Wednesday, 4 July, 2012

LIBOR Fixing - Mother of All Scams

LIBOR Fixing - Mother of All Scams

Many of you must have heard about Barclays Bank being in the soup on getting caught with their pants down in the act of supposedly "fixing" LIBOR rates (London Inter-Bank Offer Rate) over the past several years. Their big bosses have obviously resigned. And there is a lot of "mud-throwing" going on all around.

However, a few points are worth noting:

  • Barclays Bank, irrespective of how large it is / was, couldn't have done it alone. It has already tried to pass some of the buck / muck to Bank of England (Take a look at: Barclays Bank blames Paul Tucker of Bank of England for LIBOR Mess)
  • If Barclays was doing it, obviously it must have been benefitting in a HUGE manner both at the level of the bank and at the level of the individual top management members. Believe me, the figures will make our 2G Scam accused Raja look like a minor pick-pocket in comparison - you'll come to agree when you look at the volumes involved (which I'll be giving a clue about at the end of this post)
  • If Barclays was doing it, chances are bright that at least half-a-dozen other equally large banks must have been doing the same.
  • As a corollary, it must have been an industry-wide mess.
  • Equally obviously, the auditors, the regulators, the government authorities, etc. must have definitely been fully aware of and perhaps even participating in this fraud. The fraud is way too huge to have been brushed under the carpet without involving a multitude of individuals across multiple organisations.
  • In a nutshell, the whole thing stinks - It appears to be a systematic fraud intended to loot a whole range of corporates, countries, including developing countries such as India to the tune of millions of dollars every year.

To get an idea of the volumes involved, look at just the notional value of Interest Rate Swap figures of LCH Clearnet, the global leader in interest rate swaps - Source: LCH Clearnet Website:

  • Daily Volumes for July 3, 2012 - $ 1,986,805,421,914
  • Outstanding Volumes as on July 3, 2012 - $ 306,817,351,398,322

When just a single player (even if the player is the # 1 in the industry), you can imagine the size of the industry.

Even if we assume that 1% of the total volumes involved are adversely impacted due to the fudging of LIBOR rates by people like Barclays, you can imagine the implications of the litigation that would naturally follow.

Now, I can safely repeat, the figures do make our 2G Scam accused Raja look like a minor pick-pocket in comparison!

What does all this mean for India and for Indian corporates?

Simple - There is going to be a lot of turmoil in the months and quarters ahead (as though we've not had enough of that in the past 3-5 years).

Likely to impact all corporates (and the state and central governments) who have borrowed (or lent) any kind of money on the basis of "LIBOR Plus" interest rates, which virutally is the norm for all kinds of overseas borrowings.

Likely to impact all corporates and governments around the world who have borrowed/lent any kind of money on the basis of "LIBOR Plus" interest rates.

Likely to cause huge volatility in both debt markets and equity markets around the world.

Likely to cause completely unexpected and perhaps even unintended consequences in terms of direction and level of capital flows, cost of borrowing, foreign currency exchange rates, etc.

Be ready for a rocky ride!

Regards,

N


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