Everything Is Rigged:
The Biggest Price-Fixing Scandal
Ever
Illustration by
Victor Juhasz
There's no price the big banks can't fix
C onspiracy theorists
of the world, believers in the hidden hands of the Rothschilds and the Masons
and the Illuminati, we skeptics owe you an apology . You were right. The
players may be a little different, but your basic premise is correct: The world
is a rigged game. We found this out in recent months, when a series of related
corruption stories spilled out of the financial sector, suggesting the world's
largest banks may be fixing the prices of, well, just about everything. You may have
heard of the Libor scandal, in which at least three – and perhaps as many as 16
– of the name-brand too-big-to-fail banks have been manipulating global
interest rates, in the process messing around with the prices of upward of $500
trillion (that's trillion, with a "t") worth of financial
instruments. When that sprawling con burst into public view last year, it was
easily the biggest financial scandal in history – MIT professor Andrew Lo even
said it "dwarfs by orders of magnitude any financial scam in the history
of markets." That was bad
enough, but now Libor may have a twin brother. Word has leaked out that the
London-based firm ICAP, the world's largest broker of interest-rate swaps, is
being investigated by American authorities for behavior that sounds eerily
reminiscent of the Libor mess. Regulators are looking into whether or not a
small group of brokers at ICAP may have worked with up to 15 of the world's
largest banks to manipulate ISDAfix, a benchmark number used around the world
to calculate the prices of interest-rate swaps. Interest-rate
swaps are a tool used by big cities, major corporations and sovereign
governments to manage their debt, and the scale of their use is almost
unimaginably massive. It's about a $379 trillion market, meaning that any
manipulation would affect a pile of assets about 100 times the size of the
United States federal budget. It should
surprise no one that among the players implicated in this scheme to fix the
prices of interest-rate swaps are the same megabanks – including Barclays, UBS,
Bank of America, JPMorgan Chase and the Royal Bank of Scotland – that serve on
the Libor panel that sets global interest rates. In fact, in recent years many
of these banks have already paid multimillion-dollar settlements for
anti-competitive manipulation of one form or another (in addition to Libor,
some were caught up in an anti-competitive scheme, detailed in Rolling
Stone , to rig municipal-debt service auctions).
Though the jumble of financial acronyms sounds like gibberish to the layperson,
the fact that there may now be price-fixing scandals involving both Libor and
ISDAfix suggests a single, giant mushrooming conspiracy of collusion and
price-fixing hovering under the ostensibly competitive veneer of Wall Street
culture. Why? Because
Libor already affects the prices of interest-rate swaps, making this a
manipulation-on-manipulation situation. If the allegations prove to be right,
that will mean that swap customers have been paying for two different layers of
price-fixing corruption. If you can imagine paying 20 bucks for a crappy
PB&J because some evil cabal of agribusiness companies colluded to fix the
prices of both peanuts and peanut butter, you come close to grasping the lunacy
of financial markets where both interest rates and interest-rate swaps are
being manipulated at the same time, often by the same banks. "It's a
double conspiracy," says an amazed Michael Greenberger, a former director
of the trading and markets division at the Commodity Futures Trading Commission
and now a professor at the University of Maryland. "It's the height of
criminality." The bad news
didn't stop with swaps and interest rates. In March, it also came out that two
regulators – the CFTC here in the U.S. and the Madrid-based International
Organization of Securities Commissions – were spurred by the Libor revelations
to investigate the possibility of collusive manipulation of gold and silver
prices. "Given the clubby manipulation efforts we saw in Libor benchmarks,
I assume other benchmarks – many other benchmarks – are legit areas of
inquiry," CFTC Commissioner Bart Chilton said. But the
biggest shock came out of a federal courtroom at the end of March – though if
you follow these matters closely, it may not have been so shocking at all –
when a landmark class-action civil lawsuit against the banks for Libor-related
offenses was dismissed. In that case, a federal judge accepted the
banker-defendants' incredible argument: If cities and towns and other investors
lost money because of Libor manipulation, that was their own fault for ever
thinking the banks were competing in the first place. "A
farce," was one antitrust lawyer's response to the eyebrow-raising
dismissal. "Incredible,"
says Sylvia Sokol, an attorney for Constantine Cannon, a firm that specializes
in antitrust cases. All of these
stories collectively pointed to the same thing: These banks, which already
possess enormous power just by virtue of their financial holdings – in the
United States, the top six banks, many of them the same names you see on the
Libor and ISDAfix panels, own assets equivalent to 60 percent of the nation's
GDP – are beginning to realize the awesome possibilities for increased profit
and political might that would come with colluding instead of competing.
