Thanks to a series of colossal failures that were impossible to hide, we now know that Futures Commission Merchants (FCMs) could instantly access billions of dollars that did not belong to them. Thanks to incriminating emails and ongoing settlements, we now know that a horde of banks can collude to rig key interest rate benchmarks for decades. This is what we now know after decades of malfeasance. Just imagine, then, what still goes on behind the curtain.
Then again, with central banks printing trillions in fiat currencies in order that they might openly manipulate interest rates and market prices, it is abundantly clear that curtains are becoming optional. Consider the following: 14 central banks, representing a combined $16 trillion in bond and equities capitalizations, have followed the U.S. Federal Reserve down its zero percent path and have, already, printed more than $9 trillion. As Marc Doss from Wells Fargo notes, “That's like creating the second-largest economy in the world out of thin air.”1
Leaving the Fed alone for the moment (something they should have done to the markets in 2008), our journey starts with a recap of two of the most scandalous events in financial market history. These and other stories help expose the suspicious actions/inactions of regulators and policy makers, and comment on the sense of skulking uncertainty that has become embedded in the financial markets. We leave it to you to conclude whether the greater good is being served by those entrusted and empowered to marshal change.
More than a year has passed since MF Global (MFG) filed for bankruptcy. You may recall that MFG made massive leveraged bets in European debt, and when these bets started to come under pressure $1.6 billion mysteriously went missing from customer accounts. Below are some highlights and opinions of events thus far, starting from the CME’s timeline.2
“October 30, 2011:
From CME Timeline report released on December 15, 2011
Approx. 6 p.m. - 7 p.m.: O'Brien, MFGI's treasurer, calls a meeting with the CFTC, CME, and MFGI employees present at MFGI's Chicago office and confirms that MFGI has a potentially huge deficiency in the segregated account due to what MFGI states is an unidentified accounting mistake, such as a mis-booking.
9 p.m. - 10 p.m.: Procajlo speaks with [MFG’s] Serwinski and O'Brien, who repeat the explanation that the deficiency must be an accounting error and make statements to the effect that it is too big to be anything else.
October 31, 2011
Approx. 1 a.m. —2 a.m.: CME learns the deficiency is real: Serwinski and O'Brien call Procajlo into Serwinski's office and tell him there is an actual shortfall; about $700M was moved to the broker-dealer [BD] side of the business to meet liquidity issues in a series of transactions on Thursday, Friday, and possibly Wednesday. Additionally, Procajlo is told there was a loan of $175M of segregated funds to MF UK.”
At this point – early on October 31, 2011 – arrests should have been made. After all, Serwinski and O’Brien initially contended that missing segregated funds were due to an accounting error and then later discovered that segregated funds had been moved (i.e. stolen) to cover ‘liquidity issues’. As their name implies, segregated funds are not permitted to be used for liquidity shortfalls at the BD. This would have been the first time ever* that customer funds had gone missing at a FCM.
But instead of arrests, the following took place:
“2 a.m.: [CME’s] Taylor emails the FSA and CFTC to let them know that IB has gone home to get some sleep, but may still be interested in the transaction.”
Yes, even after the discovery of missing customer funds, some regulators held out hope that the MFG nightmare could still be packaged and sold to Interactive Brokers, but we digress.
“3 a.m.: …During the night, Procaljo also participated in a phone call with senior MFG employees wherein one employee indicated that Corzine knew about loans that had been made from the customer segregated accounts.”
A ‘senior MFG employee’ fingers former CEO of Goldman Sachs, former Governor/Senator, and current MFG CEO and Chairman Jon Corzine, and the sirens don’t sound? Instead of handcuffs, Corzine is provided safe passage to testify in December 2011 that, “I did not instruct anyone to lend customer funds”. Conversely, CME Executive Chairman, Terrence Duffy, testifies, “We were getting falsified (customer fund) segregation reports. Our system has never failed in 75 years. In our opinion, someone has violated the law." In other words, nothing.
