The Mess of Crisis Time LIBOR
Peter Tchir gives some interesting insight into the LIBOR vs CDS prices.
Here are the 3 month USD LIBOR submissions for some of the banks, along with where 1 year CDS was quoted at the time. The 1 year CDS data is not the best, but is indicative and certainly reflects what I remember as the relative safety perception. I’m also looking into CD rates, bonds, and stock prices, but I find a few things interesting here.
| Date | JPM | Citi | BofA | DB | HBOS | RBS | Barc | UBS | CS | Nor | BOTM | HSBC |
| 10/3/2008 | 100 | 345 | 105 | 114 | 228 | 235 | 189 |
171 |
91 | 77 | 55 | 52 |
| 10/3/2008 | 4.10 | 4.02 | 4.50 | 4.05 | 4.90 | 4.50 | 5.00 | 4.35 | 4.50 | 4.40 | 4.60 | 4.10 |
| 10/9/2008 | 103 | 400 | 113 | 102 | 181 | 246 | 149 | 191 | 83 | 104 | 78 | 45 |
| 10/9/2008 | 4.40 | 4.45 | 4.80 | 4.65 | 5.00 | 5.00 | 5.10 | 4.75 | 5.00 | 4.75 | 4.95 | 4.30 |
| 10/31/2008 | 68 | 174 | 81 | 95 | 113 | 98 |
110 |
108 | 104 | 137 | 65 | 68 |
| 10/31/2008 | 2.75 | 3.00 | 2.80 | 3.05 | 3.10 | 3.00 | 3.20 | 3.02 | 3.05 | 3.05 | 3.20 | 3.00 |
| 11/20/2008 | 98 | 369 | 104 | 112 | 146 | 143 | 156 | 146 | 125 | 94 | 98 | |
| 11/20/2008 | 1.85 | 2.10 | 2.15 | 2.20 | 2.15 | 2.23 | 2.40 | 2.14 | 2.25 | 2.18 | 2.20 | 2.10 |
LIBOR for Dummies
Many have written on the LIBOR scandal over the past week, but what is LIBOR actually, and what are the implications of manipulating IT? Some insight on the subject by Peter Tchir.
The BBA provides pretty detailed analysis of the process. The key here is what the rate is meant to be. The contributors, are supposed to submit a rate for each currency they contribute for overnight, one week, two week, and monthly out to a year. The rate is meant to be:
“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”
This is a bit like self-reporting your weight. The bank is supposed to submit a rate where they think they could borrow, not where they actually borrowed or where they would lend to other contributors. Right from the start the question raises questions that have been discussed for years.
How can a bank “know” where some other bank will lend them money? Can’t they use transactions? Can’t they get firm “offers” from other banks? Why not have the banks submit levels where they would lend to other banks?
The very nature of the question used to solicit rates tells you all you need to know. LIBOR has always had an element of “gamesmanship” if not outright lying.
In general, banks will tend to submit lower rates and attempt to artificially lower LIBOR. There are two reasons for this:
Did Spanish officials help create the crisis?
The Trader has covered the subject of the Great Spanish Denial over the past year. With the crisis and austerity hitting the Iberian Peninsula, we can’t but wonder what the “Elite” has been doing while the SPanish economy has totally imploded? More from NYT.
As Spain edged closer to a real estate and banking crisis that led to its recent bank bailout, Spanish financial leaders in influential positions mostly played down concerns that something might go terribly wrongFrom left, José Viñals of the International Monetary Fund; Jaime Caruana, chief executive of the Bank for International Settlements; and Rodrigo Rato, until last month the head of Bankia.
The optimism of Spanish central bankers who went on to top jobs at the International Monetary Fundechoes the attitudes of officials in the United States who misjudged the force of a housing collapse several years ago that crippled banks and the economy. And it underscores the complications that can arise when government officials take watchdog roles at international agencies that pass judgment on the policies they once directed.
Taibbi and Yves Smith on Banks, bail outs, greed and psychopathy
Must watch video by Bill Moyers below.
Denial stops in Spain as banks finally ask for monedas
No, no, no, but eventually after years of denial it was a YES. Spain is slowly realizing the banks need more capital. The problem is though, Spain will most probably be coming back for much more. With the “fantasy” valuations of unsold properties, the balance sheets will be needing more boosting later. Let’s see what happens to Spain’s, 92 billion Euros, part of the mighty EFSF. From El Pais.
Economy Minister Luis de Guindos announced Saturday evening that the government intends to ask for a European bailout to recapitalize Spain’s banking sector. The package will total 100 billion euros.
He added that the amount of the rescue package would be “sufficient” to meet the needs of the banking sector as identified by the audits being carried out by two independent appraisers and the estimates of the IMF, plus “a significant margin.”
