Banks’ Defenses to Potential Trillions in Libor Claims Fail

The big banks have been manipulating the world’s central economic indicator – Libor – for decades, harming homeowners, students, credit card holders, small businesses, cities and many others.

The sums involved were huge. As the Economist notes:

The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars. In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America’s Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions.

The Independent notes that potential liability from the Libor suits could wipe out Barclays, RBS and other banks … and that the big banks have taken inadequate reserves against litigation risks.

David Kotok – Chairman and Chief Investment Officer of Cumberland Advisors, with $2 billion dollars under management – writes:


The LIBOR rigging is systemic.




This scandal is going to take down many more than just Barclay’s leaders.  The claims are likely to be in the trillions.

But the banks say that they are judgment-proof because their manipulation didn’t cause any damage.

Specifically, the banks claim:

(1) Sometimes they nudges rates up and sometimes down …. so it’s a wash;

(2) Some people won and others lost … so it’s a wash; and

(3) It would be impossible for anyone who sued to quantify the amount of damages they suffered due to rate manipulation.

But the first argument is easily debunked. As Yves Smith notes:

The idea that one party’s loss from the manipulation was another’s gain is irrelevant to those on the losing side [quoting the Economist]:

….banks will be sued only by those who have lost, and will be unable to claim back the unjust gains made by some of their other customers. Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.

The second argument is also easily dispatched. For example, it is clear that for many years up until 2007, every time the banks nudged Libor rates higher, homeowners, students, credit card holders, small businesses and other borrowers were damaged by artificially inflated interest rates.

The case would be especially easy for people who borrowed money and finished paying off their loan during this period. For example, someone who bought a house in 2005 and sold it in 2007 could have a strong case.

Similarly, it is clear that Barclays and other big banks manipulated rates downward after the financial crisis hit in 2007, to make themselves look stronger than they really were. Because of the way their interest rate swaps were structured, local governments got creamed by lower Libor rates.

So governments which bought interest rate swaps during the relevant period based upon the assumption that rates would keep rising – especially if they were misled as to the likely direction of rates by one of the banks that participated in rigging Libor (Citi, Chase,, UBS, RBS, etc.) – could have a solid case.

Finally, I can assure you that derivatives experts, mortgage experts, statisticians, and alot of other people are crunching numbers right now to start quantifying damages.

Steve Keen On Why Debt Matters "All The Time" And The Need For "Quantitative Easing For The Public"

Following his somewhat epic blog debate with Paul Krugman, Steve Keen appears on Capital Account with Lauren Lyster to debunk more Keynesian propaganda and the kleptocratic status quo ‘debt doesn’t matter’ arguments. Poking holes in the stable/exogenous shock equilibrium ‘model’ versus the real-world’s dynamic systems, the Aussie economist warms up with the zero-interest rate conundrum and liquidity trap (at around 7:00); moves on to the empirical falseness of the debt-to-unemployment relationship (at around 11:00) – implying ‘debt matters all the time’ as Keen explains common-sensibly (but not Neoclassically) that the ‘change in debt adds to demand’ and that involves banks which breaks modern economic theory (since lending is credit creation not savings transfer).

Echoing the deleveraging from the Great Depression, it could take 15 years of unwinding this epic debt bubble before its all over – but not if the status quo of deficit spending is maintained – as Keen somewhat controversially concludes (at around 13:00) “you can’t just cure this with deficit spending [since debt is already beyond the black-hole’s ‘event horizon’], you have to abolish the private debt as well” by “quantitative easing for the public”.


