{"id":4049,"date":"2011-04-18T06:33:41","date_gmt":"2011-04-18T12:33:41","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=4049"},"modified":"2018-09-21T02:07:33","modified_gmt":"2018-09-21T06:07:33","slug":"evidence-of-banks-manipulating-important-interest-rate","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/04\/18\/evidence-of-banks-manipulating-important-interest-rate\/","title":{"rendered":"Evidence of Banks Manipulating Important Interest Rate"},"content":{"rendered":"

LIBOR, or the London Inter-Bank Offering Rate, is one of the world’s benchmark interest rates.\u00a0 It is used in many banking transactions around the world to establish the interest rate to be paid, especially for institutional banks.\u00a0 In fact, it helps determine interest rates for approximately $10 trillion (!) of loans and, get ready for it, $350 trillion worth of derivatives contracts (!!!).<\/span><\/p>\n

Currently the U.S. Department of Justice and the Securities and Exchange Commission are investigating whether or not large commercial banks, including Bank of America, Citigroup and Union Bank of Switzerland (UBS), manipulated LIBOR from 2006 through 2008.<\/span><\/p>\n

LIBOR is determined by sixteen giant banks reporting their borrowing costs to the financial news organization Thomson-Reuters in London.\u00a0 Then the highest and lowest four interest rates are ignored to rid the data of extreme outliers.\u00a0 Lastly, the middle eight banks’ interest rates are averaged together.<\/span><\/p>\n

Because there are so many banks reporting their rates, that outliers are cast out, and that the middle quartiles are averaged, it would be difficult to manipulate LIBOR.\u00a0 However, in 2008, when the financial crisis was at its peak and individual banks had wildly different risk profiles and hence, interest rates, LIBOR was oddly consistent.<\/span><\/p>\n

A Wall Street Journal study showed that average LIBOR was 3.18% in the first four months of 2008.\u00a0 Yet, the various rates reported by the 16 banks only fluctuated by a maximum 0.06%.\u00a0 In finance parlance, that range was only 6 basis points.\u00a0 Yeah, right!<\/span><\/p>\n

In other words, LIBOR was trading in a bank around that 3.18% of only 1.8% either up or down.\u00a0 To put this into perspective.\u00a0 Imagine in your own neighborhood you took your mortgage interest rate and those of 15 other neighbors, threw out the four highest and lowest, then averaged the middle eight.\u00a0 Then imagine that you found that the calculation resulted in an average mortgage interest rate of 6.25%, but that the range was only between 6.19% and 6.31%.<\/span><\/p>\n

I think you would be shocked.\u00a0 Especially if some of your neighbors’ homes were dilapidated, run down, or you knew that the owners had been unemployed for awhile.\u00a0 Essentially these 16 large commercial banks were reporting in the midst of the financial crisis that there were no differences between them.\u00a0 I find this incredible.\u00a0 And now you know why these banks are being investigated.<\/span><\/p>\n

You might make the argument that had the banks reported wildly differing rates that it might have thrown the financial markets into an even bigger panic and meltdown.\u00a0 You would probably be right.\u00a0 However, who is to say that they haven’t been colluding for many years, including during times when there was no panic?\u00a0 That kind of a lie creates distortions of information about the relative differences in the solvency of individual banks.\u00a0 In turn, that leads to a misunderstanding on the part of market participants, both buyers and sellers, when they are examining investments.\u00a0 Finally, that leads to poor choices and critical investment losses.<\/span><\/p>\n

Capitalism relies on honest dealing and good information in order to function well.\u00a0 In short, honesty is always in season!<\/span><\/p>\n

I will continue to track this story, because it is just more fuel for my continuing criticisms of capitalism as practiced by these powerful institutions.<\/span><\/p>\n

Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

LIBOR, or the London Inter-Bank Offering Rate, is one of the world’s benchmark interest rates.\u00a0 It is used in many banking transactions around the world to establish the interest rate to be paid, especially for institutional banks.\u00a0 In fact, it helps determine interest rates for approximately $10 trillion (!) of loans and, get ready for […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-4049","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4049","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=4049"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4049\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=4049"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=4049"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=4049"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}