In March 2012 an O'Brien’ email is leaked by congressional investigators3 which states that Corzine “gave “direct instructions” to transfer $200 million from a customer fund account…”4 Again, nothing. Then in June 2012 the ‘Report of the Trustee’s Investigation and Recommendations’5 is released, and sets the already salacious CME timeline ablaze.
Apparently, and unless the Trustee’s report is a complete fabrication, Ms. O’Brien was well aware that customer funds were being used to keep broker-dealer operations above water. To be sure, on October 26, 2011 alone Ms. O’Brien authorized “$615 million in intraday transfers”, and when funds didn’t end up back in their segregated area by the close, O’Brien – whether culpable or not - began to panic. As per the Trustee report, O’Brien “emailed Messrs. Gill, Lyons, and Simons in Operations in New York at 6:24 p.m., stating “I need to know how much is being return[ed] – from where to where”, and again at 6:25 p.m., stating, “I NEED TO KNOW NOW – TO PRE-ADVISE FUNDING AND AVOID A SEG ISSUE.”
‘Seg issue’? What Seg issue? When the money from one area didn’t arrive back in segregated accounts in a timely manner MFG’s VP of Operations, Dominick DeLucia, simply grabbed $325 million, threw it into a shell account he created called ‘Customer CFTC 1.25’, and added it to the daily segregation statement. Whether legal protocols were breached here, once again, is not clear (can regulation 1.25 be enacted well after customer funds are transferred?) What is clear is that people were starting to notice the gobs of money sloshing to-and-fro.
“Ms. Serwinski, who was out of town on vacation, received a copy [of the segregation statement]. She asked for an explanation for the large negative Firm Invested in Excess balance, and expressed concern about the $200 million “loan” from the FCM that had been made on October 27. Ms. O’Brien responded, “Lent is a strong word-I would state-Fail to return intraday funding compounded by Funding B/D Customer Wires.””
Even with O’Brien, Serwinski, and a bevy of others in the Treasury and Financial Regulatory Group aware that the daily demands for money were abnormally high, someone that testified he hadn’t a clue what was going on was Henri Steenkamp. Mr. Steenkamp was MFG’s CFO, Chief Accounting Officer and Global Controller, and he was in charge of almost all the people and departments that have been mentioned thus far. Watch his testimony in December 2011 and in March 2012 and you cannot help but get the impression he is (in our opinion) a liar extraordinaire (two panel members even suggested as much, with one asking him if he understood the phrase “willful blindness”6). A supposedly clueless Steenkamp was the same person who as early as July 2012 started looking for ways that customer funds “could be “loaned” overnight on a regular basis”, which would have been a “dramatic change from MFGI’s then-current practice”. Steenkamp is also the person that informed Ms. O’Brien in the summer of 2012 that the company ‘had lots of cash’ – to which a speechless Ms. O’Brien wanted to respond, but didn’t, ‘Really, then why is it I need to spend hours every day shuffling cash and loans from entity to entity?’ Finally, Steenkamp was informed, point blank, by Serwinski on July 27 that “Utilizing the FCM client asset [base] should not be a BD working capital source strategy to be relied upon…” In short, the increasingly aggressive treatment of customer accounts by both Corzine and Steenkamp leading into late October 2011 is well documented and irrefutable. Yet, curiously, characters charged with fighting daily segregation difficulties up until October 27 were the exact individuals (O’Brien and Sewinski) that were against treating customer accounts as a piggy bank in the first place.
On October 27 JP Morgan put a number of MF Global’s accounts on “debit alert”, and on October 28 at approximately 8:00 AM, the call was made by 3-top JPM risk compliance individuals to MFG’s Jon Corzine and Vinay Mahajan. In effect, the question asked by JPM was ‘where is our money?’, and, ‘until we get our money we can’t sell anything you own’. Knowing that a JP Morgan margin call could not be hidden or ignored, “Senior management, including Mr. Corzine and Mr. Mahajan, instructed Ms. O’Brien to wire $175 million to MFGUK’s account at JPM”. Had all of senior management ignored the daily liquidity and segregation reports and somehow believed the company had $175 million to access without threatening customer accounts? Not only is this unlikely, it is preposterous. The more logical speculation is that upper management concluded, like they did on October 26, to transfer the money and sort it out later. In essence, put the JPM fire out now lest the entire company burns.