Student loan debt and delinquency is also discussed and its self-referential ponzi-like nature (at around 16:00)…

Keen discusses his controversial idea of a debt-jubilee and the Debt Black Hole ‘event horizon’ that we are already in at around 19:00… (and notably at 24:30 he discusses how to avoid the ‘moral-hazard’ of a modern debt-jubilee with no ‘advantage’ to being in debt)

At around 20:30, Keen relates the drop in bankruptcies to the low interest rate environment warning that this will just lead to an endless zombie state like Japan

Lie-borgate is discussed at around 21:00 with his view being that the outright fraud confirms his feeling that these bankers are behaving like a parasite on the host of the economy


“The [quantitative easing for the public] solution is not easy and not straightforward but unless we do it we are stuck on wrong side of the debt black hole’s event horizon”

On The Unintended Consequences Of Europe’s ‘Naked CDS’ Ban

We have long warned that the effects of a ban on ‘free-market’ hedging instruments could well have a negative impact on the underlying market that political leaders are ‘trying’ to protect (consider the fall in equity prices after the short-sale-bans) and this week brought some clarity with regard Europe’s Short-Selling-Regulation (SSR) on CDS. As Citi’s Matt King notes: “the technical standards underlying its short selling ban reinforce the view we held previously: the ban seems likely to add to selling pressure on cash bond spreads in peripherals, even if it brings down CDS and tightens the basis.” The SSR defines ‘naked’ as CDS that are ‘highly correlated’ with long bond positions, and bonds have only tended to be quite correlated to their own CDS at periods of low volatility, but this correlation breaks down over sell-offs, which is precisely when hedging is needed most. This will leave portfolio managers unlikely to want to rely on sovereign CDS hedges (which they may now be forced to unwind at any moment) and presumably means they will be reluctant to take out initial long positions in both peripheral sovereigns and corporates in the first place – reducing demand for cash bonds. Once again – regulators and politicians should be careful what they wish for.


Matt King, Citi: As the shorts come off, what will we find underneath?

The European Commission’s publication this week of the technical standards underlying its short selling ban reinforce the view we held previously: the ban seems likely to add to selling pressure on cash bond spreads in peripherals, even if it brings down CDS and tightens the basis.

The latest publication accompanies the SSR (Short Selling Regulation), and defines the methods which will be used to assess net short positions once the regulation comes into force in November. Specifically, it sets out the rules which will be used to establish whether or not they are “naked”, or instead form a permissible hedge.

The SSR will require market participants to net their sovereign shorts with any long positions they hold, either in that same instrument or in other “highly correlated” financial instruments. “Highly correlated” is defined as an 80% correlation over the last 12 months, with an allowance for it to drop below this threshold for a stretch of up to 3 months but remain above 60% for the entire time.

We think these levels are so high that few market participants will be able rely on even genuine hedges being permissible. In peripheral sovereigns, for example, bonds have tended to be quite correlated to their own CDS at periods of low volatility, but this correlation breaks down over sell-offs, which is precisely when hedging is needed most.

During the periods of greatest stress, correlations have dropped below 60% for both Spain and Italy:



In core countries, hedging will be harder still – correlations are lower and less stable:


For those who hope to use sovereign CDS as a macro hedge for longs in corporates, the case is harder still. Here, the correlation must meet the same “meaningful and consistent” requirement over the past 12 months, and will again be monitored on an ongoing basis. Even where correlations have temporarily been above 70%, they have seldom remained there consistently:


In sum, we struggle to think that portfolio managers will fancy relying on sovereign CDS hedges which they could be forced to unwind at any moment should correlations drop below 60%. This presumably means they will be reluctant to take out initial long positions in both peripheral sovereigns and corporates in the first place, reducing the likely demand for cash bonds. So while it does look as though many existing shorts through CDS will have to come off, we are not sure policymakers will like what they find underneath.

Steve Forbes: How To Bring Back America

Steve Forbes has a message for a nation dominated by increasingly short-term decisions made on Wall Street and in Washington D.C., and by ever greater economic, financial and currency instability.  As long as America continues moving away from sound money; away from sound financial and economic policies; and, ultimately, away from freedom, its future grows more dim.  The dot-com and housing bubbles followed by the 2008 financial crisis and the most severe economic decline since the Great Depression serve as powerful lessons.  A future of bigger government, higher taxes, more burdensome regulations, less consumer choice and more unrealistic government promises requires more and more Federal Reserve play money.

