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Forum Post: "The Real LIBOR Scandal", by Paul Craig Roberts and Nomi Prins.

Posted 11 years ago on July 15, 2012, 9:21 p.m. EST by shadz66 (19985)
This content is user submitted and not an official statement

The Real LIBOR Scandal.

by Paul Craig Roberts and Nomi Prins.

{July 15, 2012 "Information Clearing House" : http://www.informationclearinghouse.info/ }

According to news reports, UK banks fixed the London interbank borrowing rate (Libor) with the complicity of the Bank of England (UK central bank) at a low rate in order to obtain a cheap borrowing cost. The way this scandal is playing out is that the banks benefitted from borrowing at these low rates. Whereas this is true, it also strikes us as simplistic and as a diversion from the deeper, darker scandal.

Banks are not the only beneficiaries of lower Libor rates. Debtors (and investors) whose floating or variable rate loans are pegged in some way to Libor also benefit. One could argue that by fixing the rate low, the banks were cheating themselves out of interest income, because the effect of the low Libor rate is to lower the interest rate on customer loans, such as variable rate mortgages that banks possess in their portfolios. But the banks did not fix the Libor rate with their customers in mind. Instead, the fixed Libor rate enabled them to improve their balance sheets, as well as help to perpetuate the regime of low interest rates. The last thing the banks want is a rise in interest rates that would drive down the values of their holdings and reveal large losses masked by rigged interest rates.

Indicative of greater deceit and a larger scandal than simply borrowing from one another at lower rates, banks gained far more from the rise in the prices, or higher evaluations of floating rate financial instruments (such as CDOs), that resulted from lower Libor rates. As prices of debt instruments all tend to move in the same direction, and in the opposite direction from interest rates (low interest rates mean high bond prices, and vice versa), the effect of lower Libor rates is to prop up the prices of bonds, asset-backed financial instruments, and other "securities." The end result is that the banks' balance sheets look healthier than they really are.

On the losing side of the scandal are purchasers of interest rate swaps, savers who receive less interest on their accounts, and ultimately all bond holders when the bond bubble pops and prices collapse.

We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%. Also, in the UK, as in the US, the government debt to GDP ratio is rising. Currently the ratio in the UK is about double its average during the 1980-2011 period.

The question is, why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP? One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate.

Why isn’t this happening?

PCR’s June 5 column, “Collapse at Hand” ...

... explained that despite the negative interest rate, investors were making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower.

What was pushing the interest rates lower?

The answer is even clearer now. First, as PCR noted, Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down. Thus, causing bond prices to rise.

Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices.

In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England’s low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it.

How long can the government bond bubble be sustained? How negative can interest rates be driven?

Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?

According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates.

The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments. We have learned that the Fed has been aware of Libor manipulation (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. The motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion.

Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.


radix omnium malorum est cupiditas ...


Nomi Prins is author of It Takes A Pillage and a former managing director of Goldman Sachs. : http://www.nomiprins.com/ .

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. : http://www.paulcraigroberts.org/ .

[Article copied verbatim under "Fair Use" from : http://www.informationclearinghouse.info/article31866.htm ]



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[-] 2 points by Middleaged (5140) 11 years ago

This country is like a Monty Python Sketch now. London is defined by Monty Python at this point. There is a suggestion that Oil Price rigging is known. I saw a similar link, but am checking yours above.

[-] 1 points by enough (587) 11 years ago

Checkout the video in Tiabbi's latest blog:


If you can't indict and convict a Wall Street banker in the Libor mega-scandal, then it is impossible to jail any of them.

[-] 2 points by Middleaged (5140) 11 years ago

Thanks. Great Spitzer show. I guess I have to start respecting Spitzer again. Taibbi, Kelleher, Spitzer good performances.

I found the CNBC Video. She does try to work him over and he does fight her back the way he should. It reminds me of my career. People gun for you, you have to defend yourself, and sometimes they can't defend themselves or prevail. I always thought that was the game that people play in big corporations or big organizations. It could be competition, but to me it always feel like I was dealing with assholes.

But I learned to prepare for a meeting.

CNBC Video here. http://video.cnbc.com/gallery/?video=3000102873

[-] -1 points by shadz66 (19985) 11 years ago

'FYI' : "The Size of the Big Banks Is – Literally – Destroying the Rule of Law" by 'WashingtonsBlog' : http://www.informationclearinghouse.info/article31951.htm .

fiat lux ...

[-] 2 points by Middleaged (5140) 11 years ago

Thanks. I see great links on the article and great list of people supporting the right values and right action. Here is somethink you might like and pass on (I will post it aslo) http://mikenormaneconomics.blogspot.com/2012/09/failure-of-us-long-range-strategic.html

[-] -1 points by shadz66 (19985) 11 years ago

Many thanx for the interesting link. Good to see you back around these parts. Hope all is well with you.

pax et lux ...

[-] 2 points by Middleaged (5140) 11 years ago

Thanks. I'm okay, but feel like I am just running on fumes. Food and money are not the problem. I suppose my issues are always spiritual. I don't care for a pushy government or all the competition by pinheads. But not sure if there is a shangrala anywhere. Someone said, "it's all an inside job". Meaning we have to learn about ourselves and find ways to be happy.

I've been thinking that getting away from politics and news might help me. But it is funny sometimes the thing I resist or turn away from can open up new opportunities.

I suppose relationships and communication are like that. Big opportunities lie there waiting for us.....

Wow did you see this one by Bill Moyers on Iran Contra??? If we had learned the lessons from Vietnam and Iran Contra, we would be a BETTER COUNTRY!!!