When JPM called back again and asked about the money Corzine told them that Ms. O’Brien had taken care of it (up until this point the story was he said (Corzine) she said (O’Brien)). Indeed, in his testimony Corzine acknowledged speaking with JPM on this matter, and O’Brien has never contradicted the fact that she followed through on her orders to make the transfer. However, when JPM called back again – ‘for at least the third time’ - and asked if the $175 million transfer they just received ‘was in compliance with regulatory requirements’, all hell broke loose. Speaking directly to Mr. Corzine, JPM wanted to know if MFG would sign a letter confirming that the tapping of customer accounts to fund their margin call was legal. At this point the jig – of attempting to borrow customer funds outside of the regulation 1.25 – was up.
This is also the point when Corzine’s name mysterious drifts out of the picture. To recap: Corzine knew JPM wanted approximately $175 million, he knew that Ms. O’Brien, as per his instructions, wired $175 million to JPM, but when it comes to where this money came from or whether it was legal under regulation 1.25 he, according to his testimony, ‘had no personal knowledge’???
Perhaps Corzine was smart enough to avoid any paper trail with the heat on, or perhaps he really was a hands-on boss that suddenly, for no apparent reason, decided to leave these nightmarish end days to his underlings. Regardless, it is simply not conceivable that he ignored the question of legality from JPM entirely (as he said he did during his testimony). In the weeks leading up to October 28 people were repeatedly showing Mr. Corzine where the company’s liquidity shortfalls were taking place. They were doing this because, to quote, “he [Corzine] keeps speculating where the money has gone and sends Treasury in different directions to investigate.” Moreover, in the months leading up to October 28 Corzine was lobbying for more lenient changes in ‘permissible investments’ under regulation 1.25, in part because he feared he would no longer be able to borrow customer funds against his sovereign debt positions. And in the days leading up to October 28 Corzine was spending a great deal of time talking with Federal Reserve Bank of New York President William C. Dudley about MFG’s strained liquidity position. Long story short, when JPM came calling Corzine was left with one of two choices: own up to the potentially illegal transfer(s) or keep his mouth shut and act the fool. It appears that he chose the latter.
At risk of belaboring the point, the madness surrounding JP Morgan’s request for a written statement to be signed by someone at MF Global makes for an enthralling read. After MF Global said the initial document was too broad, JP Morgan sent back another document with only the two transactions on it (the $200 million from customer accounts and the $175 million sent to MF UK). Yelling matches over the phone ensued, countless emails were sent from numerous people on the matter and, still, no one at MFG would sign it. MFG General Counsel, Laurie Ferber, Global Treasurer, Vinay Mahajan, and all the regular suspects (Corzine, Serwinski, O’Brien) all knew about this letter…and yet everyone was in a state of unadulterated shock when customer funds were discovered missing days later? (everyone, that is, except Ms. O’Brien, who under testimony pleaded the fifth and, reportedly, was/is seeking immunity for information).
Under testimony Ferber contended that she got the impression Ms. O’Brien would sign the JP Morgan letter if it was limited to only the two related transactions. What Ferber did not comment on is why Ms. O’Brien was asked to sign such a statement in the first place. The chain of command was Corzine, Steenkamp, Mahajan, and then assistant Treasury O’Brien. Did Ms. O’Brien awake in those late October days and abruptly, of her own volition, start moving hundreds of millions of dollars out of customer accounts? If so, for what purpose? After being placed under an enormous amount of pressure, O’Brien ultimately refused to sign the letter stating she was not an officer and did not have the authority to make such transfers.
Then, on October 31, MGF put in requests for approximately $500 million in wire transfers from various places to try and get some money back into customer accounts. Apparently hundreds of millions in missing customer funds would look better than $1+ billion. This last gasp failed miserably as only $15 million arrived. MFG, and customer funds, were locked out. The game was over. MF Global was no more...
