The Dancing Monkeys of Libor
Aesop tells the fable of a prince who had trained some monkeys how to dance. As natural mimics, they soon proved to be very good dancers. And when dressed in rich clothes and masks, they danced as well as any of the human courtiers. The spectacle at the lavish parties the prince held became wildly popular throughout the land and was repeated each night to great applause from the partygoers.
Applied today, at a time where the extremely affluent are today’s self-appointed royalty, the prince could be the CEO of any of the world’s superbanks: Barclays, JPMorgan Chase, Citibank, or Deutsche Bank. No commercial arena has consolidated more power, influence and wealth. In that glamorous world of hedge fund managers and investment executives, the monkeys—the lowest-of-the-low (with the low bonuses and salaries to prove it)—are the money market traders.
Until the financial boom began to show signs of slowing, there was no real incentive for the royals of finance to pay any attention to their money market traders. With their princes awash in cash, this band roamed the dense jungles of finance from The City of London to Wall Street, happily feeding off scraps. One day in 2007, however, the jungle caught fire and began to consume their collective habitat. Cash flew out of high rise windows. Banks began to fail. Panic ensued.
A few years earlier, Thomas Haye, and Philippe Moryoussef, both former derivatives traders, began to form loose cells of fellow traders from the other superbanks to manipulate interest rates. They had one goal: to obtain advance knowledge of the benchmark interest rate. Together, they communicated with the money market traders—the monkeys—and then colluded to rig the world’s benchmark interest rate, called the “Libor.” The adjustments were slight—usually just fractions of a percentage point—with the specific intent to eliminate any uncertainty in the rise or fall of the core interest rate.
It was a dazzling and grand scheme. Today, the Libor is tied to up to an estimated $800 trillion in financial derivatives and instruments worldwide.
And so it went. Suddenly, the prince’s monkeys found themselves in the spotlight, with a key role in eliminating uncertainty for the superbankers—the princes. They were now thrust on center stage.
The advanced rigging was often done in bars and pubs over champagne.
“Come on over; I’ll open a bottle of Bollinger,” one trader emailed his colleague after a triumphant Libor rigging session. To another monkey trader he exclaimed, "Dude. I owe you big time!
... I'm opening a bottle of Bollinger."
What’s the harm in a little Bollinger?
When I recently asked one veteran Wall Street friend his thoughts on the Libor scandal, he shrugged. “Nothing significant will be done about it because the adjustments were done mostly on the downside, not the upside.”
It’s taken me a while to frame my thoughts on this, but I’ve come to the conclusion that my Wall Street friend is wrong. Libor matters to everyone. Everyone who borrows money—whether it’s a car loan, student loan, credit card, mortgage or personal loan is affected by what happens to the Libor, because it affects the cost of money for all of us. So, if the Libor rate was artificially high when you took out any of those loans, you were effectively ripped off.
Many pension funds are also pegged to the Libor. Cities like Baltimore are suing the superbanks involved with artificially rigging interest rates because of the adverse affects the rigging had on their city pension funds.
Superbanks who were in relatively weak financial shape arranged through the growing Libor cartel to artificially inflate or deflate their interest rates to give the false impression that they were strong and creditworthy.
What’s perhaps most intriguing about the Libor scandal is how brazenly and open the collusion was:
"Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot."
--Senior trader in New York to submitter
Senior Department of Treasury and Federal Reserve Officials openly admitted that the Libor was “deeply flawed,” and yet proceeded to use the same rigged rates for federal bailout programs like TARP, knowing that in doing so, they were saving the superbanks billions and billions of dollars.
So, even if you still don’t know what Libor is, know this: it’s a very big deal, and we’re all affected. "This is the banking industry's tobacco moment," said one bank's CEO. "It's that big." An investigating official recently remarked, "It's hard to imagine a bigger case than Libor."
Aesop’s fable goes on to relate how the prince’s monkey’s were received with great applause, until on one occasion a courtier, bent on mischief, took from his pocket a handful of nuts and threw them upon the stage. The Monkeys at the sight of the nuts forgot their dancing and became (as indeed they were) Monkeys instead of actors.
Pulling off their masks and tearing their robes, they fought with one another for the nuts. The dancing spectacle came to an end amidst the laughter and ridicule of the audience.
Let’s hope that the Libor Cartel Show has come to an end, and that the Glass–Steagall Act is being brought back to replace it.