Everything is Rigged

Price fixing seems to be in vogue for Too Big To Fail megabanks.  Matt Taibbi at Rolling Stone weighs in on the most recent financial collusion amongst the big banks in "Everything is Rigged: The Biggest Price Fixing Scandal Ever."

Taibbi writes: "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."

Why and how did the manipulation of LIBOR and ICAP take place?  Taibbi answers:  "Dating back perhaps as far as the early Nineties, traders and others inside these banks were sometimes calling up the company geeks responsible for submitting the daily Libor numbers (the "Libor submitters") and asking them to fudge the numbers. Usually, the gimmick was the trader had made a bet on something – a swap, currencies, something – and he wanted the Libor submitter to make the numbers look lower (or, occasionally, higher) to help his bet pay off."