The Evidence Pile Grows
As if this swamp were not enough, politicians got involved with their own 97-page report released in November 20127. In this report the U.S. House of Representatives investigation flatly concluded that, “Jon Corzine caused MF Global’s bankruptcy and put customer funds at risk”.
The report went on to say that Corzine set up the new division to make big bets in the markets, Corzine convinced the board to let him increase his Euro-debt wager from $2 billion to $4 billion, Corzine went looking for a new chief risk officer (after the old one was worried at the $2 billion position), Corzine convinced the board to let the position grow to $4.75 billion, Corzine fired chief risk officer Roseman, Corzine and new chief risk officer (Stockman) lobbied for a $5.8 billion limit, and when Corzine got the new $8.5 billion limit even Stockman got scared.
In other words, Corzine was to blame! But instead of suggesting criminal responsibility, the recommendation from politicians was incomprehensibly vague:
“The Subcommittee recommends that the Committee on Agriculture consider whether to direct the CFTC to study whether it can better mitigate the risks that FCM customers face when customer funds are placed in secured accounts subject to the law of a foreign jurisdiction.”8
Customer funds were stolen and, to date, have not been returned in full. We know who took this money and why. All this begs the question: who is protecting Corzine?
* MF Global was the first time that customer funds had gone missing. Since then, Peregrine Financial Group blew-up (June 2012) for tapping more than $200 million in customer funds. And after trying to commit suicide Peregrine’s chief executive, Russell R. Wasendorf Sr., was charged with 31-counts of lying to regulators. Almost 14-months since its bankruptcy, no charges have been laid against anyone at MF Global.
From Small Fish To Big Fry
As early as April 16, 2008 the Wall Street Journal was suggesting that the London inter-bank offered rate (LIBOR) was being rigged. Given that this type of conspiratorial innuendo is usually reserved for sources like FallStreet.com, at the time it was clear that the Journal had to be on to something:
“In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.”9
With the gift of hindsight is also clear that LIBOR rigging was on the radar well before The Journal’ caught on. To be sure, as early as August 28, 2007 the U.S. Federal Reserve received mass-distribution emails saying LIBOR was rigged10, by late 2007 a Barclay’s compliance officer had contacted the British Bankers' Association (BBA) and the FSA about LIBOR manipulation, and shortly thereafter another Barclays employee had contacted the CFTC. Regulatory bodies deal with a lot of people claiming markets are rigged, so it is difficult to correlate these small pieces of evidence with any plot to suppress the truth. Nevertheless, what is known is that shortly after the Journal story broke the New York Fed began debating some of the tribulations with LIBOR11 and then head of the NY Fed, Tim Geithner, was sending Bank of England (BOE) governor Sir Mervyn King tips on how to improve LIBOR12. And by late 2008 everyone knew LIBOR was make believe, with even Mervyn King acknowledging that LIBOR “is not a rate at which anyone is actually borrowing”13.
With the financial world hanging on a thread and a series of bailouts and printing schemes grabbing all the spotlights, news that LIBOR had been rigged seemed to vanish. In 2009 the BBA toughened its guidelines for contributor banks. Some banks adhered while others did not. In 2010 Barclays asked its LIBOR submitters to inform them of any internal or external pressure to rig LIBOR submissions (as if rigging LIBOR was an acceptable practice beforehand). And in 2011 “Royal Bank of Scotland sacked four people for their alleged roles in the Libor-fixing scandal.”14 One of the largest scandals in financial market history and the trail turns cold for 3-years?
Then, finally, in June 2012 Barclay’s admitted misconduct. Barclay’s traders were rigging the company’s LIBOR submissions and consorting with other banks to produce ill-gotten gains. But rather than handcuffs and jail terms, the events were all about apologies and penalties. One of the first to strike was the CFTC:
“Barclays’ traders made these unlawful requests routinely, and sometimes daily, from at least mid-2005 through at least the fall of 2007, and sporadically thereafter into 2009”15
After pocketing $200 million in penalties the CFTC moved on to shaking someone else down, but not before thanking Barclays.
