Setting LIBOR: The Fix Is In At The Times

Yesterday the WaPo told us that Treasury Secretary and sometime taxpayer Tim Geithner was aware of the LIBOR rate setting problems at Barclays back in his days at the NY Fed.

Now Team Obama has leaked some documents to the Times to show that it is all good. And check this comedy gold from the Times:

When Timothy F. Geithner ran the Federal Reserve Bank of New York, he acknowledged fundamental problems with the process for setting key interest rates in the midst of the 2008 financial crisis, according to documents provided to The New York Times.

Mr. Geithner, who is now the United States Treasury secretary, questioned the integrity of the benchmark as reports surfaced that Barclays and other big banks were misrepresenting the rates. In 2008, Barclays had several conversations with New York Fed officials about the matter.

Mr. Geithner then reached out to top British authorities to discuss issues with the interest rate, which is set in London. In an e-mail to his counterparts, he outlined reforms to the system, suggesting that British authorities “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport,” according to the documents.

But the warnings came too late, and Barclays continued the illegal activity.

It was too late!?!  How could it be "too late" for such timeless advice as “eliminate incentive to misreport"?

LIBOR is set every business day; since Barclays had manipulated it in the past and the past cannot be undone, they were obliged to manipulate it forever? Really?

Come on - Geithner fired off a CYA memo, nothing happened, nobody followed up, and nobody cared. Until much later, when it was too late.

Comments

[Melinda Romanoff]

Lets play Jeopardy!

The head of this Federal Securities Agency has not been heard of since her Senate hearings to assume the chair. With statute of limitations looming on charging ANY bank executives for their errant ways and no Grand Juries sitting, Is her job just making sure that no "friends" get prosecuted? Naahh, that would be too big a coincidence.

[Ignatz]

C'mon.
Who was president in 2008 when Tiny Tim was at the NY Fed?
So whose fault was it?

[Melinda Romanoff]

Chris Cox was under his desk, holding a pillow over his ears, in the summer of '07. The Pres. of the NY Fed is selected by the Board of said Fed, not CINC, FYI.

[narciso]

'the warnings came too late' five years ago,
or was it there was no opportunity in this crisis, at the time,

[NK]

TomM/MelR-- Fantastic snark from the both of you. Congrats. A question for you financial wizs. I actually tried to read the Federal Reserve Act and NY Fed Reserve Bank charter last year after a Paulian ranted at me. So, when the NY Fed Pres. goes to JPM, Citi and BoA and tells them to stop misquoting rates-- is he their regulatory boss, or is he going to his SHs hat in hand asking pretty please. I never could figure that out.

[Danube of Thought]

Minus 16 at Raz today.

Leads Romney by 1.

[Jane - Get off the couch your country needs you!]

The head of this Federal Securities Agency has not been heard of since her Senate hearings to assume the chair.

What's her name?

[narciso]

Mary Shapiro, who used to run FINRA previously right.

[Melinda Romanoff]

It should be: "Who is Mary Shapiro?".

Jeopardy, remember?

[Melinda Romanoff]

NK-

Shareholders, and, ergo, the latter.

[Threadkiller]

Stupid homeowners. They should have known the LIBOR was a fabrication.

[narciso]

Not that it matters, really, well I'm sure Dodd/Frank, was designed to deal with this eventually, no, that's so 'unexpected'

[NK]

MelR-- I have to admit, that was my sense reading the Act and Charter last year. So basically, Turbo Tax Timmie was the absolutely perfect empty suit to hold that job. Who were the Class A NY Fed Bank Board members in 2007-2008 anyway? Jamie Dimon and Robert Rubin? Did they tell Timmie to shut up and go to Paul Stewart and buy another monochrome power tie?

[Melinda Romanoff]

First, it's Paul Stuart. And, secondly, I have to go and look up who was on the NY Fed Board at that time. I know Jamie was one, but it would have been all the "playas" of Manhattan. I seem to recall that Timmy was offered up as a "strong candidate" by his Open Society mentor.