Steve Forbes has a quintessentially American policy prescription rooted in American history.  The answer to America’s economic problems is—and has always been—new wealth creation.  New wealth creation doesn’t come from the government or from the Federal Reserve’s printing press.  New wealth creation is what happens naturally with stable money based on the gold standard, lower taxes on individuals, a simplified tax code, reduced bureaucracy and free markets.


Interview: Steve Forbes: How To Bring Back America

The Hera Research Newsletter is pleased to present an incredibly powerful interview with Steve Forbes, Chairman and Editor-in-Chief of Forbes Media.  The company’s flagship publication, FORBES, is the leading business magazine.  Combined with international and licensee editions, FORBES reaches more than 6 million readers worldwide.  The website is a leading destination for senior business decision-makers and investors with more than 30 million unique visitors per month.

Hera Research Newsletter (HRN): Thank you for joining us today.  With the U.S. economy struggling to recover from recession and financial crisis, what policies would you recommend?

Steve Forbes: The only way to recover is to stabilize our money, have a gold backed dollar, simplified tax code and return to a free market.

HRN: You advocate the gold standard?

Steve Forbes: If there’s any better system to ensure a stable value for money, it’s yet to be found.  For nearly all of America’s first 200 years, the dollar was linked to gold.  Since we went off the gold standard, we’ve had more and more financial, economic and banking crises.  For example, if the Federal Reserve hadn’t started to print so much money ten years ago, we wouldn’t have experienced the housing bust or the commodities boom or the sovereign debt crisis in Europe.  Eventually, events become a persuasive teacher.

HRN: Don’t we need a flexible money supply?

Steve Forbes: That’s like saying that changing the number of minutes in an hour would be a great tool to increase productivity in the economy.  Manipulating weights and measures, whether it’s the number of ounces in a pound or minutes in an hour, is a false way to think that you can achieve prosperity.  All gold does is serve as a yardstick to measure the value of your currency.

HRN: Doesn’t increasing the money supply help to stimulate the economy?

Steve Forbes: The only way to increase prosperity is through innovation and productivity.  Attempts to manipulate the value of money invariably fail.  We’ve had numerous devaluations, and not once has it created lasting prosperity.

HRN: Under the gold standard, would there still be a lender of last resort to backstop the banking system?

Steve Forbes: The gold standard doesn’t prevent lending during a panic.  The Bank of England pioneered acting as a lender of last resort in the 1860s under the gold standard.

HRN: Wouldn’t the gold standard prevent financial innovation?

Steve Forbes: No.  Financial innovation has been with us for hundreds of years in terms of new financial instruments to meet expanding needs as the global economy becomes more complex.  Many of the innovations of recent years, however, have come about in response to the instability of the dollar and other currencies, which has increased volatility in currency and commodity markets.  New instruments have been designed either as insurance against volatility or to take advantage of it.  If you had stable money, there would be much less hedging and financial speculation.

HRN: Can governments function under the gold standard?

Steve Forbes: Certain countries feel free to spend money whether they have it or not.  Fiat money, which can just be printed up, has disguised the real cost.  We would never have experienced the kind of government borrowing we’ve had in recent years if we’d had stable money.  The gold standard would keep the government honest.

HRN: Doesn’t government deficit spending smooth over recessions?

Steve Forbes: The bottom line for the U.S. is that a weak dollar means a weak recovery.  Stability is good for the economy.  The simplest thing to do is to re-link the U.S. dollar to gold.

HRN: Wouldn’t that tie the hands of the Federal Reserve?

Steve Forbes: Tie their hands to do what, further harm to the economy?  I don’t think that’s such a bad thing.

HRN: Isn’t the price of gold volatile like other commodities?

Steve Forbes: The reason to return to the gold standard is that gold maintains a stable, intrinsic value over time.  Stable money meets all conditions.  Gold doesn’t change in value.  Currencies change in value.  Gold is Polaris.

HRN: How would re-linking the U.S. dollar to gold work?

Steve Forbes: You simply peg the value of the dollar to gold.  Let’s say, for argument’s sake, you peg the dollar to gold at $1,600 per ounce.  If gold goes above $1,600, you tighten up on money creation.  If it goes below $1,600, you ease up.  You keep it around $1,600 by tightening or easing up on money creation.  The gold standard doesn’t preclude a booming economy having more money or a stagnant economy having less money.