“The Order recognizes Barclays’ significant cooperation with the CFTC during the investigation of this matter.”
The above statement suggests that Barclay’s had a choice in the matter, but we digress.
Not to be outdone, the U.S. Department of Justice announced on the same day, June 27, 2012, that Barclay’s agreed to pay them $160 million16. And after a few harsh words – i.e. ‘illegal conduct’ and ‘Barclays Bank’s illegal activity’ – the DOJ likewise acquiesced from the handcuff route:
“As a result of Barclays’s admission of its misconduct, its extraordinary cooperation, its remediation efforts and certain mitigating and other factors, the department agreed not to prosecute Barclays for providing false LIBOR and EURIBOR contributions…”
The DOJ’s take is akin to saying we let the bank robbers off because they showed us how they robbed the bank and spent all the money.
Finally, the FSA was able to land £59.5 million from Barclays17 and, not surprisingly, was very thankful. The FSA even went so far as disclose the special deal Barclays received for being such a punctual ‘criminal’ (our word not theirs).
“Barclays agreed to settle at an early stage of the FSA’s investigation. Barclays therefore qualified for a 30% (stage 1) discount under the FSA’s executive…”
Sadly, we are not making this up. Admit your guilt and you get cash back on your fine. Barclays completed their business transaction with the FSA on, you guessed it, June 27, 2012.
The Barclay’s LIBOR settlements were a piece of beautifully choreographed theater that required multiple regulatory bodies, a great deal of PR, no arrests, and only a few dismissals at Barclays. This drama took years of
investigating planning, and happened more than 4-years after one of the first mainstream articles had caught on to the LIBOR scandal. Immediately following the penalties, Barclay’s chief executive, Bob Diamond, said he would stay on with the company and bring everyone responsible to justice!
But the settlements were not greeted with flowers: 4-days later Mr. Diamond was force to resign.
Only A Few Rotten Apples?
Beyond the sensational emails from traders begging for specific LIBOR rates so they could buy booze, there was also the outrageous relationship between Barclay’s, the BOE, and UK government. The basic plot here was that BOE Deputy Governor, Paul Tucker, was asking Bob Diamond and others at Barclays why their LIBOR submissions where so high. What is interesting from the emails is not what was said, but what could only be said in person or over the telephone. The emails between Tucker and Barclays, without exception, started or ended with language about either meeting in person or talking over the phone. (because this collection of emails are so scintillating, a complete recap is provided at the end of this document)
One of the more interesting emails was Tucker’s first to Diamond, in which he noted about his LIBOR questions that: ‘It is a slightly sensitive point’. This email arrived a day after a senior civil servant in the Cabinet Office, Jeremy Heywood, contacted Tucker about LIBOR. The coincidence, if that, was stunning. Was the government putting pressure on the BOE to put pressure on Barclays to rig LIBOR?
Following the release of the emails an interesting plot turn developed in that Sir Mervyn King, reportedly long-time nemesis to Mr. Diamond, played a role in making sure Diamond was ousted from Barclays (with a £2m payoff, of course). Mr. Diamond didn’t take kindly to this, and, for reputational reasons, tried to change the conversation by releasing an email he sent to then chief executive John Varley and Jerry del Missier on October 29, 2008. One of the most salacious disclosures to date, the entire email is below (bolds added):
“Further to our last call, Mr Tucker reiterated that he had received calls from a number of senior figures within Whitehall to question why Barclays was always toward the top end of the Libor pricing. His response was "you have to pay what you have to pay". I asked if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions, his response "oh, that would be worse". I explained again our market rate driven policy and that it had recently meant that we appeared in the top quartile and on occasion the top decile of the pricing. Equally I noted that we continued to see others in the market posting rates at levels that were not representative of where they would actually undertake business. This latter point has on occasion pushed us higher than would otherwise appear to be the case. In fact, we are not having to "pay up" for money at all. Mr Tucker stated the levels of calls he was receiving from Whitehall were 'senior' and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.