Now what was his name....

[Clarice]

Cmon guys, Tim was too busy trying to figure out how to file his tax returns. It's Quiken's fault.

[Appalled]

OK -- the reporting tells us Geithner and other US regulators knew Barclay's LIBOR rates were not accurate. Now LIBOR is set in the UK, so presumably the US has no say so on how to regulate this number. What should Geithner have done? Blow the whistle on LIBOR during the 2008 bank crisis publicly? Blown the whistle after a decent interval has passed? Made sure Dodd-Frank addressed this issue in some fashion?

I realize the "too late" line in the NYT article is "comedy gold", by any objective standard. But what really was the right thing to do here?

[narciso]

Dimon, Charles Walt?, among the Class B, Immelt and Fuld, late of Lehman's it looks like the poker table in 'Casino Royale'

http://www.newyorkfed.org/aboutthefed/org_nydirectors.html

[Jane - Get off the couch your country needs you!]

What should Geithner have done?

Warn us. Lot's of people here have Libor backed loans. And it should have been done simultaneously so it all came out.

[NK]

MelR-- OK Paul StUART-- I'm not a rich banker so obviously I don't shop there. Back in the day when the pillars of the financial world were crumbling and I was being screamed at regularly by Sandy Weill's 'people' (non-Citi issues) I started following this LIBOR stuff; I had used that word just about every week for 20 years, but I didn't actually know what it was, to me as a lawyer it was just a number. Here's an archived article from June 2008 I read back then. There were lots of explanations for the LIBOR rate developing a wide spread against other rates like OIS -- why didn't it dawn on people that the LIBOR banks were simply lying? http://www.voxeu.org/article/libor-ois-spread-due-predatory-behaviour

[Walter]

Appalled, when I was in corporate finance, I remember people trying to drop all the bad news at once on the theory that something may get lost in the shuffle. They might have been able together legislative relief back when everything was melting down.

Now, they ARE the story.

[jimmyk]

What should Geithner have done? Blow the whistle on LIBOR during the 2008 bank crisis publicly?

According to the WaPo, Timmy was told of problems in 2007, well before the crisis. I'm sure he thought his exhortations of "C'mon, stop doing that!" and "Pretty please?" would do the trick.

[NK]

Jane-- the victims? it depends on which side of the LIBOR spread you were on. I assume that theoretically, the cumulative winners and losers from the misrepresented spreads would cancel each other out. But someone like MelR would know about that.

[Jane - Get off the couch your country needs you!]

I'm pretty sure I didn't use the word "victims" which is one of my least favorite words on the planet NK.

[NK]

JimmyK-- take a look at the article I linked to at 10:20. The spread between LIBOR and OIS exploded in august 2007 and persisted up until June 2008 when that article was written. The new spread was there for everybody to see and there was alot debate about what caused it. I believe at that time Citi, JPM and BoA were LIBOR setting banks (16 total?) so Timmie was responsible to --eh-- investigate.
Narc/MelR-- the NY Fed link 2 names of interest. Jerry Speyer was a NY Fed Director when he bought Stuy-Town? ay yay yay. And in 2008-- Stephen Friedman came aboard-- Just in time for Bear Stearns and Lehman immolating. Hmm....

[narciso]

Well who was left holding the bag, when the musical chairs stopped.

[Danube of Thought]

The Jeopardy response should be "what is the [insert name of 'this Fedral Securities Agency']?"

[Melinda Romanoff]

Some LIeBOR perspective from someone who's been around the block more often than I have.

Bruce Krasting relates his history with LIBOR.

[NK]

When the lawsuits alleging fraud by the LIBOR banks start-- alot of people will claim to be victims. My is guess is many of them will be people we would not ordinarily conceive of as 'victims'.

