The Edmond Sun


July 19, 2012

What the LIBOR scandal means to you

EDMOND — It seems there is no shortage of financial scandals to write about these days. By now you have no doubt heard about the latest financial scandal involving LIBOR, the London InterBank Offering Rate.

From a writer’s standpoint, this is like the gift that keeps on giving. You can’t make this stuff up. Barclays Bank admitted to manipulating LIBOR in 2008, at the height of the financial crisis. Their excuse? Not only did they get the hint from the Bank of England that they should hold LIBOR lower than it would otherwise be, but they said almost everyone else was in on the game too. Well, maybe not everyone.

For those not familiar with it, many bank loans around the world use LIBOR as a benchmark for the interest rate charged on a given loan. It will usually be expressed as LIBOR plus a certain percent. Trillions of dollars in loans are tied to LIBOR in some way.

So why is this scandal such a big deal? Borrowers who have loans outstanding at LIBOR or LIBOR-plus got a good deal. This includes many Americans who financed their homes on an adjustable rate, which was usually the prevailing LIBOR plus some number, like 2.25 percent. With LIBOR held lower, borrowers paid less interest. For a borrower, this is a good thing. However, if you were the lender, it was not so good.

Many of these types of loans are included in securitized baskets of mortgages that were bought up by pension funds, insurance companies and others. These institutions became the lenders to many of the borrowers — the homeowners. So as homeowners got the gift of paying a lower interest rate than they should have, the lenders — the pension funds and insurance companies — got less than they should have received. So we have pensioners, insurance contract holders and other fixed income investors that basically had their interest stolen from them.

Borrowing some dialogue from Groucho Marx in the movie “A Night in Casablanca.” —

Groucho: You know I think you’re the most beautiful woman in the world?

Woman: Really?

Groucho: No, but I don’t mind lying if it gets me somewhere.

The magazine The Economist recently wrote that Bob Diamond (Barclays CEO) “retorted in a memo to staff that ‘on the majority of days, no requests were made at all’ to manipulate the rate.” This was rather like an adulterer saying that he was faithful on most days.

Attempts to manipulate free markets invariably end badly. From the Tulip Mania of the 1600s, to the Erie War of the 1860s through the soybean market in 1977-78, the Hunt Brothers’ ill-fated attempt to corner the silver market in 1979-80 and further attempted corners in the tin market (1981- 82 and 1984-85) as well as Enron’s interference with energy pricing and various attempts to manipulate the Treasury markets, all these episodes ended badly for those perpetrating them.

The fact that these episodes were brought to light is always one of the main reasons that most people inherently disbelieve in conspiracy theories. After all, how can a manipulation of such size or scale evade the harsh light of truth? Well, of course, it can’t. The only difference is the length of time they remain in darkness.

To borrow a common line from the infomercials — But wait; there’s more!  When Diamond got thrown under the bus, he decided he wasn’t going alone. It now seems that a giant conspiracy has been going on for years to rig LIBOR, involving the Bank of England and many major banks. There is never just one cockroach.

Let’s take a look at how LIBOR works. LIBOR is actually not just one interest rate. It is the name for rates calculated in 15 currencies for loans of 10 different maturities, ranging from overnight to 12-months. The setting of LIBOR begins each morning in London when someone in one of the designated LIBOR panel banks enters a number into a piece of Thomson Reuters software that asks the question: “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m.?”

Without going into extreme, boring detail, suffice it to say that numbers are submitted by many banks and the highest and lowest 25 percent are thrown out. The middle 50 percent are then averaged, producing a figure that is published as that day’s LIBOR.

Think about this for a moment and notice the obvious. Given that almost half the reported inputs that help establish the LIBOR rate are discarded immediately, Barclays simply could not have manipulated the LIBOR rate alone. Plenty of people were in on the scam. It also seems that a lot of winking has been going on and this was the dirty little secret that everyone inside knew about.

If you were trying to manipulate LIBOR alone, to effectively ensure the rate is set at the price required, you’d need to not only establish the highest and lowest 25 percent of prices, but then ensure the remaining 50 percent average out to the required rate. Based on the fact that there are 16 banks that submit rates, about 13 of the 16 involved would need to be complicit.

At best this is a cartel, at worst it is outright fraud on a scale that is completely unprecedented. Which is it? OK ... I guess that answers that question.

Forget “too big to fail.” Was this “too deep to prove?” Let’s all shout the Latin phrase “Fiat Lux” — Let There Be Light!

You can expect lots of fireworks from this situation in the weeks and months ahead, and expect it to “jump the pond” to the U.S. as we see our American banks pulled into the fray. Stay tuned. What does it mean to you? Most likely a financial sector under more pressure and one more reason to cast a wary eye toward the equity markets. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at Securities offered through Securities Service Network Inc., member FINRA/SIPC.

Text Only
  • Edmond School District’s change orders anticipated

    When building new schools and classrooms there may be additional costs, but when renovating older buildings those costs can more than double, according to a Edmond School District official.
    “When remodeling, you have unknown and hidden costs and you need to include in your budgeted funds for the built-in items you can not see,” said Bret Towne, Edmond’s associate superintendent of general administration.