The LIBOR scandal could disappear tomorrow, but the emails last forever. Who was Mr. Tucker referring to when he mentioned ‘senior officials’? What does ‘that did not always need to be the case that we appeared as high as we have recently’ really mean? Is Mr. Tucker – when he says “oh, that would be worse” – telling Mr. Diamond to continue releasing a falsified LIBOR submissions that did not reflect any real transactions? Also added to Barclay’s pile were notes from a call between Tucker, Diamond, and top Barclay’s investment-banking executive, Jerry del Missier. Mr. Missier, reportedly, “had interpreted the conversation as an instruction to understate Barclays’ borrowing costs.”19 Tucker denied this to be the case.
Suffice to say, as Barclays’ sly settlement didn’t stick and heads started to roll, the pressure against Tucker mounted in short order. Did blatant criminal activity by Barclays’ upper management get overlooked once Tucker, the leading internal candidate to replace Governor Mervyn King, was bombarded? If so, who gave the order? Suddenly the conspiratorial viewpoint that markets are rigged doesn’t seem all that conspiratorial.
The Big Fry Boils Over
As if the Barclay’s LIBOR fiasco were not startling enough, since June 27, 2012 Deutsche Bank, JPMorgan, UBS, Citigroup, RBS, and others have said they are cooperating with investigations. The penalty discounts Barclays was able to grab may be gone, but it is clear firms are cooperating now because the evidence is so damning. Stepping in the game late was the Serious Fraud Office (SFO), which on July 6, 2012 stated “we hope to come to a conclusion within a month”. Then - finally! - on December 11, 2012 the SFO announced that it has arrested three British men in connection to the LIBOR scandal.
Also, since December 11, The Hong Kong Monetary Authority has “started an investigation to see if there was wrongdoing by the bank in its submission of data for setting the Hong Kong Interbank Offered Rate”20, and UBS settled for $1.5 billion. The UBS settlement(s) unleashed another wave of criminal conduct to rival the Barclay’s revelations. To be sure, according to the CFTC, there was “more than 2,000 instances of unlawful conduct involving dozens of UBS employees”, with one “Senior Yen Trader”21 doing so quite openly:
“The Senior Yen Trader used at least three manipulative strategies: (i) he wrongfully induced at least five interdealer brokers to assist with his manipulative scheme; (ii) he had UBS submitters make submissions reflecting his preferred rates; and (iii) he cultivated prior working relationships and friendships with derivatives traders from at least four other banks and had them make requests of their banks’ own Yen LIBOR submitters based on his preferred rates.”22
As part of UBS’s settlements a division, UBS Securities Japan Co. Ltd., actually admitted to fraud. As Reuters noted, this was the first “felony plea since Drexel Burnham Lambert’s no-contest plea deal in 1988.” That this admission and thousands of instances of ‘unlawful conduct’ didn’t come packaged with arrests is almost immaterial – at least the admission is on the record.
Then, earlier this week, RBS entered their initial settlement with regulators23. With at least 21 individuals and at least one manager fingered for rigging LIBOR, RBS handed over $612-milliom, the second largest LIBOR settlement to date. Clearly, not only is the LIBOR scandal threatening to grow even more ominous, the cost to those financial companies involved is on the rise.
First we rig LIBOR, then we…?
The regulators admit that the LIBOR manipulation was expansive and persistent since, at least, 2005. Other reports have also surfaced that LIBOR was rigged since at least 1991 and even earlier . Politicians and Bank of England official(s) were in the mix, and it is clear that low level traders were not the only ones involved. As one recent disclosure notes, “Senior managers at RBS…knew banks were systematically rigging Libor as early as August 2007”26.
The plot, thickening, also continues to confound. A November 29, 2012 article from the Guardian chimed in with the following:
“The government has begun a month-long consultation on changes to the law to make manipulating Libor a criminal offence.”27
With an estimated $350 trillion in financial instruments tied to LIBOR, the government is having a hard time proving that manipulating it isn’t a criminal offense? The more likely conclusion is that government would rather see this problem, and its involvement in it, go away…
One trader, as early as 2007, emailed, “[I]f you breathe a word of this I'm not telling you anything else.” Question is, what else is there to tell?