[Clarice]

we need a little sherbet about now to clear the palate:http://www.boredpanda.com/worst-logo-fails-ever/

[GMAX]

I am still yawning over the LIBOR "scandal". Who is shocked that there was gambling go on in the casino? Most folks can not tell you what LIBOR stands for and since they did not know how and why it was calculated, why is it any more or less unfriendly that PRIME which is another lending construct. Most PRIME based loans are local bank prime, which can be changed for any reason or no reason at all. Why is prime 3.25% generally today? Beats the hell out of me, and I am a lender.

[Sue]

I am listening to an interview with Joe Paterno's son, and I swear, I thought it was Joe Biden. Anyone else notice it?

[narciso]

Conquistador Coffee, was working all those accounts, LOL, what other deals do we not knowing about 'Spring Surprises' and other
assortments at Whizzo Chocolates,

[Melinda Romanoff]

GMax-

It is a yawner, until 3rd party risk gets transferred onto the TBTF clan.

NK-

There was no functioning LIBOR market by August '07. All Fiction for at least the following 5 months.

[NK]

MelR/GMAX-- thanks for that Krasting post. I'm sure he's right that lying about LIBOR rates was going on forever, and traders understood that and their rates reflected that. But when LIBOR became pervasive as a rate spread measure in MBS syndications for instance-- a supressed LIBOR could have affected the spreads (assuming the other spread variable was real.), no? I assume lots of MBS trade losers are calculating their 'damages' as we speak.

[GMAX]

Hey Rick, did you write to Jim Geraghty? I sure didn't but it kinda sounds like you or me, and since I know I did not, you are my prime suspect. The post is cogent and I recommend it highly for anyone wondering why for example, I laugh at PHEW polling. Here:

http://www.nationalreview.com/campaign-spot/309347/why-are-so-many-pollsters-oversampling-democrats

[narciso]

Our 'old friend' Jay Rosen, pipes in, why did we ever take him seriously;

http://pressthink.org/2012/07/if-mitt-romney-were-running-a-post-truth-campaign-would-the-political-press-report-it/

[Melinda Romanoff]

GMax & Rick-

You guys have taught me to go to the internals first in any poll. I, for one, appreciate the lessons.

[GMAX]

NK

I am sure the legal response will be the legal equivalent of Belusi's "you f'ed up, you trusted us."

[narciso]

She's got the Katie Couric role, downpat,

http://newsbusters.org/blogs/kyle-drennen/2012/07/13/nbcs-guthrie-invites-clinton-slam-gop-rooting-economy-fail

[Danube of Thought]

Sue, my beloved said exactly the same thing.

[GMAX]

Mel just got to your link. I totally agree with this part:

As far as any consumers who took out a Libor based loan are concerned; they have no claim at all. If Libor hadn’t been “fixed” all these years they would have paid substantially more on those loans. Libor has always been jimmied down, not up.

The world has been looking for an excuse to hang some bankers (and a few regulators). Liborgate looks like it could be the opportunity for the bloodletting. I’m convinced that this is the wrong issue to bring out the nooses.

The rigging ran to holding rates DOWN not up. So counterparties (TBTF institutions and hedge funds ) got less than they might have. Any sympathy to be had there?

[NK]

GMAX-- you raise a very fair point. Many times the truth is a WINNING legal response to a claim of fraud. BUT, the truth just LOOKS REAL bad. It takes discipline for the defendant and their attorneys to stick with the truth and say FU-- and even then it can all come to tears if you have some bogus judge who makes up new law.

[narciso]

Sometimes no matter the package, the dogs won't eat it:

http://www.miamiherald.com/2012/07/12/2892871/poll-most-floridians-disapprove.html

[Thomas Collins]

What should TurboMan have done? At the very least apply more pressure than the sending of an email that makes UN warnings to North Korea and Iran sound tough-minded by comparison.

The leaders of what Angelo Codevilla referred to as the Ruling Class practice omerta in a manner that would be the envy of the Patriarca crime syndicate in its heyday.

