Here is a market manipulation story that I can easily believe. Bloomberg reports Chicago Trading Firm’s Lawsuit Claims Banks Conspired to Manipulate Libor

A Chicago trading firm accused Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), UBS AG (UBSN) and Citigroup Inc. (C) of conspiring to manipulate the London interbank offered rate.

The banks drove down Libor to generate billions of dollars in profits from swaps, loans, interest rate derivatives and other financial instruments whose value depended on the rate, Eldorado Trading Group LLC said in a complaint filed July 5 in federal court in Newark, New Jersey.

The civil lawsuit is one of several filed in response to probes by the U.S. Justice Department, Securities and Exchange Commission and Commodity Futures Trading Commission related to whether there were improper attempts to manipulate Libor. The rate, at which banks borrow from one another in the London interbank market, is a short-term, international benchmark.

The banks “had a substantial incentive to manipulate, and in fact did manipulate, Libor downward, in order to increase the income from its interest rate derivatives and similar instruments,” according to Eldorado’s complaint. “This manipulation resulted in billions of dollars in revenue.”

LIBOR, the London Interbank Offered Rate, is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank lending market).

LIBOR is defined as: “The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.”

On Thursday, 29 May 2008 the Wall Street Journal released a controversial study suggesting that banks may have understated borrowing costs they reported for LIBOR during the 2008 credit crunch. Such underreporting could have created an impression that banks could borrow from other banks more cheaply than they could in reality. It could also have made the banking system or specific contributing bank appear healthier than it was during the 2008 credit crunch.

The study found that rates at which one major bank “said it could borrow dollars for three months were about 0.87 percentage point lower than the rate calculated using default-insurance data.”

Conspiracy is likely the wrong word. That the accused independently lied for their own benefit is more like it.

LIBOR does not necessarily represent actual transactions. Instead, it represents rates banks say they would charge for bank-to-bank lending. Thus, it is easy to believe charges of manipulation.

Proving those charges is another matter.

Mike “Mish” Shedlock
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