Crime and Punishment
In August 2009 Si Chaxian was brought to justice after she had collected 167 million yuan ($24m) from more than 300 people in a real estate scam. Her partner, Du Yimin, was able to swindle 700 million yuan ($102.5m ) from investors. Despite varying degrees of criminal success, both received a standard penalty for their actions. Death.
Given the political corruption, lack of due process, and questionable record on human rights, applauding the Chinese legal system for executing criminals is difficult to do. Nevertheless, let us say that with the threat of death lurking in the background, the testimony from MF Global employees would have involved a lot more honesty and tears. For that matter, and to exaggerate an extreme, if a death van28 had been constantly driving around Canary Wharf there would have been a lot fewer traders hell bent on reaping illegal profits by manipulating LIBOR. The point is not that exceptionally severe punishment is the prerequisite to deterring criminals, only that some level of punishment is required.
But before punishment can be levied, crimes must first be unearthed. It doesn’t take more than 4-years to investigate whether or not banks are rigging LIBOR. Moreover, and complex or not, it should not take more than 14-months before a riddle like MF Global is solved. Thus, not only is the punishment when financial-related crimes are discovered exceptionally weak and/or non-existent, but the broken process of exposing such crimes is a crime in itself. Regulator didn’t simply drop the ball, they tried to kick it down a dark hole.
Free Markets and Criminals Be Damned!
Contacted at least 13-times by Barclays and other banks about a rigged LIBOR, the FSA was intimately aware that LIBOR was being rigged. But the FSA is charged with four statutory mandates29 which, loosely stated, are to maintain market confidence, defend financial stability in the UK, protect consumers, and reduce financial crime. Is it possible that these mandates conflict – that the FSA can conclude that financial market stability takes precedence over catching the bad guys? More than possible, this conflict at the FSA and countless other regulatory bodies is obvious, and sometimes, if you read between the lines, spoken out loud:
“people need to know what the price of money is, what the price of equity is, so we need benchmarks, we just need them to work and to tell the truth”30
As FSA managing director, Martin Wheatley, recently suggested, falsified markets need to become more truthful, but please do remember that people also need to know what prices are and for this you need benchmarks. This line of reasoning, akin to condoning a counterfeiting operating because it creates liquidity, comes as many have called for the destruction of LIBOR, others plead for arrests, and yet another wave of FSA promises to finally fix things. As Mr. Wheatley equivocates and says bankers must “pay the price” (next time, of course), the onlooker is left to wonder why the FSA, a cop, is the one prevaricating on matters of crime.
Copy Wheatley’s logic and paste it into the minds of central bankers, and their strain of sagacity begins to take shape. To be sure, every economist and central banker is well aware that the 2007/08 crisis was the result of too much leverage and debt in a bubbly financial system almost devoid of regulatory constraints. In fact, leading up to the crisis there was a quest from policy makers, the U.S. Federal Reserve included, to allow self-regulation to flourish, to cast decades-old banking regulations aside, and to permit unregulated markets to expand to outlandish proportions. But as these experiments produced toxic effects, central banks didn’t elect to fix the mess that they helped create because the only thing that mattered was people need financial market stability! (as an aside, there are plenty of other conspiratorial viewpoints about the Fed’s intentions).
Contrary to stabilizing the financial system, the Fed’s extraordinary interventions are akin to the shuffling of risks. The FSA and others did their best to do nothing about the LIBOR scandal because, the facts suggest, arresting hundreds of traders and managers was not worth the risk of negatively impacting the near-term financial well being of millions. In a similar vein the Fed bought vacant malls and started accepting junk as collateral because they deemed illiquid and/or falling asset prices would have overwhelmed the financial system and hurt everyone. In each instance the end goal of placating investor jitters or championing market stability reads like an afterschool special – tough choices, yes, but the right choices!