[Melinda Romanoff]

Only to the degree that some smart lawyers will put it to a not-so-smart jury that manipulation is a two-way street, not just one, then it's, "Katie, bar the door.".

Baltimore City suing the TBTF for this manipulation will be an interesting one to follow, as will the Schwab suit.

[Thomas Collins]

Yeah, what could Timmy boy have done. If you are the CFO of an institution that was getting it up the keister in a LIBOR based swap, there's no need to get upset. Timmy and the rest of the Ruling Class were protecting the financial system. No way the main motivation would have been protecting their Ruling Class friends. Nothing to see here. Move on.

[Melinda Romanoff]

Uh-oh.

Big CME/Solar flare to hit Earth at around 1PM EDT tomorrow.

[narciso]

You know, statistics, lies, figures, the whole drill;

http://www.breitbart.com/Big-Government/2012/07/11/texas-trial-day-one

[Melinda Romanoff]

Mary Shapiro currently in China.

Makes sense.

[NK]

GMAX@11:06-- LENDERS who set the spread @ LIBOR + a fixed% may claim fraud. The LIBOR banks' defense will be as you said above -- you lenders knew and your fixed % spread was set accordingly-- go pound sand. It does get more complicated for deals where the spread was set at the differenece between LIBOR and another rate.

[centralcal]

I am with GMax. When I read Geraghty a few minutes ago, I wondered if his "number cruncher" was Rick Ballard.

[rse]

I remember being the young associate asking the partner what was this LIBOR we keep referencing in documents.

Of course he was also a British patrician so he thought it was a fine peg.

I know Timmy was a legacy at Dart. It appears that may have been the beginning of promoted beyond his expertise.

Melinda-your tie comment reminded me of the stockbroker telling me the importance of Pink shirts. Not my broker. A self-centered Fla neighbor.

Finally heard from my eldest. Hooray! It's probably a good thing my head is grappling with abstractions most days. At least until it is time to make dinner.

[Thomas Collins]

Don't worry, Mel. The financial system will do better if, as a result of the solar flareup, we must go back to those black ledger books.

Perhaps Running Rabbit Warren will hold seminars for financial folks on how to communicate stock and bond quotes by smoke signals.

[Melinda Romanoff]

My broker wears his late father's ties.

[NK]

"My broker wears his late father's ties.
Posted by: Melinda Romanoff | July 13, 2012 at 11:27 AM"

Creepy?, no?

TC@11:18-- I think that's very true. I really don't doubt Turbo Tax Tim's IQ, I assume he's a very intelligent and well educated guy-- for real. BUT-- he is an empty suit of the highest order, who'll do whatever THE MAN who signs his paychecks tells him to do. Hello Jamie, hello Goldman....

[NK]

PS: who is THE MAN to Turbo Timmie now?? I wonder about that.

[Melinda Romanoff]

TC-

I'm not worried about the flare, but the earthquakes that will follow the CME.

[NK]

CME? CME = the exchange or coronal mass?

[sailor]

Sounds like a good broker, Mel.

[Thomas Collins]

See LUN for an article on LIBOR and muni issuers.

[narciso]

There is irony here, on multiple levels,

http://www.rt.com/news/egypt-destroy-pyramids-islamists-007/

[NK]

TC-- many thanks for the 11:47 LUN. those munibond rates are definitely plausible cases; I don't think they add up to a huge pile of dough though. As deals dried up in 2007-2008, and stopping completely in September 2008, the bogus LIBOR may not have affected the spreads for that many deals. TBD.

[Melinda Romanoff]

NK-

I'm sure Mike Madigan, I mean Amy Madigan will be looking into that.

[matt]

we're up to $5.8 Billion and counting at JPM so far. So glad to see they lost it in CDS's.

A billion here. A billion there. Pretty soon you start talking real money.

[Melinda Romanoff]

matt-

And the Investment bank has taken over the portfolio. A $380 Billion credit portfolio.

Heh-heh.

