Just interacted with Professor Marti G Subrahmanyam, Charles E Merrill Professor of Finance, Economics & International Business, Stern School of Business in New York University
He just gave an hour’s presentation at the BSE on a 2012 Statistical Study done by him and others on to show some evidence on whether the Libor and the Euribor Rates were manipulated
LIBOR & EURIBOR are important benchmark rates that serve as reference to determine value of complex derivatives as well as to a simple application of how much is the monthly interest rate on a House mortgage
To put this in perspective the total value estimated of complex financial instruments aggregates US $ 700 Trillion, grossly around ten times more than the World’s aggregate GDP of US $ 70 trillion ~ it was computed that for Deutsche Bank just a shift of one basis point made a difference of US $ 65 million
My Question to Professor Subrahmanyam was simple ~ “Did the Banks have to rig LIBOR to survive !?”
The Context for this Question was that many banks have already owned up rigging and paid or agreed to pay hefty fines ~ UBS has agreed to pay US $ 1.5 Billion for atleast 2000 attempts to manipulate the Rate between 2005 and 2010 ~ Earlier in Summer of 2012 Barclays paid US $ 450 million for LIBOR rigging and it cost the Bank Chairman his job !
Why did the Banks do it !? ~ for reasons both Qualitative ~ to show more solvency and stability than was and get a better credit rating and avoid the glare of Central Bank to infuse more funds into them to shore up capital ~ and Quantitative ~ where bank’s traders took bets on the rates trends and manipulated them to happen in collusion with others to make hundreds of million of dollars profits
My Question “Did Banks have to rig LIBOR to survive!?” was more related to the bigger qualitative aspect to show a better sound position than really was ! ~ if this was the objective then did the direction come from right up to manipulate the rates !?
Prof Subrahmanyam was of the ‘kind’ opinion that on the qualitative aspect it was difficult to make an abstract conclusion that directions came from the top but on the quantitative aspect many banks were able to show better balance sheet numbers than actually would have been
The Problem is far from over ~ The Swiss Justice Department is not filing criminal charges against Zurich based UBS for this as it fears it may affect the stability of the Bank ~ Many Banks are under investigation and 2013 may see many more arrests and settlements ~ In the US, both the big mortgage giants Freddie Mac and Fannie Mae have, it is speculated, lost US $ 3 billion because of LIBOR rigging to keep the rate low and thus impacting their lending rates to be low too ~ they may just sue those who did so
So don’t take the High Credit Ratings of Banks and Investment Banks at Face Value ! ~ Remember that in USA , Standard & Poor continued rating Lehman at ‘A’ in September 2008 just before is collapsed !