Unfortunately, fact doesn’t depict the feel-good non-fiction of how to avoid peer pressure. The seemingly altruistic regulatory lapses arrived when the FSA was being run by now disgraced and ousted leader (see Sir James Crosby), and it has now been said that during the crisis years the boss at the SFO (See Richard Alderman) “betrayed the rule of law”31. Apparently, Crosby and Alderman didn’t turn a blind eye from the manipulation because they cared deeply about the well being of people and the markets. As for the Fed, their plan to artificially boast asset prices after denying they artificially boosted asset prices during each of the last two asset bubbles may have radiated a tiny aura of gallantry in 2008 when every major financial company on the planet appeared to be at risk of collapse. Not so much today. The Fed, which never seems to see these financial crises coming and always deny that their policies caused them, already has more than $3 trillion in non-traditional assets on their balance sheet and has pledged to purchase $40 billion a month in mortgage securities. Apparently ‘stability’ is highly contingent upon whether market prices are doing what the Fed wants.
But hasn’t the Fed’s extraordinary interference in 2008, 2009, 2010, 2011, 2012, and now 2013 done a world of good and taken risk off the table? The Fed would certainly like everyone to think so, but veracity is not a trait becoming of a central banker, especially one that thinks that their magical printing well will never run dry. In other words, it is without question that the Fed’s actions are analogous to the same ideological myopia that infected those at MF Global. The only difference being that Corzine and company risked customer funds while Bernanke and company risk the very viability of the U.S. dollar.
In conjunction with the exploitation of the dollar is the speculation that the Fed secretly embarks upon even more nefarious actions in the marketplace. For example, in recently disclosed transcripts from an August 2007 conference call32 Richmond Fed President, Jeffrey Lacker, took the remarkable step of accusing then Vice Chairman, Timothy Geithner, of passing along inside information to the CEO of Bank of America, Ken Lewis. According to Lacker, Mr. Geithner alerted Mr. Lewis of upcoming changes to Fed policy. This stunning confrontation took place around the same time an equally stunning rally in stocks was transpiring (because of Geithner’s leak?) The media provided obligatory coverage on this story, and the potentially illegal conduct of Mr. Geithner did not even elicit a rounding up of suspects.
In short, given that a more robust regulatory apparatus could temporarily hurt the financial markets, there exists a toothless regulatory façade that is more interested in creating imaginary market prices than attacking crime and championing free markets. Massive crimes have become an accepted revenue stream for regulators and a cost of doing business for the criminals, and illegal actions that may provoke market jarring events are not made public but instead concealed by the very bodies charged with policing them. Remember, if the CME had their way MF Global would have been sold to Interactive Brokers, with the theft of customer funds never revealed.
Curtains Open and Close
How many suspicious market movements need to pile up before there sits a mountain of certainty? How many mind boggling lapses in regulatory oversight are required before we see things straight? The silver market, one of the most rigged on the planet, has been under investigation for more than four years, and only recently CFTC’s Chilton stated, “certainly there were nefarious actions, and, I believe, violations of the law”33. Then there is HSBC, which recently completed a $1.92 billion transaction with the CFTC for money laundering charges. Despite dealing with Mexican drug cartels and banks with ties to terrorist groups, not a single individual at HSBC was charged. Whether ‘too-big-to-fail’ or ‘too big to jail’, the time for eureka has long past: There is definitely an intensely iniquitous hand in today’s financial marketplace.
In sum, we are asked to believe that 3 of the top individuals at the CME – keeping meticulous notes on everything said and done mind you – did this on October 30, 2011.
“11 a.m.: Taylor, Donohue, and Duffy seek and obtain Jon Corzine's phone number. They do not recall speaking with Corzine.”
The company is imploding, regulators are monitoring everything and have put a lock on equity withdrawals, the downgrades are rolling in from the rating agencies, and three of the top employees at the CME (not 1 mind you, but 3 of them) want Jon Corzine’s telephone number! What do they want this number for and what do they do when they finally get it? Nothing of course. They do not recall speaking to the man…
28. China reportedly has a ‘death van’ that is was “specially developed to make executions more cost-effective and efficient.”