This ain't over.

[NK]

Did JPM report yet?

[Melinda Romanoff]

Earlier. Q1 revision down $0.12, buybacks halted. Jamie dodges questions on call.

[Thomas Collins]

On the aggregate, NK, I agree that the LIBOR/muni relationship may not be super dollars in relation to other financial challenges for munis (the unfunded pension problem, for instance). But if I'm a CFO at a tax-exempt bond borrower that borrowed on a variable rate basis and then swapped fixed for LIBOR payments with a counterparty, I'm calling my contacts at the counterparty with some queries.

[Jim Ryan]

I was gonna vote for Barack, but with Condi over on Romney's ticket, no way. Because for the first time in my life I'M VOTIN' FOR A SISTER!!

[NK]

TC@12:19-- all true, but the timing may keep the totals of claims down. The LIBOR lies stared in August 2007 (THESE LIBOR lies) and by Lehman, everything was taken over by TARP. How many deals were afected by LIBOR quotes during those 13 months? A big Carnegie Hall offering had to wait over a year for things to settle down in November 2009.

[rse]

You know I watched a presentation by Big Blue's new head on where the economy should be going and she had 3 people for support: head of Boeing, Dimon, and Fareed Zakaria on what the 21st century economy needed.

Lots of TBTF in the room. Corporatism doesn't even seem to be a preferred model. That's simply the way the economy works.

That was also TG's world.

[pagar]

"What should Geithner have done? "

IMO, he should have never accepted the Treasury job, once his tax problems were made known. He has made the US the laughing stock of the financial world. A Sec of Treasury who not only can't do his own taxes correctly, but isn't smart enough to hire some one capable of doing his taxes correctly.

[Threadkiller]

What Geithner did do was use LIBOR as the pulse for which he made the case to the Congressional Oversight Panel that TARP(mostly authored by him) was a success:

"Confidence in the stability of our financial markets and institutions has improved dramatically over the past year. Interbank lending rates, which reflect stress in the banking system, have returned to levels associated with more stable times. For example, the spread of one-month Libor to the overnight index swap has fallen from a peak of about 340 basis points last fall to roughly 10 basis points today."

http://www.treasury.gov/press-center/press-releases/Pages/tg437.aspx

[Sue]

Sue, my beloved said exactly the same thing.

Since I'm being adopted by you and your beloved (please, please, please) it would make sense that she and I hear the same way.

[Threadkiller]

And:

Measuring the Performance of TARP:

* Difficult to separate the effects of TARP from those of other non-TARP activities.

* GAO reports on a range of market indicators with qualitative discussions. - Broad improvements in lending in terms of cost of credit and perceptions of risk. - Improvements in total mortgage originations, though foreclosures continue to rise.

Table: Measuring the Performance of TARP:

Credit market rates and spreads:

Indicator: LIBOR; Description: 3-month London interbank offered rate (an average of interest rates offered on dollar-denominated loans); Basis point change since October 13, 2008: Down 446.

Indicator: TED Spread; Description: Spread between 3-month LIBOR and 3-month Treasury yield; Basis point change since October 13, 2008: Down 434.

http://www.gao.gov/assets/80/78555.html

Turbo-Timmy knew LIBOR was ripe with fraud, but he uses LIBOR for GAO to track TARP's progress?

We have to pass TARP to see what is in it...

[Threadkiller]

Good thing Geihtner called London. To bad he didn't call the Congress:

"CONGRESSIONAL OVERSIGHT PANEL

DECEMBER OVERSIGHT REPORT *

----------

TAKING STOCK: WHAT HAS THE TROUBLED ASSET RELIEF PROGRAM ACHIEVED?

