Rolling Stone: “Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds, the Masons and the Illuminati, we skeptics owe you an apology”.
You were right.
The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world’s largest banks may be fixing the prices of, well, just about everything….
You may have heard of the Libor scandal, in which at least three – and perhaps as many as 16 – of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that’s trillion, with a “t”) worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history – MIT professor Andrew Lo even said it “dwarfs by orders of magnitude any financial scam in the history of markets.”
That was bad enough, but now Libor may have a twin brother. Word has leaked out that the London-based firm ICAP, the world’s largest broker of interest-rate swaps, is being investigated by American authorities for behavior that sounds eerily reminiscent of the Libor mess. Regulators are looking into whether or not a small group of brokers at ICAP may have worked with up to 15 of the world’s largest banks to manipulate ISDAfix, a benchmark number used around the world to calculate the prices of interest-rate swaps….
Interest-rate swaps are a tool used by big cities, major corporations and sovereign governments to manage their debt, and the scale of their use is almost unimaginably massive. It’s about a $379 trillion market, meaning that any manipulation would affect a pile of assets about 100 times the size of the United States federal budget.
It should surprise no one that among the players implicated in this scheme to fix the prices of interest-rate swaps are the same megabanks – including Barclays, UBS, Bank of America, JPMorgan Chase and the Royal Bank of Scotland – that serve on the Libor panel that sets global interest rates.
….In fact, in recent years many of these banks have already paid multimillion-dollar settlements for anti-competitive manipulation of one form or another (in addition to Libor, some were caught up in an anti-competitive scheme, detailed in Rolling Stone last year, to rig municipal-debt service auctions).
Though the jumble of financial acronyms sounds like gibberish to the layperson, the fact that there may now be price-fixing scandals involving both Libor and ISDAfix suggests a single, giant mushrooming conspiracy of collusion and price-fixing hovering under the ostensibly competitive veneer of Wall Street culture….
Why? Because Libor already affects the prices of interest-rate swaps, making this a manipulation-on-manipulation situation. If the allegations prove to be right, that will mean that swap customers have been paying for two different layers of price-fixing corruption.
If you can imagine paying 20 bucks for a crappy PB&J because some evil cabal of agribusiness companies colluded to fix the prices of both peanuts and peanut butter, you come close to grasping the lunacy of financial markets where both interest rates and interest-rate swaps are being manipulated at the same time, often by the same banks.
“It’s a double conspiracy,” says an amazed Michael Greenberger, a former director of the trading and markets division at the Commodity Futures Trading Commission and now a professor at the University of Maryland. “It’s the height of criminality.”
….although it’s not quite as widespread as Libor, ISDAfix is sufficiently power-jammed into the world financial infrastructure that any manipulation of the rate would be catastrophic – and a huge class of victims that could include everyone from state pensioners to big cities to wealthy investors in structured notes would have no idea they were being robbed.
“How is some municipality in Cleveland or wherever going to know if it’s getting ripped off?” asks Michael Masters of Masters Capital Management, a fund manager who has long been an advocate of greater transparency in the derivatives world. “The answer is, they won’t know.”
Worse still, the CFTC investigation apparently isn’t limited to possible manipulation of swap prices by monkeying around with ISDAfix. According to reports, the commission is also looking at whether or not employees at ICAP may have intentionally delayed publication of swap prices, which in theory could give someone (bankers, cough, cough) a chance to trade ahead of the information….
From Political Velcraft –