HRN: Isn’t the gold standard deflationary?

Steve Forbes: No.  The gold standard is neither inflationary nor deflationary.  It’s like the mile: There are 5,280 feet in a mile; it’s a fixed length.  That doesn’t restrict the number of miles of highway you can build.  Between 1776 and 1900 the U.S. grew from a small, agricultural nation of 2.5 million people to a nation of 76.2 million people, and it became the greatest industrial power on earth.  The money supply went up about 160-fold while the dollar was pegged to gold.

HRN: Wouldn’t the gold standard severely limit leverage in the financial system?

Steve Forbes: If you’re a worthy borrower, you can borrow at the market interest rate; if you’re an unworthy borrower, you have to pay a higher interest rate or you can’t get money.  The gold standard would have prevented the wild lending and money creation we’ve experienced in the last few years, which has led to disaster.  You can see it in the housing bubble and in the European government debt bubble.  None of these things could have happened had we had stable money.

HRN: Is the Utah Legal Tender Act, which makes gold and silver legal in Utah, helpful?

Steve Forbes: I’m in favor of the states trying to get away from the Federal Reserve’s play-money approach.  The key is for the next President to institute a gold-linked dollar policy.

HRN: Do competing currencies make sense?

Steve Forbes: The idea of a parallel currency is a perfectly good one.  People would come to prefer a dollar based on gold rather than a dollar based on politicians.

HRN: Do you also suggest using silver as money?

Steve Forbes: The Chinese and other cultures have used silver as money, but silver doesn’t maintain its value the way gold does.  Over time it takes more silver to buy an ounce of gold.  About 120 years ago it took 15 ounces of silver to buy 1 ounce of gold.  Today it takes more than 50 ounces.  That’s why the U.S. moved away from a bi-metallic standard to the gold standard.  One metal becomes more valuable than the other at different times.  Silver is better than fiat money, but there’s only one gold standard.

HRN: Would the gold standard help the U.S. economy to recover?

Steve Forbes: In the 1980s, when we had very high unemployment and a stagnant economy, the way out was through a strong dollar, lower income taxes, entrepreneurship and new wealth creation.  Remember, the values of assets go up when people see a future.  They don’t today.

HRN: We didn’t have the gold standard in the 1980s.

Steve Forbes: Ronald Reagan killed the terrible inflation of the 1970s and sharply reduced income tax rates.  Reagan wanted a return to the gold standard, but none of his advisors believed in it.  Inflation was effectively killed by high interest rates.  Deregulation was pushed forward, and America roared.  In 1982, the Dow bottomed at 776; over the next 18 years it went up 18-fold.

HRN: You advocate cutting taxes?

Steve Forbes: Yes, and we should put in a flat tax.  The advantage of the flat tax is that it enables people to focus on real things.  Abraham Lincoln’s Gettysburg Address, which defines the character of the American nation, is all of 272 words.  The Declaration of Independence is a little more than 1,300 words.  The Constitution of the United States and all of its amendments are a little more than 7,000 words.  The Bible, which took centuries to put together, is a mere 773,000 words.  The U.S. federal income tax code—with all of its cross-references, descriptions of amendments and effective dates—is probably now in excess of 4,000,000 words.  Nobody knows what’s in it.  Last year the IRS announced that Americans spent 6.1 billion hours filling out tax forms and $300 billion on tax preparation.  This is a huge waste of resources and brain power.  Not to mention that it’s a corrupting influence.  It’s a huge source of government power, and it brings out the worst in us.  The sooner we get simplicity—and a flat tax would give us that—the more energy we can devote to productive pursuits.

HRN: How could the U.S. transition to a flat-tax system?

Steve Forbes: Since people get hung up on their deductions, we would institute a flat tax and give people the option of filing either under the new, simple system or the old, horrific system.  If you’re a masochist and want to punish yourself, you can file under the old income tax system.  If you want the simplified one, you can go with that.  I think 99% of Americans, out of sheer convenience, would quickly switch to the new system.

