I posted this on the other Barclays thread and do so again here.
From a mate of mine who works in banking (but neither derivatives or the cash desk).
The conclusion is that since the LIBOR is set by excluding outliers and taking an average of many banks' interest rate submissions, a single setter would struggle to move the market. However, in a business where relationships with other traders/bankers is important and IM chatter is constant, it would seem the banter is commonplace.
So, this is how it works in practice.
When LIBOR was instituted, all banks were well rated and would lend to each other on the interbank market with impunity. You would literally get a broker call you and say "Where will you lend 3mth dollars?". You would give a rate and then he would say "USD500mio done. Your counterparty is X". X could be a AAA rated bank like Rabobank or someone lower rated (say Coventry Building Society). The point is that no-one cared who the borrower was as the assumption was that it was going to re-pay.
Around 10am the submitters get a call asking them to quote "the rate" on a variety of different maturities and currencies. The banks provide an indication of where they believe that they would lend to another well rated bank. However in order to lend money at a profit, they have to be able to borrow it themselves cheaper. As a result a bank thinks "Well I can borrow at Y.YY% so I would need to lend at Y.YY% plus 0.06% to make a reasonable margin."
And this is how LIBOR worked for years. In EUR, AUD, USD, CAD the fixing was always around 0.06% higher than where a bank could execute the trade. In Sterling it was normally about 0.125% higher due to the convention that it trades on eighths. It isn't some massive conspiracy... it is good business sense and most importantly it was consistent.
So let's look at what happens when banks started exploding. Everyone in the market knew that RBS was fvcked. They were borrowing billions a day and most banks could not lend them any more due to risk limits. So when BBAM phones you and says "Where's the rate?" the system wasn't set up to factor in credit risk. If the question was "Where would you lend to RBS?" then the answer would have been "I wouldn't.". The BBAM was hardly getting its top tier staff to make the calls either and look for explanations on the rate - it was a low level clerk just filling in a spreadsheet. The banks were not being malicious in setting the fixings - they were actually trying to maintain a consistency by assuming a good market.
To dispel some myths :
1. The LIBOR fixing does not allow banks to "cheat" by mis-declaring funding costs.
2. A low fixing saves borrowers money as it impacts the swap rate.
3. Banks did not "make up" the figure any more than they did previously. It was their interpretation of where an utterly f
ked market should be.
4. There is no way to replace LIBOR easily. Reported transactions tend to be too short to be useful as an indicator.
5. No one bank can impact the rate as it is an average with outliers excluded.
6. Most of the reported comments are banter that is typical in a bank. No worse than for example someone in a law firm jokingly saying "haha. This deal is gonna have a LOT of billable hours". Traders in a firm talk for 16 hours a day on messaging systems and all markets impact each other. It is natural for someone to say "Chz for your market helping mine". No trader is naive enough to think that they can control the market by a single submission.
7. I am sure that fixings will have been discussed internally and probably even with other banks. However most of this is traders trying to "find" the market - not collusion.
8. The comments about traders being seduced by promises of Bollinger and coffee are risible. Believe me - a submitter will earn somewhere between GBP400k and GBP1.5mio per year and really doesn't need someone to buy him a bottle of Bolly to have a good time!
Also, I take your point about not reading too much into trader IM trash talk - don't think they care about a bottle of bolly, but I'm sure they care quite a bit about the relationships they tried to maintain by rigging the fix.
Why? Barclays cash desk makes virtually nothing out of their swaps desk. You are reading in something that isn't there. Relationships in a bank are based upon making money and there is no financial gain here for them personally. Fvck - it's like any lawyer claiming to have helped out on a deal on his CV when actually they just paginated it. It's true, but not as true as the reader thinks.
I'm struggling to see how you can defend this tbh - some of those emails explicitly talk about how they are pulling off a coup but need to keep it a secret or it won't work - because they knew it was dodgy.
Largely because they really haven't done anything nearly as bad as people are saying. What if they suddenly flip to calling it where it really is? Imagine the situation in Sterling with the following panel. How many of these do you think really could have borrowed Sterling for 1yr when RBS went under or the day after Lehman?
Abbey National plc
Bank of Tokyo-Mitsubishi UFJ Ltd
Barclays Bank plc
Credit Agricole CIB
Deutsche Bank AG
JP Morgan Chase
Lloyds Banking Group
Mizuho Corporate Bank
Royal Bank of Canada
The Royal Bank of Scotland Group
6 of them at the most. The rest would have had to quote something like 100%. That would have forced mortgage rates up to about 20% for everyone on a floating rate mortgage within a week!
"As the U.S. Dollar senior submitter said in October 2008 to his supervisor at the time, “following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices."
This is an internal disagreement over where it is set. As I was saying earlier, convention sets it 6bp higher than where the perception of the market is. The boss has clearly told him to get back in line with convention rather than putting his own interpretation on things and establishing a new convention. As it is a theoretical number, there is nothing wrong with this at all, no matter what you think it looks like!
"Why would they accept three hundred million pounds worth of fines and forgo their bonuses if they had done nothing wrong?"
For exactly the same reason that insurance firms settle car accidents. It just isn't worth the hassle of fighting. If you take a load of traders offline it interrupts business badly. In addition, the US regulator is a with a bone with even more of a silly political agenda than the FSA as prosecutions are driven by DAs. In addition, if I recall correctly, Diamond's background was running one of the business areas that could have a finger pointed at it and Barclays stock would get hammered if he came directly under the microscope.
Forgoing bonuses isn't a problem when you have been paid as much as they have and can choose your own bonus next year...
Putting silly comments on IM is something that traders are always warned about but bear in mind that we chatter all of the time to one another and occasionally an "in joke" may look incriminating. ie. At the moment I have 34 different chats open with other traders, 5 of whom I regularly socialise with outside of a work context. Joviality is bound to happen.
Just to demonstrate the utter silliness of one of the quotes, a trader is reported as saying something like "Yeah can you fix it low?". "Sure. 5.36%?" replies the submitter. "5.37% is fine" is the response.
Now, assuming that the trader asking was even being serious he would have known that his submitter's input was worth a maximum of 0.1bp as an average and even then only if he didn't make himself an outlier. If the quote was out of the market it would have been excluded.
Traders who chat to the BoE or the ECB will jokingly say "yeah if you could talk to Merv and get him to cut 25bp that would make me a few quid".
The fact of the matter is, yet again, that the FSA was asleep on the job and they want a scapegoat and a cheap political win. If they didn't like the convention of LIBOR being 0.06% above traded cash then they should have stepped on the practice 10 or 15 years ago. Why didn't they? Because they had fvck all idea about how markets worked and fvck all idea of how LIBOR was set.