U.S. Borrowers Deserve Protection from Libor

In the wake of the financial crisis caused in large part by the reckless behavior of banks, we have wrestled with institutions that are "too big to fail" and "too big to jail."

Now, after evidence of a widespread fraud on a key benchmark interest rate that has cost borrowers and savers billions of dollars, we may be dealing with something "too big to replace."

The rate in question, which is used to adjust interest rates on everything from swaps to mortgages, is the infamous Libor, an acronym which stands for London interbank offered Rate — the rate at which banks in London supposedly make unsecured loans to each other.

It emerged last year that some of the 18 international banks involved in setting Libor each day were manipulating this rate, which means that on each of millions of securities, loans and retirement plans using Libor as a benchmark someone — U.S. cities and school districts, homeowners, retirees — got cheated.

Regulators found e-mails from bank staffers asking friends at competing banks to fudge the rate in return for steering them brokerage business — or a bottle of champagne or, in one case, leftover sushi!

Three banks — British banks Barclays and RBS and Swiss bank UBS — paid a total of $2.5 billion in fines for falsifying Libor rates.

So once this malfeasance was discovered, banks stopped using the compromised rate in their products, right?

Nope. As with so many of the banks' abusive practices, regulators are moving at glacial speed to rectify the situation, and in the meantime this dubious benchmark continues to be used in numerous financial products.

After due deliberation, U.K. authorities announced they will remove oversight of Libor from the British Bankers Association and put it under government regulatory authorities.

But governance is not the only problem with Libor. The fact is that banks have virtually ceased making unsecured loans to each other so that Libor is pretty much a total fiction.

For this reason, Gary Gensler, chairman of the Commodity Futures Trading Commission, the U.S. agency responsible for regulating swaps, suggested in a speech last month in London that it is time to find a benchmark rate that is more honest in spite of Libor's widespread use.

"It's best that we not fall prey to accepting that Libor or any benchmark is 'too big to replace,' " he told an audience of regulators and bankers.

Last month's annual report from the Financial Stability Oversight Council — the interagency body set up in the U.S. in the wake of the financial crisis to identify and defuse potential threats to the global financial system — listed the damaged integrity of Libor as one of the major potential risks it is currently worried about.

Calling attention to the dearth of any actual transactions at this "interbank" rate, the report warns, "This situation leaves the financial system with benchmarks that are prone to and provide significant incentives for misconduct."

Gensler documented the fictitious nature of Libor for his London audience in a series of slides comparing bank credit rates during the recent crisis over a possible exit by Cyprus from the euro.

While other measures of credit for international banks, such as the cost of credit default swaps for these institutions, were swinging widely during this period, the banks' submissions for Libor remained unchanged.

"One might have thought the two would have had some relation to one another," Gensler said.

What Gensler and the FSOC want is a benchmark set by on observable process anchored in a real market. For instance, while many adjustable-rate mortgages in the U.S. are based on Libor, others use much more widely based or verifiable benchmarks, such as the cost of funds index (COFI) from the San Francisco Federal Reserve or the one-year constant maturity Treasury (CMT) based on an average of yields on Treasury securities.

However, not only are the big banks resisting any change, authorities in the U.K. are dragging their feet on scrapping Libor, arguing that improved governance will help and that a change of this scope would be disruptive.

The U.K. wants at all costs to maintain London's role as a hub of global finance. Financial and related professional services employ some 2 million people in the U.K. and account for nearly 15% of the country's GDP, more than in any other industrial country.

So London is showing little sense of urgency even in making the move to better supervision, let alone finding suitable alternatives.

If borrowers and pensioners here are to be protected from further losses due to fraudulent manipulation of this key rate, it will be up to U.S. authorities to keep pressing for alternatives, even if they have to do it alone.

Source: http://www.usatoday.com/story/money/business/2013/05/14/delamaide-column-libor-scandal/2158085/

How Rigged Are The Markets? Libor, ISDAfix And Now The Oil Price...

It seems that news about the fixing of trillion dollar markets is becoming, well, rather routine. First there was Libor, then there was the announcement that the Commodities Futures Trading Commission (CTFC) was investigating the possible rigging of the interest rate swap rate, another market in the hundreds of trillions. Then in mid-April the EU announced that it was investigating possible price manipulation in the $165 trillion physical-oil market. That's three price fixing scandals slap bang on each other's heels, all involving trillion dollar markets.