Moreover, it's increasingly clear that both the criminal justice system and the
civil courts may be impotent to stop them, even when they do get caught working
together to game the system. If true,
that would leave us living in an era of undisguised, real-world conspiracy, in
which the prices of currencies, commodities like gold and silver, even interest
rates and the value of money itself, can be and may already have been dictated
from above. And those who are doing it can get away with it. Forget the
Illuminati – this is the real thing, and it's no secret. You can stare right at
it, anytime you want. T he banks found a
loophole, a basic flaw in the machine. Across the financial system, there are
places where prices or official indices are set based upon unverified data sent
in by private banks and financial companies. In other words, we gave the
players with incentives to game the system institutional roles in the economic
infrastructure. Libor, which
measures the prices banks charge one another to borrow money, is a perfect
example, not only of this basic flaw in the price-setting system but of the
weakness in the regulatory framework supposedly policing it. Couple a voluntary
reporting scheme with too-big-to-fail status and a revolving-door legal system,
and what you get is unstoppable corruption. Every
morning, 18 of the world's biggest banks submit data to an office in London
about how much they believe they would have to pay to borrow from other banks.
The 18 banks together are called the "Libor panel," and when all of
these data from all 18 panelist banks are collected, the numbers are averaged
out. What emerges, every morning at 11:30 London time, are the daily Libor
figures. Banks submit
numbers about borrowing in 10 different currencies across 15 different time
periods, e.g., loans as short as one day and as long as one year. This mountain
of bank-submitted data is used every day to create benchmark rates that affect
the prices of everything from credit cards to mortgages to currencies to
commercial loans (both short- and long-term) to swaps. Dating back
perhaps as far as the early Nineties, traders and others inside these banks
were sometimes calling up the company geeks responsible for submitting the
daily Libor numbers (the "Libor submitters") and asking them to fudge
the numbers. Usually, the gimmick was the trader had made a bet on something –
a swap, currencies, something – and he wanted the Libor submitter to make the
numbers look lower (or, occasionally, higher) to help his bet pay off. Famously,
one Barclays trader monkeyed with Libor submissions in exchange for a bottle of
Bollinger champagne, but in some cases, it was even lamer than that. This is
from an exchange between a trader and a Libor submitter at the Royal Bank of
Scotland: SWISS FRANC
TRADER: can u put 6m swiss libor in low pls?...
Screwing
around with world interest rates that affect billions of people in exchange for
day-old sushi – it's hard to imagine an image that better captures the moral
insanity of the modern financial-services sector. Hundreds of
similar exchanges were uncovered when regulators like Britain's Financial
Services Authority and the U.S. Justice Department started burrowing into the
befouled entrails of Libor. The documentary evidence of anti-competitive
manipulation they found was so overwhelming that, to read it, one almost
becomes embarrassed for the banks. "It's just amazing how Libor fixing can
make you that much money," chirped one yen trader. "Pure manipulation
going on," wrote another. Yet despite
so many instances of at least attempted manipulation, the banks mostly skated.
Barclays got off with a relatively minor fine in the $450 million range, UBS
was stuck with $1.5 billion in penalties, and RBS was forced to give up $615
million. Apart from a few low-level flunkies overseas, no individual involved
in this scam that impacted nearly everyone in the industrialized world was even
threatened with criminal prosecution. Two of
America's top law-enforcement officials, Attorney General Eric Holder and
former Justice Department Criminal Division chief Lanny Breuer, confessed that
it's dangerous to prosecute offending banks because they are simply too big.