HRN: You mentioned deregulation.  How would that help the U.S. economy?

Steve Forbes: Take health care, for example.  We don’t have a free market in health care.  There’s a disconnect between patients and health care providers.  If you go to a hospital and ask how much something costs they’ll look at you strangely because they think you’re either uninsured or a lunatic.  How many hospitals put the prices of procedures on their websites?  It’s like going into a restaurant and having no idea how much anything on the menu costs.  It’s a crazy system.

HRN: How would you go about deregulating health care?

Steve Forbes: First, we should repeal the Patient Protection and Affordable Care Act—Obamacare—which is an abomination.  Patients should have more choice.  The insurance companies don’t compete freely for business.  We should allow people to shop nationwide for health insurance.  I live in New Jersey, which has a lot of senseless regulations.  Why can’t I buy a health insurance policy in Pennsylvania that costs less?  We should equalize the tax treatment of health care expenses.  If you’re a business or are self-employed, you should be able to deduct the expense.  And individuals should be free to go into the market and pay with after-tax dollars.  We should make it easier for small businesses to form a collective to buy health insurance.  There are a lot of simple things that could be done.

HRN: Do free markets really work?

Steve Forbes: Free markets, with sensible rules of the road, can do all the things that big government advocates say the government does but that it really can’t do.  Free markets enable people to move out of poverty and break down barriers between ethnic groups and between nations.  Free markets increase cooperation and foster a sense of humanity.  Everything that big government says it will do, you get more from free markets than from government bureaucracies.  Which one has a better future, FedEx or the U.S. Post Office?  Do you want food stamps or paychecks?  Big government makes a lot of promises, but it’s short sighted.  Government is about meeting its own needs at the expense of the nation, and it’s immoral.  Free markets have gotten a bad rap, which happens to be the subject of my new book.

HRN: The Federal Reserve recently announced that it will extend its “Operation Twist” program by $267 billion through the end of 2012.  Will that help the U.S. economy?

Steve Forbes: No.  The more Federal Reserve Chairman Ben Bernanke messes up, the more he’s hailed as a savior.  The Federal Reserve’s programs—quantitative easing 1 and 2 and Operation Twist—are just fancy words for printing up more money.  It’s a bunch of smoke and mirrors.  They’ve done a lot of damage already, and they’re continuing to.  What they’re doing is dangerous.  Not only has the Federal Reserve created a lot of money and vastly expanded its balance sheet but, along with the U.S. Department of Treasury, it has dramatically shortened the maturity of U.S. government debt.

HRN: What do you mean when you say that the Federal Reserve has done a lot of damage?

Steve Forbes: By keeping interest rates artificially low, Chairman Ben Bernanke is cheapening the dollar, which punishes savers and harms future investment.  It distorts financial markets and misdirects investments into things like creating the housing bubble.  It subsidizes government borrowing at the expense of the rest of us.  It’s the equivalent of a cut in pay for workers.  Let’s say you’re earning $20 per hour and the government cheapens the dollar; then, in effect, you’re making $15 per hour.  It violates contracts and undermines social trust.

HRN: What should Chairman Bernanke do instead?

Steve Forbes: Other than resign, Chairman Bernanke should realize that the gold standard works and that when you deviate from it, you create more and more uncertainty.  He should re-link the dollar to gold.  Doctors used to treat patients by bleeding them.  Bernanke just keeps bleeding the economy.

HRN: Thank you for being so generous with your time.

Steve Forbes: Thank you.


Hera Research, LLC, provides deeply researched analysis to help investors profit from changing economic and market conditions.  Hera Research focuses on relationships between macroeconomics, government, banking, and financial markets in order to identify and analyze investment opportunities with extraordinary upside potential. Hera Research is currently researching mining and metals including precious metals, oil and energy including green energy, agriculture, and other natural resources.  The Hera Research Newsletter covers key economic data, trends and analysis including reviews of companies with extraordinary value and upside potential.

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