The public has not yet got worked up about the first two since the instruments involved are so far out of the ordinary person's view that the response, if you stopped someone on the street would be, "Sorry, never heard of it..." The alleged oil price scandal, however, could strike a lot closer to home. Motorists around the world are already furious over the cost of petrol and diesel at the pumps. While the vast majority of them probably feel that the oil companies are profiteering, the general feeling seems to be "Oh well, thing are as they are..." But if it transpired that instead of just being opportunistic, some of the major oil companies were actually involved in criminal activity things could get ugly.

Being a banker was almost a dangerous career to be in, for a few years after the smash, and bankers are not wholly out of the woods yet. Being an oil company executive could soon attract similar opprobrium if the EU investigation turns up any wrong-doing. A hate campaign against the oil companies, in a world that continues to run on oil and gas despite the strides being made in renewables, would not be a good thing.

The EU began with an investigation into possible price fixing by Royal Dutch Shell, BP and Statoil, three of Europe’s biggest oil exporters. According to Bloomberg EU investigators have now asked Neste Oil, Finland’s only refiner, to provide them with information regarding the potential manipulation of global crude and biofuels markets. Bloomberg also reported that Pannonia Ethanol, a Hungarian bio-fuels producer, has lodged a complaint with the European commission after it was denied the opportunity to contribute to the price setting process carried out by data-price setting company, Platts. There is plenty of speculation that the EU investigation will widen out pretty rapidly once the investigators start going through oil company emails and memos. Neste has said it is not a target of the investigation but will provide information into the investigation. Refineries, as major buyers of crude, are in a good position to know if they have been facing price fixing by supposed competitor suppliers, so their contribution is bound to be at least interesting.

Source: http://seekingalpha.com/article/1449461-how-rigged-are-the-markets-libor-isdafix-and-now-the-oil-price?source=google_news

Investigation Into Oil Industry Price Rigging Mirrors LIBOR Scandal

The European Union is investigating price-rigging in the global oil market, a widely-known yet unaddressed problem. That investigation hit a peak with last Tuesday’s raids of British Petroleum, Royal Dutch Shell, and Statoil offices. By the end of the week, Sen. Ron Wyden (D-OR) asked the U.S. Justice Department to undertake its own investigation into the effects on U.S. consumers.

Day-to-day oil transaction prices are based on benchmarks set by private firms, and the EU investigation focuses on the firm Platts, whose oil price benchmarks are “the most influential,” according to CNN Money. By manipulating individual transations late in a given day, traders can tweak the next day’s benchmark to increase their profits on other deals.

This looks to be very similar to last year’s massive, under-covered LIBOR scandal, in which megabanks colluded to gear a supposedly market-driven interest rate toward their own interests. CNN Money explains the shared pitfalls of basing daily price-setting on voluntarily-provided, unaudited data from the biggest players in the two industries:

“[T]hey are both widely used benchmarks that are compiled by private organizations and that are subject to minimal regulation and oversight by regulatory authorities,” the review, led by former financial regulator Martin Wheatley, said in August . “To that extent they are also likely to be vulnerable to similar issues with regards to the motivation and opportunity for manipulation and distortion.” […]

There are also concerns about the fact that reporting to Platts is done by traders voluntarily. In a report issued in October, the International Organization of Securities Commissions — an association of regulators — said the ability “to selectively report data on a voluntary basis creates an opportunity for manipulating the commodity market data” submitted to Platts and its competitors.

LIBOR manipulation impacts $800 trillion in assets globally. Similarly, oil prices are a core driver of the price of nearly every consumer good, especially food. LIBOR manipulation helped force massive cuts to public services in American cities by blowing up the balance sheets of those cities, and the apparent manipulation of oil prices is likely to have a similarly long and destructive reach.

The shared features of the LIBOR scandal and the burgeoning price-rigging investigation in the oil industry suggest a policy lesson: Left to themselves, the biggest industries in the world tend to cheat in their own interests, at great cost to consumers.

The LIBOR scandal, regarded as the largest financial fraud scandal in history, led to over $2.5 billion in fines and forced changes in the U.K. Under a law passed earlier this year, the process by which LIBOR is set will receive tighter government oversight from a new agency. But that change is insufficient, according to the American head of the Commodities Futures Trading Commission, and fraud remains a possibility.