Making arrests, they say, might lead to "collateral consequences" in
the economy. The
relatively small sums of money extracted in these settlements did not go toward
reparations for the cities, towns and other victims who lost money due to Libor
manipulation. Instead, it flowed mindlessly into government coffers. So it was
left to towns and cities like Baltimore (which lost money due to fluctuations
in their municipal investments caused by Libor movements), pensions like the
New Britain, Connecticut, Firefighters' and Police Benefit Fund, and other
foundations – and even individuals (billionaire real-estate developer Sheldon
Solow, who filed his own suit in February, claims that his company lost $450
million because of Libor manipulation) – to sue the banks for damages. One of the
biggest Libor suits was proceeding on schedule when, early in March, an army of
superstar lawyers working on behalf of the banks descended upon federal judge
Naomi Buchwald in the Southern District of New York to argue an extraordinary
motion to dismiss. The banks' legal dream team drew from heavyweight
Beltway-connected firms like Boies Schiller (you remember David Boies
represented Al Gore), Davis Polk (home of top ex-regulators like former SEC
enforcement chief Linda Thomsen) and Covington & Burling, the onetime
private-practice home of both Holder and Breuer. The presence
of Covington & Burling in the suit – representing, of all companies,
Citigroup, the former employer of current Treasury Secretary Jack Lew – was
particularly galling. Right as the Libor case was being dismissed, the firm had
hired none other than Lanny Breuer, the same Lanny Breuer who, just a few
months before, was the assistant attorney general who had balked at criminally
prosecuting UBS over Libor because, he said, "Our goal here is not to
destroy a major financial institution." In any case,
this all-star squad of white-shoe lawyers came before Buchwald and made the
mother of all audacious arguments. Robert Wise of Davis Polk, representing Bank
of America, told Buchwald that the banks could not possibly be guilty of anti-
competitive collusion because nobody ever said that the creation of Libor was
competitive. "It is essential to our argument that this is not a competitive
process," he said. "The banks do not compete with one another in the
submission of Libor." If you
squint incredibly hard and look at the issue through a mirror, maybe while
standing on your head, you can sort of see what Wise is saying. In a very theoretical,
technical sense, the actual process by which banks submit Libor data – 18 geeks
sending numbers to the British Bankers' Association offices in London once
every morning – is not competitive per se. But these
numbers are supposed to reflect interbank-loan prices derived in a real,
competitive market. Saying the Libor submission process is not competitive is
sort of like pointing out that bank robbers obeyed the speed limit on the way
to the heist. It's the silliest kind of legal sophistry. But Wise
eventually outdid even that argument, essentially saying that while the banks
may have lied to or cheated their customers, they weren't guilty of the
particular crime of antitrust collusion. This is like the old joke about the
lawyer who gets up in court and claims his client had to be innocent, because
his client was committing a crime in a different state at the time of the
offense. "The
plaintiffs, I believe, are confusing a claim of being perhaps deceived,"
he said, "with a claim for harm to competition." Judge
Buchwald swallowed this lunatic argument whole and dismissed most of the case.
Libor, she said, was a "cooperative endeavor" that was "never
intended to be competitive." Her decision "does not reflect the
reality of this business, where all of these banks were acting as competitors
throughout the process," said the antitrust lawyer Sokol. Buchwald made
this ruling despite the fact that both the U.S. and British governments had
already settled with three banks for billions of dollars for improper
manipulation, manipulation that these companies admitted to in their
settlements. Michael
Hausfeld of Hausfeld LLP, one of the lead lawyers for the plaintiffs in this
Libor suit, declined to comment specifically on the dismissal. But he did talk
about the significance of the Libor case and other manipulation cases now in
the pipeline. "It's
now evident that there is a ubiquitous culture among the banks to collude and
cheat their customers as many times as they can in as many forms as they can
conceive," he said. "And that's not just surmising. This is just
based upon what they've been caught at." Greenberger
says the lack of serious consequences for the Libor scandal has only made other
kinds of manipulation more inevitable. "There's no therapy like sending
those who are used to wearing Gucci shoes to jail," he says. "But
when the attorney general says, 'I don't want to indict people,' it's the Wild
West. There's no law." T he problem is, a
number of markets feature the same infrastructural weakness that failed in the
Libor mess. In the case of interest-rate swaps and the ISDAfix benchmark, the
system is very similar to Libor, although the investigation into these markets
reportedly focuses on some different types of improprieties. Though
interest-rate swaps are not widely understood outside the finance world, the
root concept actually isn't that hard. If you can imagine taking out a
variable-rate mortgage and then paying a bank to make your loan payments fixed,
you've got the basic idea of an interest-rate swap. In practice,
it might be a country like Greece or a regional government like Jefferson
County, Alabama, that borrows money at a variable rate of interest, then later
goes to a bank to "swap" that loan to a more predictable fixed rate.
