LIBOR JUDGEMENTSunl

THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) & OTHERS V THE PANEL DEFENDANTS (AS DEFINED)

Recently FDIC filed papers with the High Court in London following a decision by the US Court that it didn’t have jurisdiction over all the matters covered by FDIC’s claim. Extracting key features that are otherwise repeated for each Panel Defendant this paper summarises and comments on the issues raised in the original submission to the Southern District Court of New York.

My own comments are highlighted in white on a blue background.

Certain paragraphs featuring bold, italic and or upper case reflect my own view as to the importance of the relevant paragraphs.

For the full review access please copy and paste the following link:

https://1drv.ms/b/s!AkETRqe6izSQ2gm5Fuo38RK_qihQ

NATURE OF THE CASE

The Federal Deposit Insurance Corporation (“FDIC”) established under the Federal Deposit Insurance (“FDI”) Act, is empowered, inter alia, to act as receiver for some 38 failed insured depository institutions (the Closed Banks) that had entered into a variety of interest rate swaps (IRS) as the fixed rate payer with a number of major international financial institutions that were members of the LIBOR USD panel (the Panel Defendants) comprising:

Bank of America Corporation.

Barclays Bank plc (“Barclays”)

Libor Ltd is also a Defendant in this Case.

Citigroup, Inc.

Coöperatieve Centrale Raiffeisen-Boerenleenbank, B.A. (“Rabobank

Credit Suisse Group AG

Deutsche Bank AG (“Deutsche Bank”)

HSBC Holdings

JPMorgan Chase & Co.

Lloyds Banking Group plc

Société Générale.

Norinchukin Bank (“Norinchukin”).

Royal Bank of Canada (“RBC”)

Royal Bank of Scotland plc (“RBS

Bank of Tokyo-Mitsubishi UFJ Ltd. (“BTMU”)

WestLB AG acquired by Portigon AG in 2009

In addition FDIC has enjoined the BBA and its subsidiary BBA LIBOR Ltd to this action in the Southern District Court of New York. This Case arises as a result of the manipulation, between 2007 and 2011of LIBOR and specifically in this instance of the US Dollar LIBOR (USD LIBOR) of various tenors.

The Closed Banks reasonably expected that accurate representations of competitive market forces, and not fraudulent conduct or collusion among the Panel Bank Defendants, would determine USD LIBOR.

The alleged acts enumerated herein were committed by the above mentioned parties and or those of their subsidiaries listed in the Complaint. A number of other anonymous parties are believed to have been involved with the Defendants which parties will be named at such time as their putative involvement can be substantiated.

The Particulars of Claim (the Complaint) cover:

 

 

 

 

 

LIBOR: ISSUES & CONSEQUENCES

OVERVIEW

The PAG Judgement threw up a number of issues requiring attention. Amongst these is the definition of Libor Manipulation and the role of Libor Panel Members as submitters with the potential to influence any one or more tenors of Libor or indeed any other benchmark or reference interest rate.

An initial review of the performance of 1 Month (1 M), 3 Month (3 M) Libor and Bank of England (BofE) Base rates categorically demonstrates an inescapable correlation between all three (rates) from 2000 to 2016 as shown by Table 1 originally produced as part of the analysis of the PAG Judgement.

fINally a link that appears to work!!

https://1drv.ms/b/s!AkETRqe6izSQrEgXxMPGgsCg5fvf

LIBOR INFLUENCES & CONSEQUENCES

LIBOR Manipulation – A Matter of Consequence

 

In seeking to cover LIBOR manipulation the Executive, the Banks and the Regulators chose to treat the rest of the World as gullible stooges. More so when from recent judgements such as PAG and Thornbridge it can only be inferred that some members of the judiciary have joined the “Club of the Cognoscente”.

It is simply impossible, in a dying market, where (the banks) demand for money is unlimited that its cost should be negligible (or less) when it should be at or close to its all-time high. LIBOR and other benchmark trends over the last ten years or so have wholly contradicted the most fundamental principles of economics, the laws of supply and demand. This can only have been the result of continued unceasing manipulation especially when examined in the light of authoritative writings:

Almost every economic event or phenomenon is the product of the interaction of these two laws. The law of supply states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as the market price rises, and falls as the price falls. Conversely, the law of demand says that the quantity of a good demanded falls as the price rises, and vice versa. (Economists do not really have a “law” of supply, though they talk and write as though they do.)

The Concise Encyclopedia of Economics

The law of supply and demand, which dictates that a product’s availability and demand impacts its price, was noticed in the marketplace long before it was mentioned in a published work. Philosopher John Locke is credited with one of the earliest descriptions of this economic principle in his 1691 publication of “Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money.”

Locke did not actually use the term “supply and demand,” which first appeared in print in 1767 in Sir James Steuart’s “Inquiry into the Principles of Political Economy.” Adam Smith dealt extensively with the topic in his 1776 epic work, “The Wealth of Nations.”