One particularly stark measure of the panic that had seized the markets was the spread between the three-month London Interbank Offered Rate (LIBOR), which shows quarterly borrowing costs for banks, and the Overnight Indexed Swaps (OIS) rate, which shows the cost of extremely short-term borrowing. The spread between these two rates reflects whatI the market believes to be the risk in lending money to a bank; it is therefore understood to be a measure of the banking sector's overall health."

http://www.gpo.gov/fdsys/pkg/CPRT-111JPRT54148/html/CPRT-111JPRT54148.htm

My copy function is overwhelmed. More reliance on LIBOR at the link.

[Extraneus]

I love how these titans of finance have been looking out for us all these years, protecting the "financial system" and bailing each other out and all. Why, there could have been a real "melt down" if these geniuses didn't have the guts to intervene with trillions of our dollars in order to save us from a real estate debacle that might have put a major dent in our net worth.

[hrtshpdbox]

Why, there could have been a real "melt down" if these geniuses didn't have the guts to intervene with trillions of our dollars..

So true; altruism on a heroic scale, I thank these pillars among men nightly in my prayers. The Nobel committee need look no further when deciding on upcoming Economics laureates.

OT, but based on the oppo research on Rubio, I can't see how Romney picks him:
http://abcnews.go.com/blogs/politics/2012/07/exclusive-democrats-dump-opposition-research-on-top-vice-presidential-contenders/?=id2

[GMAX]

When Libor is almost nothing, the spread between in and an even shorter timed borrowing ( like overnight lending from the central bank ) by definition must be compressed. There just is not much room for a spread between 25 bps and zippo.

[sailor]

I am so angry with Obama's changing welfare requirements!! How can he do that? I thought Clinton and a Republican congress passed welfare reform law?

[jimmyk]

Great finds, TK. Timmy's wink and nod at the banksters had a political agenda, big surprise.

A Sec of Treasury who not only can't do his own taxes correctly, but isn't smart enough to hire some one capable of doing his taxes correctly.

Speaking of winks and nods, while normally I'll go with incompetence over evil, in this case I'm pretty sure there was an open secret among IMF honchos that this was something they could get away with. And he would have but for his nomination to Treasury.

[GMAX]

one of the comments at Geraghty says this:

I have a MS in Computer Science, majoring in Quantitative Mathematics/Statistics. So my side hobby is sort of re-engineering these oversampled polls to the proper party id.

The party id split in 2008 was D+7. While the diff in 2010 was essentially tie.

My program I use just about splits the difference (D+3) to be conservative (even though I think that the R turnout will be higher).

Based on my analysis using a sample of D 36 R 33 I 31 across all national polls over the past 3 months (using RCP list which provides internals/crosstabs), Romney is leading 48.6 - 44.2 (Romney +4.2)

If you use a 34|34|32 sample, you would get Romney leading 49.8 - 43.4 (Romney +5.4)

I did not reengineer all the polls to see if he is correct in his calculations, but he is certainly right in the direction and I dont think + 3 Democrat is pretty ridiculous, much more likely to be R + 2 in my opinion, and could be eversomuch more. That intensity factor last seen in Wisconsin.

[hrtshpdbox]

There just is not much room for a spread between 25 bps and zippo.
Well, there's an eighth and a teeny, but yeah.

[Extraneus]

Don't worry, sailor. For every $1 spent on welfare recipients, almost twice that much economic activity is generated. By discouraging some people from applying for the benefits to which they're entitled, the work requirement just make it that much harder to generate more economic activity, which is something this country badly needs during these tough times.

[Extraneus]

Government under fire for 'novela' ad campaign promoting food stamp enrollment

The Department of Agriculture is coming under fire for its "aggressive" ad campaign, including a 10-part series of Spanish-language "novelas," to convince people to go on food stamps -- at a time when one in seven are already enrolled.

The food stamp rolls have swelled since the recession, growing roughly 40 percent since 2009. As of April, more than 46 million people were in the program, which costs $80 billion a year. Yet the USDA is engaged in an ongoing ad campaign to convince those not on food stamps -- but still technically eligible -- to let down their pride and sign up.

Alas, they're not as "under fire" as I would like.