In its simplest form, the customer in a swap deal is usually paying a premium
for the safety and security of fixed interest rates, while the firm selling the
swap is usually betting that it knows more about future movements in interest
rates than its customers. Prices for interest-rate
swaps are often based on ISDAfix, which, like Libor, is yet another of these
privately calculated benchmarks. ISDAfix's U.S. dollar rates are published
every day, at 11:30 a.m. and 3:30 p.m., after a gang of the same usual-suspect
megabanks (Bank of America, RBS, Deutsche, JPMorgan Chase, Barclays, etc.)
submits information about bids and offers for swaps. And here's
what we know so far: The CFTC has sent subpoenas to ICAP and to as many as 15
of those member banks, and plans to interview about a dozen ICAP employees from
the company's office in Jersey City, New Jersey. Moreover, the International
Swaps and Derivatives Association, or ISDA, which works together with ICAP (for
U.S. dollar transactions) and Thomson Reuters to compute the ISDAfix benchmark,
has hired the consulting firm Oliver Wyman to review the process by which
ISDAfix is calculated. Oliver Wyman is the same company that the British
Bankers' Association hired to review the Libor submission process after that
scandal broke last year. The upshot of all of this is that it looks very much
like ISDAfix could be Libor all over again. "It's
obviously reminiscent of the Libor manipulation issue," Darrell Duffie, a
finance professor at Stanford University, told reporters. "People may have
been naive that simply reporting these rates was enough to avoid
manipulation." And just
like in Libor, the potential losers in an interest-rate-swap manipulation
scandal would be the same sad-sack collection of cities, towns, companies and
other nonbank entities that have no way of knowing if they're paying the real
price for swaps or a price being manipulated by bank insiders for profit.
Moreover, ISDAfix is not only used to calculate prices for interest-rate swaps,
it's also used to set values for about $550 billion worth of bonds tied to
commercial real estate, and also affects the payouts on some state-pension
annuities. So although
it's not quite as widespread as Libor, ISDAfix is sufficiently power-jammed
into the world financial infrastructure that any manipulation of the rate would
be catastrophic – and a huge class of victims that could include everyone from
state pensioners to big cities to wealthy investors in structured notes would
have no idea they were being robbed. "How is
some municipality in Cleveland or wherever going to know if it's getting ripped
off?" asks Michael Masters of Masters Capital Management, a fund manager
who has long been an advocate of greater transparency in the derivatives world.
"The answer is, they won't know." Worse still,
the CFTC investigation apparently isn't limited to possible manipulation of
swap prices by monkeying around with ISDAfix. According to reports, the
commission is also looking at whether or not employees at ICAP may have
intentionally delayed publication of swap prices, which in theory could give
someone (bankers, cough,
cough Swap prices
are published when ICAP employees manually enter the data on a computer screen
called "19901." Some 6,000 customers subscribe to a service that
allows them to access the data appearing on the 19901 screen. The key here
is that unlike a more transparent, regulated market like the New York Stock
Exchange, where the results of stock trades are computed more or less instantly
and everyone in theory can immediately see the impact of trading on the prices
of stocks, in the swap market the whole world is dependent upon a handful of
brokers quickly and honestly entering data about trades by hand into a computer
terminal. Any delay in
entering price data would provide the banks involved in the transactions with a
rare opportunity to trade ahead of the information. One way to imagine it would
be to picture a racetrack where a giant curtain is pulled over the track as the
horses come down the stretch – and the gallery is only told two minutes later
which horse actually won. Anyone on the right side of the curtain could make a
lot of smart bets before the audience saw the results of the race. At ICAP, the
interest-rate swap desk, and the 19901 screen, were reportedly controlled by a
small group of 20 or so brokers, some of whom were making millions of dollars.
