Let the Cat Guard the Cream – And You Get LIBOR Fraud, or

Don’t Blame Barclay’s, Blame Ourselves!

By Shlomo  Maital   




The Cat Guards the Cream..Great Idea!


What in the world is LIBOR? 

 It is an acronym that stands for “London Interbank Offered Rate”.  It is the average of the perceived rate of interest banks pay when they borrow from each other.  It is calculated by officials of the top London banks with “cash” responsibilities, just before 11 a.m. daily. 

Why is it so important?

Because, LIBOR is used as the basis for calculating the rate of interest on a very wide and large range of assets, including  forward rate agreements, short-term-interest-rate futures contracts,  interest rate swaps, inflation swaps, floating rate notes, syndicated loans, variable rate mortgages, and currencies. You do not have to know what all those are; enough to know, as the BBC says, that LIBOR impacts $550 trillion (!) worth of assets (about 10 times the annual world GDP). 

Why is it in the news?

 On May 29 2008, The Wall Street Journal reported that banks were systematically understating the LIBOR rates,  in order to pretend they could borrow much more cheaply than they really could.  They did this,  because in the face of huge losses on subprime mortgages and credit default swaps, they had to pretend their balance sheets were better than they really were.   According to WSJ, “) “Citigroup said it could borrow dollars for three months at about 0.87 percentage point lower than the rate calculated using default-insurance data.”   Is that a lot?  You bet!  0.87 per cent on, say $550 trillion, is $4.35 trillion (twice the GDP of Italy!). 

On 27 June 2012, Barclays Bank was fined $200m by the U.S. Commodity Futures Trading Commission, $150m by the United States Department of Justice and £59.5m by the British FSA manipulation of the LIBOR and EURIBOR rates. 

Why Barclay’s?

Because the CEO of Barclay’s Bob Diamond was the first to admit wrongdoing.  (You can bet he is kicking himself, because his reward for being the only one to tell the truth is to be humiliated, busted, fired and discarded).  But many other banks did the same thing.  And it was obvious they were doing it.   How come we let the bank cats guard the cream? If they have every incentive to mis-state the true LIBOR rate, if millions of dollars and pounds in bonuses are at stake, why would they not do it?  Especially when, as author Michael Lewis recounts, the bank culture is not that of kittycats but ferocious tigers:

   “An investment banker is a breed apart, a member of a master race of dealmakers. He possessed vast, almost unimaginable talent and ambition. If he had a dog it snarled. He had two little red sports cars yet wanted four. To get them, he was, for a man in a suit, surprisingly willing to cause trouble.”

   Bob Diamond is an investment banker. So are most of the other Masters of the Universe (cf. Jamie Dimon, JP Morgan, etc.).  Maybe he did not know his workers were falsifying LIBOR.  But given the culture he represented, why would they NOT?

 What is the solution?

 Here is a serious suggestion I heard on the BBC.  Treat every bank product or service as a pharmaceutical drug.  Act like the FDA – insist that banks prove that every new proposed product or service creates real value for human society, like medicine.  And make them do ‘clinical trials’ to provide evidence.  Because otherwise, we will continue to get poisonous products like manipulated LIBOR.

   But at the very least, let’s stop being so stupid.  Calculate LIBOR with a team of Bank of England experts who use objective data from real borrowing deals, not ‘perceived’ estimates from bank kittycats who have a vested interest in lying.  If we let them do this, we deserve what we get.