming....I hear the pays good 2.
A wee bit like Instead of joining Labour, maybe Libor......would have been better....3.
I hear the take over bids are coming thick and fast....and that retiring for sum, is better than   betting on the cards, or the pokies, or the drugs.
I also hear that..
The  UN wants to takeover, where the despots left off.
It oils the works......as does cheap...labour.
I also hear that it pays in the long run.....4.
But who is counting...
It is only funny...munny, after all is done and said.