These brokers made so much money for themselves the unit was nicknamed
"Treasure Island." Already,
there are some reports that brokers of Treasure Island did create such
intentional delays. Bloomberg interviewed a former broker who claims that he
watched ICAP brokers delay the reporting of swap prices. "That allows
dealers to tell the brokers to delay putting trades into the system instead of
in real time," Bloomberg wrote, noting the former broker had
"witnessed such activity firsthand." An ICAP spokesman has no comment
on the story, though the company has released a statement saying that it is
"cooperating" with the CFTC's inquiry and that it "maintains
policies that prohibit" the improper behavior alleged in news reports. The idea
that prices in a $379 trillion market could be dependent on a desk of about 20
guys in New Jersey should tell you a lot about the absurdity of our financial
infrastructure. The whole thing, in fact, has a darkly comic element to it.
"It's almost hilarious in the irony," says David Frenk, director of
research for Better Markets, a financial-reform advocacy group, "that they
called it ISDAfix A fter scandals involving
libor and, perhaps, ISDAfix, the question that should have everyone freaked out
is this: What other markets out there carry the same potential for
manipulation? The answer to that question is far from reassuring, because the
potential is almost everywhere. From gold to gas to swaps to interest rates,
prices all over the world are dependent upon little private cabals of
cigar-chomping insiders we're forced to trust. "In all
the over-the-counter markets, you don't really have pricing except by a bunch of
guys getting together," Masters notes glumly. That
includes the markets for gold (where prices are set by five banks in a
Libor-ish teleconferencing process that, ironically, was created in part by N M
Rothschild & Sons) and silver (whose price is set by just three banks), as
well as benchmark rates in numerous other commodities – jet fuel, diesel,
electric power, coal, you name it. The problem in each of these markets is the
same: We all have to rely upon the honesty of companies like Barclays (already
caught and fined $453 million for rigging Libor) or JPMorgan Chase (paid a $228
million settlement for rigging municipal-bond auctions) or UBS (fined a
collective $1.66 billion for both muni-bond rigging and Libor manipulation) to
faithfully report the real prices of things like interest rates, swaps,
currencies and commodities. All of these
benchmarks based on voluntary reporting are now being looked at by regulators
around the world, and God knows what they'll find. The European Federation of
Financial Services Users wrote in an official EU survey last summer that all of
these systems are ripe targets for manipulation. "In general," it
wrote, "those markets which are based on non-attested, voluntary
submission of data from agents whose benefits depend on such benchmarks are
especially vulnerable of market abuse and distortion." Translation:
When prices are set by companies that can profit by manipulating them, we're
fucked. "You
name it," says Frenk. "Any of these benchmarks is a possibility for
corruption." The only
reason this problem has not received the attention it deserves is because the
scale of it is so enormous that ordinary people simply cannot see it. It's not
just stealing by reaching a hand into your pocket and taking out money, but
stealing in which banks can hit a few keystrokes and magically make whatever's
in your pocket worth less. This is corruption at the molecular level of the
economy, Space Age stealing – and it's only just coming into view. This
story is from the May 9th, 2013 issue of Rolling Stone. via Rolling Stone @ http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425?page=4
For more information
about banksters see http://nexusilluminati.blogspot.com/search/label/banksters
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I proclaim the bankers heist is not a problem, it's only a problem if we believe it to be, for the very nature of the financial system is based on BELIEF and or faith in a system of thievery that has no basis in the real world. No, this is all Alice's Wonderland stuff, of made-up numbers and words that are slanted to cause one to question ones sanity. In an insane world, this story makes sense, but in a sane and rational world, there simply is no such thing as a financial myth making system
ReplyDeleteA Habsburg art exhibit is now in Minneapolis, as I was walking through I couldn't help but say to myself, hey if I had a good PR agent, and access to the best costume department in the world, I too could proclaim myself to be a royal pain in the ass for over 500 years or however long they reined supreme. Yes, as my old late great acting teacher Stella Adler used to say, "surround yourself with beautiful things, wear beautiful clothing and speak intelligently, and you will attain a regal nature." It's all just an acting job... But if you're like me, you'll simply find the absurdity of the current material social structure, laugh at it, make fun of it, and then attain your pleasure by simply pissing on it in a sort of conceited noble manner!
ReplyDeleteIs everything rigged? Well, of course it is within the framework of any political-monetary dictatorship of myth!
ReplyDelete