[-] -1 points by shadz66 (19985) 11 years ago

I hear your words with an element of recognition. I myself, have little time for Paternalistic, Obsessively Monotheistic Abrahamic Mumbo-Jumbo & subscribe to Buddhistic Metaphysics. Stilling the mind from all the 'mind stuff' and trying 'to feel as opposed to think' for a few minutes every day has value, imho. Thanx again for another good link. Take care ; stay well ; stay aware. See you around the threads :-)

amor vincit omnia ...

[-] 2 points by Middleaged (5140) 11 years ago

Thanks for the boost. Perhaps, "Peace conquers the mind". PAX VINCIT MENTIS ???

[-] -1 points by shadz66 (19985) 11 years ago

Yet more evidence of unconscionable behaviour and just when you might think that a sense of 'total outrage' can not be more justified, please also consider :

fiat justitia ruat caelum ...

[-] 2 points by Middleaged (5140) 11 years ago

Yes, saved that one now. I should forward it tonight.

[-] 1 points by ImNotMe (1488) 5 years ago

For OWS/#S17 & ''Ten Years After the Crash, We have Learned Nothing'' ... by Matt Taibbi:

''The great financial catastrophe of our times is still badly misunderstood, and led to grotesque consequences, including the election of Donald Trump.'' ... Deep Truths from a great journalist.

Still miss folk like U>MA. This place was & to a lesser extent still is, such a good place to learn

for those Open Minded Enough to be able to see through: U$A's Corp. CON-Troll-ed Duopoly!

radix omnium malorum est cupiditas - et spero meliora!

[-] 1 points by beautifulworld (23771) 5 years ago

The archive on this forum is well worth a look.

Ten years since the GFC and maybe the oligarchs haven't learned much, but the people have formed a class consciousness since Occupy Wall Street, 7 years ago today, that we hadn't seen in the USA for several decades.

The establishment may have taken down the tents and killed the physical occupations across this nation but they have not killed the ideas of Occupy, that we are all equal, that we deserve lives worthy of living without suffering and with fairness and economic and social justice for each and every one of us.

Solidarity and Happy Birthday Occupy!

[-] 1 points by ImNotMe (1488) 5 years ago

Bernie: ''No financial institution should be so large that its failure would cause catastrophic risk to millions of Americans or to our nation’s economic wellbeing.'' from ...

Viva OWS! Their refusal to kiss DNC A$$ - is a credit to the true spirit of The 99% in U$A!! Solidarity!!!

radix omnium malorum est cupiditas ... ergo fiat justitia!

(love of money is root of all evil, so let justice be done!)

[-] 1 points by elf3 (4203) 5 years ago

This legislation could have been more helpful years ago...where has it been all my life. Democrats note to self must foresee /predict and thwart future evil better: when it is calm...plan for storms . Screw this clean up crap.

Fyi Dems read the WSJ...it is full of evil predictions/ plans.

[-] 1 points by ImNotMe (1488) 5 years ago

Sanders' Furious Kavanaugh Speech ..

"Democrats note to self" .. must include to STOP acting

like the corrupt corporate owned GOP.nuts themselves!

fiat justitia - spero meliora!

[-] 2 points by richardkentgates (3269) 11 years ago

This is a good place for me to again address the relationship between our financial sector and the pentagon.


[-] 1 points by shadz66 (19985) 11 years ago

Interesting Link - tho' of course I do not share the same 'rose tinted' view of RR as any sort of "shining example" of anything except 'jelly bean munching' ! Furthermore, I append herewith some relevant links :

fiat lux ...

[-] 2 points by Middleaged (5140) 11 years ago

We all wish RR was the worst it ever got. You would trade Gerogie W.s 8 years away for another 8 years of RR. Not trying to be funny.

Tricky Dick, Richard Nixon was a boy scout compared to Georgie W. Deregulation started under William Jefferson...and I don't know how to put Bill into historical context. Bill Signed off on NAFTA as well. Bill is not in a league with Newt Gingrich, but Bill is a little bit of a show boater. Obama is not a Neocon, but almost... Obama is a rightwing centrist.

This country is like a Monty Python Sketch now. Altough you have to include London in any image. I've been thinking Monty Python for days reviewing this LIBOR Scandal.

[-] 0 points by shadz66 (19985) 11 years ago

For some more material for 'the sketch' :

fiat lux ...

[-] 2 points by Middleaged (5140) 11 years ago

Thanks, was looking for this one.

[-] 1 points by beautifulworld (23771) 5 years ago

"The real LIBOR scandal" by Paul Craig Roberts and Nomi Prins.

10 years on, we haven't forgotten.

[-] 1 points by TrevorMnemonic (5827) 11 years ago

Trader "When I retire and write a book about this business, your name will be written in golden letters."

Submitter "I would prefer this to not be in any book!"


[-] 1 points by john23 (-272) 11 years ago

What boggles my mind is that many Keynsians are just infuriated by this scandal. This post even goes into how lowering interest rates screws over the people (the savers). What do you think the Fed has done for the last 100 years? They are the central LIBOR scandal. They manipulate interest rates every day.

[-] 0 points by shadz66 (19985) 11 years ago

"JPMorgan Scandal : The Tip Of The Iceberg", by Andre Damon and Barry Grey :

"JPMorgan Chase, the biggest US bank by assets, announced Friday that the trading loss from derivatives bets made by its Chief Investment Office (CIO) had reached $5.8 billion, nearly three times the amount the company had revealed in May. It added that the bad bets could result in an additional $1.7 billion in losses over the rest of the year."

fiat lux et fiat justitia ...

[-] 0 points by shadz66 (19985) 11 years ago

To accompany the above 'forum-post' :

fiat justitia ruat caelum ...