John Locke

Locke addressed the concept of supply and demand as part of a discussion about interest rates in 17th-century England. Many merchants wanted the government to lower the cap on interest rates charged by private lenders so that people could borrow more money and thus purchase more goods. Locke argued that the free-market economy should set rates because government regulation could have unintended consequences. If the lending industry were left alone, interest rates would regulate themselves, Locke wrote: “The price of any commodity rises or falls, by the proportion of the number of buyers and sellers.”

Adam Smith 

Smith (a celebrated alumnus of Kirkcaldy High School) often referred to as the father of economics, explained the concept of supply and demand as an “Invisible Hand” that naturally guides the economy. Smith described a society where bakers and butchers provide products that individuals need and want, providing a supply that meets demand and developing an economy that benefits everyone.

Who discovered the law of supply and demand? By Investopedia | March 4, 2015 — 4:11 PM EST 

The extent to which the political class wished and still wishes to set aside what amounts to the Apostle’s Creed of economics is preposterous. Similarly, the desire to conflate Executive led fraud with alleged trader manipulation is beyond reason. It was not trader manipulation that allowed RBS to write up its derivative assets by an estimated £2.55 TRILLION between October 2008 and July 2009.
As a consequence of these manipulative activities clients of almost every hue have suffered:

Depositors (notably pensioners and pension funds) lost out as interest income was eroded.

Fixed rate swap counterparties were hammered as a falling LIBOR caused spreads to widen

&

Corporate purchasers of financial instruments, particularly swaps, paid over the odds for “paper” the value of which was a function of fraud.

Clearly if, as market forces would indicate, the daily (manipulated) decreases had instead given place to daily (unmanipulated) increases we would have been faced with a GBP 1M LIBOR rate of the order of 12.00% as opposed to 00.60% (as at July 2009).

Yet, there appears little if any protection at law for plaintiffs who, inter alia, are required to peruse screeds of ostensible evidence designed to obfuscate and to overwhelm their advisors when the most obvious of evidence, the breach of the fundamental economic principles outlined above requires little, if anything, by way of further substantiation.

The crucial need for maximisation of (revalued) assets and spreads to ensure compliance with regulatory norms (as per Basle 3) entail that the consequences of allowing economic forces to play their rational part would have been disastrous. However, the impact of Executive Sanctioned fraud on an infinitely greater number (of persons and businesses) appears to have been acceptable in the eyes of No10 amongst others.

Obviously, the Invisible Hand was being guided in such a manner as would ensure that consequences of government regulation could only benefit the banks. Quite clearly interest rates weren’t left to regulate themselves or they would have reached the 12% (or more) postulated above. That the latter-day guide (of the Invisible Hand) was the then Prime Minister, Gordon Brown, another alumnus of Kirkcaldy High School, makes its manifest illegality no less unacceptable.

Implications or Imperatives?

 

 

Following the ongoing adverse publicity examination of the most basic and fundamental role of the banker may provide some guidance as the approach to be adopted to ensure that some lost credibility is restored.

For most the first experience of banking consisted of opening a deposit account with a view to setting aside some money to cover (a significant) future expenditure. When the time came the depositors knew that they could go to the bank to withdraw funds.

Nota bene: they knew, not they expected, they absolutely knew. And that knowledge came from the most basic principle covering the relationship between client and the bank(er) – “Trust”- for client money was entrusted to them (the bank and the banker) to safeguard. That “Trust” itself was based on another fundamental concept “Good Faith”.

Many delight in arguing that there is no presumption of “Good Faith” under English Law (perfidious Albion?) But, need there be unless, as Tim Lord QC recently argued (in PAG v RBS), the banks operations are regulated by nothing other than a “Rogues’ Charter”?

It matters not that the relationship between client and banker developed such that the bank (now) looked after the client’s business as well as personal affairs. It is still looking after the client’s money (even money the client may have borrowed from the bank) in that ongoing relationship subject to (the) Trust, which was established the minute the bank(er) accepted that very first deposit.

Recent cases have seen much emphasis given to the “Implied Terms” that underpin banker-client relationships. Governing these “Implied Terms” is the overarching concept that the bank will always act in and safeguard the client’s best interests; that the bank will not, inter alia, covet clients’ assets, co-mingle them and or seek to divert them for its own benefit.

Should we really need, then, to look to the Law to adjudicate when “Trust” and “Good Faith” are not so much “Implied Terms” as “Categorical Imperatives?” For the absence of those Imperatives, the essential underpinning of the bank(er)’s duties, would have precluded that very first visit and the subsequent evolution of the ongoing banker-client relationship.