These structural incentive problems crop up in myriad other markets. Finance expert Barry Ritholtz has a roundup of dozens of other types of market manipulation by insiders, far beyond oil and LIBOR. Privately and voluntarily generated core prices tend to discourage competition at the expense of consumers, as economist Costas Lapavistsas argued earlier this year in the Financial Times. “The answer,” according to Lapavistas, “is public intervention in the rate-setting process, whether through the central bank or otherwise.”

Source: http://thinkprogress.org/economy/2013/05/20/2036101/investigation-into-oil-industry-price-rigging-mirrors-libor-scandal/?mobile=nc

Mis-sold Interest Rate Swaps Deadline Imminent

Time is running out for bringing a court claim against banks for the mis-selling of interest rate swaps according to Lucy Baker, commercial litigation solicitor at Brabners Chaffe Street in Manchester.



On 31 January 2013 and 14 February 2013 the Financial Services Authority published updates regarding the mis-sold interest rate swaps by banks including Barclays, RBS and Lloyds Banking Group.

The report revealed the FSA's findings from the pilot reviews completed with Barclays, Lloyds Banking Group, RBS, Natwest, Allied Irish Bank, Bank of Ireland, Co-operative Bank, Clydesdale and Yorkshire Banks.

The FSA reviewed the sale of around 40,000 interest rate hedging products and found that over 90% failed to comply with one or more of the FSA's regulatory requirements. It has also added new criteria to the test of whether a customer is "sophisticated" or not.

In order to help small and medium sized businesses assess whether they fall within the review the FSA has produced a flowchart and guidelines to enable consistency from the banks with regards to redress, by attempting to put the customers back in the position they would have been in had the breach of regulatory requirements not occurred.

The FSA is set to announce its findings from the pilots of other banks who agreed to the review within the next few months.

The banks are aiming to complete the review within six months, however no guarantees have been given.

Small and medium sized businesses that bought interest rate hedging products commencing in 2007 will be approaching its six-year anniversary. In legal terms this means it will be approaching the limitation period under the Limitation Act 1980; any claim which is not brought within six years of the date of the hedging product commencing will be statute barred from pursuing court action.

Even if a company falls within the FSA scheme, it may wish to preserve its right to bring proceedings in the event that the proposals for redress that it recovers from its bank are unsatisfactory.

Barker suggests that any business which entered into an interest rate hedging product should take immediate legal advice, as there are protective writs and standstill agreements with the banks that can be entered into to stop time running out.

Source: http://www.placenorthwest.co.uk/news/archive/13363-mis-sold-interest-rate-swaps-deadline-imminent.html

Interest Rate Swap – An Unending Process

There are many financial derivatives that have threatened our banking and financial systems. Interest rate swap is probably the most important of it all posing a serious threat to the banks. You need to have the basic rights if you honestly want to understand the complexities of such an important derivative that affects our financial system in a large scale.


The Interest rate swap is nothing but a liquid financial derivative or more of an instrument that includes the exchange of interest rate cash flows between two parties. You should know that one of these parties in most cases is the bank itself, occasionally both parties being banks or other financial institutions. This is a lot more complicated to understand. So if you want to understand in simple terms, then it is just a kind of a agreement that different institutions like small businesses enter with banks just to protect themselves from the continuous change and market fluctuations in the interest rates.

In this process both the parties agree to pay fixed interest rates that are usually made under a common currency not a different one. Last few years have seen many new features being incorporated in the field of interest rate swapping, the major one being the exchange of rates based on different currencies. Banks make use of these rate swaps just for extending credit facilities to small business organizations. But this doesn't come without its disadvantages. It has been a subject of massive litigation giving rise to interest rate swap mis selling.

Small business organizations enter into such an agreement to protect themselves from the ever changing market. But the recent past has seen some serious exploitation on the part of top banks that have encouraged serious irregularities in sales practices adopted by these banks. As a result the small businesses are left crippled by this type of mis selling. Even they end up completely broke and nothing else to do.

Legally, the law enforcement is trying to bring order in this and have so ordered the top financial institutions the big names in the banking industry to properly compensate these small and hardworking business enterprises for these mis sellings. But this order is yet to be seen followed seriously by the banks. There have been penalties on the banks to do such thing but still mis selling are a thing that still thrives on. There is no place of trust in the equation contrary of the time when trust was most important in banking relations.

For customers (small time business owners) have ensued a battle for this injustice. Many have rather tasted success in winning and getting the money back. Yes they have thwarted the plans of the banks and get the right amount of compensation. Law enforcement has been strict and massive but still the interest rate swaps are going on and businesses are still being prey to such banks. Though the law regulations have become somewhat strong, the banks still find a way to do such things and still evade the law.