[Extraneus]

Sen. Jeff Sessions, R-Ala., ranking Republican on the Senate Budget Committee, slammed the campaign as a push to enroll individuals who don't feel they need it.

"It has become increasingly clear that, in recent years, the mission of the food stamp program has been converted from targeted assistance for those in need into an aggressive drive to expand enrollment regardless of need," he said in a statement. "Food stamp spending has quadrupled since 2001, yet USDA complains that too many eligible people continue to resist enrollment. ... Read as a whole, USDA's activities suggest that the program administrators take personal offense when people who technically qualify for their largesse decline to accept -- and see it as an obstacle to overcome."

[Jane - Get off the couch your country needs you!]

Someone just sent me an email (with references in the statute) saying that by 2013 under Obamacare we will all be required to have devices implanted in us which gives the government access to our bank accounts. I laughed, I cried, because these days you just can't assume it's a joke

[Extraneus]

Here’s something Rice said to the Republican National Convention in 2000: ‘My father joined our party because the Democrats in Jim Crow Alabama of 1952 would not register him to vote. The Republicans did.’ What will the Obama people do if that sort of thing is thrown in their face? Let them worry about it.

[Extraneus]

(I'm not spamming, honest.)

[hrtshpdbox]

What will the Obama people do if that sort of thing is thrown in their face?
They'll accuse Rice of inserting race into the campaign, and start calling her "Rice-ist".

[Danube of Thought]

How is the LIBOR rate supposed to be set?

[sbwaters]

Narciso, I won't click on the Jay Rosen PressThink link you provided.

It's PressNotThink. When I did go there eons ago, reality held no interest for him.

[NK]

MelR et al-- Jamie D says CIO losses may hit $7.5B. Poof-- but otherwise JPM is doing great! AND -- THEY REALLY ARE. If you could get newly minted Ben B Dollars for basically 0%-- you'd be doing great too!

[narciso]

When did we slip through the wormhole, and how did we miss it.

[NK]

Wiki's LIBOR page is fair enough:http://en.wikipedia.org/wiki/Libor

[narciso]

So Gallup has Romney ahead by one point, and Rasmussen has him one point down, so which is the proper measure,

[Danube of Thought]

Anybody know how Raz weights?

[Thomas Collins]

The financial mavens may want to correct me on this if I err, but one of the problems is that LIBOR is not set by quotes based on actual bank lending. It's like the Olympics gymnastics competition grades. Each "bank judge" "holds up a card" with its best estimate of the rate it must pay for an interbank loan for the time period in question, and there is a process by which these various cards become a LIBOR rate for a given period of time (my memory is a specific number of top and low rates are discarded, and then the rest are averaged or subject to some other sort of procedure).

In any event, it's akin to determinining the "Major League Fastball Speed Rate" by having a selected group of pitchers estimating how many MPH their heaters are going, and subjecting those estimates to some sort of procedure. In LIBOR, there is arguably an incentive for banks to lowball their estimates so they appear to be good credits (with pitchers, of course, there might be a tendency to overestimate heater speed).

[Thomas Collins]

So, let's say Mel and TC are entering into a swap transaction (each of us is a swap counterparty). Counterparty TC is paying Counterparty Mel a fixed rate, say 3%. Counterparty Mel is paying Counterparty TC a rate based on a percentage of LIBOR. These two rates are netted. If the LIBOR rate is greater than the fixed rate, Mel must send TC money. If the fixed rate is greater than the LIBOR rate, TC must send Mel money. If the banks are lowballing LIBOR, because the Mel/TC swap contract has TC paying a fixed rate, Mel is doing fine and TC is not happy.

[matt]

So it's gone from $2B to $4B to $5.9B and now to $7 Billion Dollars!

Jamie! What do we have behind Door Number 3?

I loved the remark about traders hiding losses. "They were here somewhere, but I can't seem to find them at the moment."

$70 Million for a duplex in Manhattan because of these guys.....