Thursday, July 26, 2012

Libor's Deep Throat cries boo who? ~2008

The unfolding Libor rate setting scandal sets up a logic test.

The NY Fed (somehow) became aware of issues framed in today's Senate Banking Subcommittee exchange.
Senator Vitter (LA) ~ "Since you knew Libor was being manipulated why did the Treasury and Fed (continue to) rely upon it ~2008?". The witness ~ " was under reported, uh, misreported...but we didn't know if we were being hurt by it..."

Framing what, when and who knew matters, but unless and until we find out who complained to the NY Fed ~2008 it's not the whole picture and you want to know the whole picture. In other words - Who started the whole thing?

The LIBOR logic test, says the complainers (to the NY Fed) would not be any of the Libor panel banks, but others adversely effected. Wall St logic dictates "why complain unless it's hurting us or..."

So that leaves certain entities which may have had a dog in the hunt, perhaps the nascent BHC's (Bank Holding Companies), perhaps the world's largest CDO CDS seller at the time, perhaps the world's light bulb maker, and intriguingly why was one of the panel banks paid almost $250 million more IN cash by the CDS seller, than requested on Sept. 16, 2008.

But, there's always a but, by definition, the circumspect NY Fed could (or should) only field complaints or market rumors from those it supervised at the time - si? That could shrink the number of potential (legal?) complainers - si?

Who were the Libor Deep Thoats in ~2008 or before? And for that matter, does this go all the way back to Prime - rate setting? Why did Libor replace prime, and become the benchmark for nearly all world's derivatives? It's not new news that Libor was a survey - based, rather than market-based rate forever.