    July 25, 2014

  • Planning Commission approves rezoning

    The Edmond Planning Commission this week voted 4-0 in favor of rezoning from a single family district.  Peter and Kimberly Roberts made the request to allow a planned unit development on the southeast corner of Jackson and Lincoln Avenue, said Bob Schiermeyer, city planner.
    “They would like to have D-2 family (neighborhood commercial) zoning for duplexes, 14,000 square feet,” Schiermeyer said. “They can put four units on the property.”

    July 25, 2014

  • A Q&A on ‘Obamacare’ Court Rulings

    On Tuesday, two federal appeals courts issued conflicting rulings on the legality of tax subsidies being provided to people who bought “Obamacare” health insurance policies in Oklahoma and 35 other states.
    Here’s a look at the rulings’ potential impact in Oklahoma.

    Q: I’m confused. What did the courts rule today?
    A: A three-judge panel of the U.S. Court of Appeals circuit in Washington, D.C., decided that the government can’t provide tax subsidies for Affordable Care Act plans purchased in 36 states where the federal government is operating the health insurance exchange. Oklahoma is one of the 36 states. A few hours later, the U.S. Court of Appeals circuit in Richmond, Va., issued a conflicting ruling that upheld the legality of the health-care law’s tax subsidies.

    July 22, 2014

  • June healthy month for Oklahoma jobs

    Nearly 10,000 new jobs in Oklahoma were created in June, according to the U.S. Labor Department.
    Gov. Mary Fallin said Tuesday the state experienced one of the largest increases in employment in the nation in June. More than 9,600 additional people joined the state’s workforce in June.
    The unemployment rate in June dropped to 4.5 percent, its lowest ratio in six years. June’s rate was down a percentage point from 4.6 percent in May and April, according to the Oklahoma Employment Security Commission.

    July 22, 2014

  • UCO campus 3.jpg University of Central Oklahoma recognized as having friendly work environment

    The Chronicle of Higher Education named the University of Central Oklahoma as one of the “2014 Great Colleges to Work For.” Central is the only higher education institution in the state recognized on the list and one of only a handful of institutions in the nation given the distinction of being named to the Honor Roll for being cited most often among all the recognition categories.          
    Central joins Duke, Baylor and Notre Dame on the list of the 10 universities named to the large institution honor roll.

    July 21, 2014 1 Photo

  • Council approves funds toward ADA update

    City Council members have approved a $398,800 professional services contract with Accessology, a McKinney, Texas, firm, to establish an Americans With Disabilities Act transition plan for the city.
    Title II of the ADA requires state and local governments to make their programs and services accessible to persons with disabilities. It includes access to government facilities, programs and events and relevant policy changes.
    Accessology was selected out of a pool of five finalists by a five-member committee to create Edmond’s plan. The firm will partner with Kimley-Horn and Associates, a design consulting firm located in North Carolina.
    Edmond’s last ADA transition plan was created in 1992.

    July 21, 2014

  • Panel approves jail services agreement

    City Council members have approved renewal of the city’s jail services agreement with Oklahoma County for prisoners incarcerated at the county jail on city charges.
    The current annual agreement expired June 30. It provides the feeding, care, housing and upkeep of said prisoners. Edmond uses the county jail when the city jail is at capacity.
    The sheriff’s office proposed a slight increase from $46.25 to a $46.50 daily rate per prisoner. City staff said the current agreement is working satisfactorily and believe the proposed rate is reasonable. The new agreement took effect July 1. The city can hold prisoners in its current jail  up to 10 days; a new jail with 10 male and five female cells will be available inside the new Public Safety Center next year when the facility opens.

    July 21, 2014

  • Panel establishes 911 phone rate

    City Council members have established the rate for the 911 emergency phone service fee for calendar year 2015
    Council members set the rate at 3 percent of the recurring charges as designated by the tariff for exchange telephone service or its equivalent within Edmond beginning Jan. 1, 2015.
    Fees collected by wireless and voice over Internet protocol companies are established under a separate statute. To continue collection of the locally authorized service fee on landline phone bills, local governments must approve a resolution on an annual basis to set the actual fee.
    Governments must also through the Association of Central Oklahoma Governments notify the appropriate incumbent local exchange carrier and competitive local exchange carrier phone companies by Sept. 1, 2015.
    ACOG recommended for calendar year 2015 to maintain service fees at their current level of 3 percent.

    July 21, 2014

  • Council approves $2.5M extra for utility

    City Council members have approved the transfer of a $2.5 million appropriation for Edmond Electric.
    The action was needed due to higher natural gas prices. Those increased prices caused wholesale electric purchase costs to exceed the department’s budget estimates for Fiscal Year 2013-14. To cover the increased costs, a transfer of funds from the “Transfers” category to the “Other Services and Charges” category was necessary.
    It will maintain state law requirements and not increase Edmond Electric’s budget.
    The action occurred during Monday’s meeting and was approved unanimously.

    July 21, 2014

  • The Escape Edmond entrepreneurs sleuth their way to success led Andrew Gipson to an industrial complex outside of Dublin, Ireland, about a year ago. The recent University of Central Oklahoma graduate was in the midst of an extended stay in Australia and the United Kingdom when he walked through the doors of XIT Live Escape Adventure Game. According to Tripdadvisor, it was the top attraction in Ireland. He had to go.
    An hour later, Gipson, 24, exited the facility inspired.

    July 19, 2014 1 Photo