HEY THERE GEORGIE BOY…

Few, if any of us have experienced a world wherein economic turmoil is as rampant as it now is, where major countries as of January 2014, especially the UK (total balance of payments -$96 billion) and the USA (-$361 billion) would, if they were trading companies, be in administration or worse. A World where other countries such as Germany, China & Saudi Arabia are the net funders (of those operating these enormous deficits).

Deficits that seem to operate like perpetual rolling (& increasing) overdraft facilities but are now of such proportions that the likelihood of them ever being repaid is close to or beyond zero. The net lenders are surely facing enormous write-offs and should be making appropriate provisions. This situation is grave for it entails that money is, in reality, just not working anymore, effectively (international) finance is (at best) moribund.

If Merkel is facing domestic unrest now over a bit of “pocket money” for Greece what if she has to provide for us or the “cousins” threatening default?

And in this environment the UK budget deficit remains Osborne’s main pre-occupation. Of course it has to be, on a month by month basis it’s in single digits (of billions) which he can handle whilst keeping his socks on. So he persists with his ludicrous austerity policies, impoverishing the poor, flying in the face of basic (o-level) Keynesian economics to kill effective demand whilst boasting of 0% inflation.

All the time he hopes that we don’t realise that QE is an inflationary measure meaning that we don’t have a strong economy but one in abject recession which, with a total balance of payments deficit now in excess of $100 billion, is manifestly insolvent by any measure of that condition.

Greece by comparison is healthy…

Banks and SMEs – The Future

As of 2014 the total assets of the 4 major UK banks exceeded 5.6 trillion pounds. The BofE estimated that the assets of the top 10 foreign owned banks in the UK then amounted to some £2.75 trillion.

Therefore the top 14 banks operating in the UK last year accounted for total assets of £8.35trillion. Of this derivatives were worth some £1.6 trillion whilst deposits (liabilities) rose to £2.16 trillion.

Herein lies the answer to historic, present and future issues for SMEs. Any one of the main UK banks is too large to deal with any one SME. Their structures are such as to make it uneconomic to handle SME business at normal banking rates (the days of Bloggins calling in at his local branch are long gone). As I said at the SME meeting in Bristol lending to SME’s at anything less than “5 over” makes no sense relative to risk and time. Especially if the bank is providing most, if not all, of a company’s funding.

However rather than deal with this issue openly and honestly and setting their charges accordingly the banks chose dishonesty. Lending rates at “2 over” were compensated for by the imposition of swaps with a strike rate of (say) 5.5% with variable set at LIBOR. Do the sums and you will see that this does nothing other than generate a fixed interest rate of 7.5% regardless of LIBOR (or Base) movements.

Looked at from a trading perspective the bank completely laid off its swap variable risk (and some) against you so stood to receive a net 7.5% (again regardless of the LIBOR movements). For any one-off swap to be used as interest rate protection I would expect “strike” to be no more than 50 bps (as opposed to 500bps) above “variable”.

Banking has changed irrevocably; the “Barclays”, “Lloyds”, “Midlands” & “NatWests”,once the moral consciences of business, are no more. In these circumstances my advice to SMEs is twofold:

• Resolve your IRHP issues (with whichever major bank)
• Take your business to a challenger bank

Note in passing that special interests groups, such as depositors have prior more compelling (and unrequited) claims to board representation (see my blog All a(board). In any event, at best, this would prove to be a poisoned chalice.

All a(board)

Resolving the issue of banks’ fraudulent behaviour by having special interest groups represented on boards is fraught with issues.

The first is that any and all directors are bound to act in the interests of the Company on whose board they sit. Where there is any other intention the director should not accept the appointment nor should the board appoint him or her. When an existing director can no longer comply with this requirement he / she has must resign or otherwise be dismissed.

There are any number of provisions in various bodies of legislation designed to regulate the behaviour of directors of all and any incorporated vehicle. As regards banks there is the extra level of control (ostensibly) provided under the Banking Acts whose main focus is / was to protect depositors.

If any special interest group warrants representation on banks’ boards it is surely these depositors, the unsecured creditors who take significant “haircuts” when banks fail. However one special interest group begets another ultimately resulting in a situation where board meetings result in conflict rather than consensus. The Company is then stymied by being required to operate in what amounts to a perpetual state of “general meeting” so rendering it unmanageable.

Banks have seen fit to ride roughshod over all and any statute or authority. Consequently marginalising any special non-conforming interest group board representatives would be a readily achievable natural reaction. As much as the State has no desire to address these issues by properly applying existing legislation ultimately it will have to, especially where the attitude of the judiciary is decreasingly “bank friendly”.

From another angle British banks’, unlike their continental brethren, have invariably resisted appointing members to client company boards, on the grounds of “conflict of interest”. This even where, as often is the case with SMEs and others, the banks are by far the largest if not the sole provider of medium and long term finance. In this sense the justification for the dominant provider (of finance) to sit on a client board is much more compelling than argument for the borrower to sit on the lender’s.