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Sunday, 23 November 2014

Banks' Libor nightmare just keeps on giving

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Often when I sit down in the morning and begin to contemplate what events in the world of business, finance and politics I am going to take pot-shots at on that particular day, I wonder how much of me is level-headed observer and how much of me is just grumpy old man. However, when it comes to the shenanigans surrounding the Libor scandal, I do find copious quantities of both.   

Anthony Peters, SwissInvest Strategist

I remember well the phone call I received more than a year ago from a chum at one of the national newspapers asking me what I thought of the news that the US authorities were launching a review into putative rigging of the Libor rate fixes. Frankly, I laughed it off for two reasons. The first is, as every two-bit business correspondent on a local paper now knows, that the rate is taken from eight of 16 submissions with the highest and lowest four being discarded. Try rigging that. The second is that, as both assets and liabilities on the balance sheet are pegged to the same Libor rate, whatever was gained on the swings was lost again on the roundabouts.

I have now spent several months watching the story develop and gain momentum and the longer it goes on, the more I feel that we should just put it all down to being a bad experience, not to be repeated, and move on. Unfortunately, I have no influence on the affair and so, following the carpeting of Barclays and the defenestration of its chairman and its CEO, I am not at all surprised to read this morning that the New York Attorney General and Connecticut Attorney General have joined hands and have subpoenaed the world and his dog as they launch a further investigation into the alleged manipulation of rates.

All well and good, as far as I am concerned, as a job creation scheme. We seem to have acknowledged that some “low-balling” went on and, having been caught at it, the banks have put their hands up and confessed that they might have been able to do better. But what, other than collecting a few billion dollars more in fines which will help to lessen the deficit, is all this going to bring? Not a lot is my guess.

That is, until you hear that “thousand of US states and municipalities” had elements of their finances linked to Libor and therefore there will be claims for damages in the hundreds of billions which are about to be filed. I still struggle to see where they see the damage they suffered if their borrowings were linked to Libor which was set lower than it should have been.

On local authorities: they should be handing out honorary citizenships to their bankers, not suing them

Anyhow, given that the number of local authorities which were net lenders to the markets and who might have been hurt by lower rate settings is probably to be counted in teens rather than hundreds, let alone thousands, and they should be handing out honorary citizenships to their bankers, not suing them. Sadly, public sector finances are in just as parlous a state in the US as they are in Europe and, with smooth-talking litigation lawyers being the 21st century equivalent of the archetypal snake-oil salesmen, the thought of wiping out the deficit and the debt with one single court ruling is just too tempting.

If these local authorities feel so strongly that rates had been manipulated and that there is a case to answer, how about they open the batting by offering to make up the amount of interest they must have underpaid on their Libor-based liabilities. I could go on, grumpy old man that I am.

Difficult reading

Wednesday was a good day for the glass half-full brigade as Tuesday’s strong US Retail Sales figures were followed by some equally strong Industrial Production and Capacity Utilisation releases. However, these did not at all tally with the Empire State Manufacturing survey which is not a hard output figure, but a reflection of perceived business conditions and this diffusion index went negative for the first time in nearly a year.

It continues, day by day, to be incredibly difficult to read the direction in which the economy is moving. Likewise, in China, for every strong release, we get a stinker in its wake. Today it was Foreign Direct Investment which fell in July by an annualised 8.7%, significantly more than expected. However, this is a fairly volatile series and one which, to be honest, probably doesn’t mean a whole hell of a lot. However, it does confirm that wherever we are going, we’re not going there in a hurry. Nothing new there, is there?                 

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