Source: http://www.articlesbase.com/law-articles/interest-rate-swap-an-unending-process-6497003.html

The Interest Rate Swaps Scam: Has Your Small Business Experienced Financial Difficulties?

Within the past year, the interest rate swap scam has received a great deal of attention and with good reason. Once again banks were misleading customers by selling financial products that were highly complex whilst carrying a great deal of risk. Has your small business experienced difficulties as a result of the

interest rate swaps scandal? If so, perhaps the following information may help you claim redress.

LIBOR Rate Fixing Is at the Root of the Scam

Unlike other countries in the Western World, the UK’s interest rates are set by high street banks. Whereas the United States and the EU have a central bank that sets rates, interest rates are calculated based on what the major banks are charging at any one period of time. There are twelve separate ways in which rates fluctuate and this only adds to the complexity of the problem. The Financial Services Authority (FSA) is well aware of the fact that the average small businessman is highly unqualified to make an educated decision on whether or not to purchase this product alongside a commercial loan.

It is the FSA’s contention that high street banks were fully aware of this and that they knowingly continued mis selling interest rate swaps as a packaged deal with commercial loans to unsophisticated customers who had no way of calculating the risks involved.

Escalating Number of Interest Rate Swaps Complaints

As in the case of mis sold payment protection insurance, small businesses are able to make a claim of mis sold interest rate swaps and compensation as well. The problem is that SMEs are operating at a disadvantage when it comes to tackling savvy high street banks. A small business may have an accountant or the services of a solicitor, but the key players in the scam, high street banks, are represented by teams of the world’s best lawyers. If you have been mis sold interest rate swaps in tandem with a small business loan, you may not know where to turn for help.

Real Business Rescue is more than an insolvency service. Our team of financial advisers and insolvency specialists are able to help you determine if you have fallen prey to the interest rate swap scam. We can help put you in touch with the right specialists who are able to take on the big guys and beat them at their own game.

If you have experienced financial distress due to losses incurred from interest rate swaps, we can help make that right. Give us a call on 0800 231 6040 to learn what you can do to be compensated for those losses and to recover what was lost in high interest payments.

Source: http://www.realbusinessrescue.co.uk/articles/interest-rate-swaps/interest-rate-swaps-scam

The Disadvantage of the Interest Rate Swaps

The disadvantages of interest rate swaps Interest rate swaps are financial instruments used by big investors. The interest rate swap is a financial mechanism used by investors, manage risk and speculation of future market performance. Interest rate swaps, an investment group committed to pay a fixed interest rate and a variable interest rate in exchange for the same amount of money to invest to another. This allows speculators to help other investors to consolidate its investment.


Disadvantages of interest rate swaps others are reading to exchange debt for equity risk survey of rate increases return on investment due to floating interest rates fluctuate with the market, they are more difficult to manage than the fixed-rate investments. Fund managers frequently exchange floating interest rates for fixed rate interest rate swaps to lock in the rate, and allows planning. If the terms of the floating interest rate rise in the interest rate swaps consultation, the original owner of the amount of flow lost increased interest income to boost prices, but only the difference between the agreed rate out of each other in floating. For example, if in a 6.7% interest rate swap negotiations, the floating rate rose to 6.9%, the original investors in non-interest bearing 0.2% interest rate differentials.

Speculators the rate speculative investors trading the predictability and safety of fixed-rate revenue stream flow forecasting interest rates will rise in floating interest rate volatility, the more lucrative investment value of floating rate over the initial fees. If the floating rate decreased to reduce the investment value of speculators, investors lose money. For example, a thousand dollars floating rate flow down to 6% (pay an annual value of $ 60) resulting in a net loss of 5 dollar speculators transactions per year interest rate of 6.5% revenue streams (worth $ 65 a year) 1,000 a Australian dollars.

Currency fluctuations, interest rate the swap mechanism more complex form of transaction value of the two currencies interest rate and currency combination. These strategies bring the same investigators and the risk of speculators – whether it is to lose the extra income the value of one currency rises or lose money when it falls – foreign currency exchange and interest rate forecasts, making the international interest rate swaps period a complex proposition.

Source: http://www.howmoneyarticles.com/archives/20130407/the-disadvantage-of-the-interest-rate-swaps.html