As the financial assistance as defined by De Guindos will be to attend to the needs of the banking sector, the conditions that will be imposed for its disbursement will be linked exclusively to the specific loan to the financial sector.
The loan will be received under “very favourable conditions.”
End Game Nearing for European Banks
I have been braying on this video channel that the European banking problem is so big as to be unsolvable. On a May 29 video I quoted a Spanish financier as saying: The Spanish loan loss problem has not been quantified by anyone because there is huge pressure not to tell the truth. Spain has engaged in a policy of delay and pray.
Apparently the delay is over, the can has gone as far down road as it could be kicked, whatever. Spanish banks are so broke that they are willing to open their books to the auditors. Yesterday the Spanish Economy Minister said that three groups of auditors, that include the top five American and one German firm as well as the IMF. VIDEO BELOW.
Financial Sector
El Erian on the challenges for the Financial Sector.
I suspect that virtually everyone would agree that, in the last few years, we have seen an unprecedented focus on regulatory reform, and rightly so. Indeed, the issue has not been the input but, rather, the output.
Since the financial crisis, lawmakers in several countries have passed on paper seemingly sweeping financial reform, and regulators have been working hard to implement the details at a breakneck pace. Examples of national, regional and multilateral initiatives include (and are certainly not limited to):
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The Dodd-Frank Act in the United States that, among other things, involves the overhaul of the derivatives landscape, increases transparency and disclosure, implements the “Volcker Rule” that limits trading activities within banks and establishes measures meant to address both “too big to fail” and systemically important institutions;
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The European Market Infrastructure Regulation (“EMIR”), which, similar to Dodd-Frank, addresses derivatives trading, central clearing, fund structure and reporting and disclosure requirements in Europe;
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Markets in Financial Instruments Directive (“MiFID”) II, which, in updating the original directive, addresses issues of high frequency trading, transparency and position limits in Europe; and
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Basel III regulations on capital requirements and other aspects to be phased in between 2013 and 2019.
The lies of the EBA about how safe our banks are.
They tell us; “it is all fine, we don’t need more capital”. Then suddenly, in matter of short time, they come back and ask us for more money. The latest of banks first telling us all was fine, and then asking for help, is Spanish Bankia. From Golem.
Some time ago in the Propaganda War series (Markets don’t Fail, Risk Weighted Lies, Balance Sheet Instabilities, Toxic Bloom of Lies and The Banker’s Mexican Standoff ), I questioned the system of jargon which banks and their regulators use to assure us, and perhaps themselves as well, about the risks they run, and their claims of having it all under control. I suggested that the concepts, for all their pretensions to mathematical precision, were dangerously stupid and actually little more than self-serving piffle.
In Toxic Bloom of Lies, I looked in particular at the technical sounding notion of Risk Weighted Assets. A bank’s Risk Weighted Assets are just the amount the bank expects to make back on the loans it has given out, multiplied by some estimate of the risk that some or all of the income from the loan might not be paid back. Not that complicated really but essential if you want to really know how solid a bank is. Of course the obvious question is who gets to set the risk factor?
ETFs – The Next Accident Waiting to Happen?
How many of those holding ETF’s know what the ETF stands for? How many know how they work? How many understand the leveraged ETF’s and their risks? How many understand the hedging procedures? How many have actually created, priced, and hedged ETFs? The answer to all the above is probably very few. Despite being a relatively complex field within the creative finance industry, especially the exotic and leveraged versions, few people actually understand what they trade, and even less the risks involved with these products.
A few weeks ago we saw many novice investors get crushed in their TVIX holdings. Below is a good summary, by a non banker, explaining in plain english about some of the risks associated with ETFs. Don’t forget, 80% of the issued ETFs, are done by 6 players. Most of those had to be bailed out by the taxpayers. Those are some risks to think about….From Golem.
Where will the next point of instability be? Not what will trigger the next liquidity and credit crunch and cause the next landslide of panic selling and losses. We can already see many candidates for the trigger. But what will be the mechanism by which it is amplified and spread?
I think that in a couple of years, unless something alters the current trends in money flows, we will come to know ETFs the way we already know the securitization and packaging of sub-prime mortgages into CDOs. I think the signs are already there to suggest ETFs are where the instability and risk is accumulating. If I am in any way correct then ETFs will be to the next stage in our on-going state of siege-mentality crisis what CDOs were to the last.
To substantiate this claim I have to tell you in simplified terms what an ETF is. And then explain how, despite all the differences between mortgage backed CDOs and ETFs, the latter generally being based on stocks, bonds and commodities rather than mortgages, they are undergoing the same evolution from simple to opaque, stable to unstable, are being seen as the provider of liquidity and risk-controlled ‘exposure to risk’, just as CDOs were, when in fact they are concentrating risk and will, in a moment of panic, cause liquidity and lending to collapse.
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