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The roots of
the LIBOR crisis can be found in the broad based sub-prime FRAUD in America
circa 2000 - 2007. The sub-prime fraud involved American investment banks
securitizing [bundling] poor mortgage credits into “pools”
– then working hand-in-hand with credit rating agencies like S & P
and Moodys – having these pooled securities
rated AAA.
In Q1/2007
American investment bank - Bear Stearns, a major player in this sub-prime securitization
– had a number of these sub-prime pools FAIL to perform.
The failure of
AAA credit – up till then – was UNHEARD of in modern finance and
precipitated a GLOBAL CREDIT CRISIS where banks became UNWILLING TO LEND
– even to one another. The sanctity of triple “AAA” credit
had been violated.
So by August
2007, Global Credit Markets were “locked up” – Commercial
Paper markets, which function on “creditworthiness” – are
the oil that greases the wheels of world industry. These critical markets
were brought to a standstill.
America Panicked
In response to
Global Credit Markets being locked up – the U.S. Treasury [Hank Paulson] in conjunction with the
U.S. Federal Reserve [Benjamin
Bernanke] undertook EXTREME MEASURES – via 7.5 TRILLION of
off-balance sheet, OTC [over the counter] Derivatives Trades done with J.P.
Morgan Chase.
The reason we
definitively know this is EXACTLY WHAT HAPPENED is that Morgan’s
“less than 1 year” portion of their OTC swap book grew by 7.5
Trillion in Q3/2007 only to contract by virtually the same amount in Q4/2007
[data available at the OCC's
Quarterly Reports]. FRA’s are the ONLY OTC Swap instrument at
allows a bank to grow their book by such an amount in one quarter and have it
reverse itself in the following quarter. Given the fact that banks were not
lending or extending credit to anyone at the time – and FRA’s
require TWO WAY CREDIT – the notion that Morgan could put 7.5 Trillion
in these instruments on in such a short period of time TELLS US that their
counter party in this trade was NON
BANK. From here, it’s academic – who has the motive and
means to conduct such trade??? The Answer is a universe of ONE!!!!!!
Acting for the
U.S. Treasury was the Exchange Stabilization Fund [ESF] – a clandestine
division of the U.S. Treasury which is beyond oversight/supervision by
Congress and U.S. Law. The trades the ESF engaged in were
“brokered” by the N.Y. Federal Reserve [Turbo Timothy Geithner] and specifically targeted to J.P. Morgan
Chase to “compel” them to purchase TRILLIONS in short dated U.S.
Government T-bills [maturities of 1 yr. and less]. Procedurally, this is how
this worked:
In Q3/07, the U.S. Treasury [ESF] gets the N.Y. Fed
to ask the treasury at J.P. Morgan to place multi-Trillion dollar bets on
what 3 month LIBOR will be in one or two months in trades called Forward Rate
Agreements [FRA’s]. If you purchase a FRA you are “synthetically
borrowing money”. Morgan showed a price [bid] at a yield less than the
yield on 3 month T-bills. When the U.S. Treasury “hit”
Morgan’s bid – at say .28 basis points – J.P. Morgan
hurriedly went into the T-bill market to purchase virtually unlimited
quantities of 3 month T-bills – at say .33 basis points to “lock
in” perhaps a 5 basis point risk free profit on their gargantuan trade.
THIS DID HAPPEN!!!
These trades
were undertaken/administered in a defibrillator like fashion to “jolt
the frozen credit markets” into once again purchasing commercial paper.
This practice worked “in part” but only gained
“traction” when the U.S. Treasury/Fed introduced a host of
‘swap programs’ where holders of illiquid commercial paper were allowed
to “freely” swap their dubious paper for the “perceived
safety” of U.S. Government Securities [T-bills].
As a
result of these MASSIVE J.P. Morgan led T-bill purchases – short term
T-bill rates plummeted 200
basis points in Q3/2007 from roughly 5 % to 3 % in a matter of days. However,
this did nothing to solve the core issue at first – namely, that banks
were unwilling to lend which is/was reflected by the 3 month Eurodollar
Futures contract [a proxy for LIBOR] refused to decline [and in fact
initially went up] with plummeting T-bill rates; hence the TED Spread widened
significantly from roughly 25 basis points or less to well over 200 basis
points:
 
The difference
[expressed in basis points] between the 3 month T-bill rate and the 3 month
Eurodollar Futures rate is called the TED Spread. As the TED Spread widened
dramatically – LIBOR was seen to be “broken” –
because LIBOR rates [rates posted by the likes of Barclays, UBS etc.] were
not reflecting falling short term Treasury rates.
Why LIBOR [London Interbank Offered Rate] is important?
The British
Bankers Association [BBA] has historically been responsible for polling
member banks daily for reference rates as to where they would be willing to
lend to their most creditworthy clients in periods ranging from
“overnight” to 1 month and right out to 1 year. These reference
rates stand as the basis for resets in floating rate corporate loans as well
as floating rate / reference rates for hundreds of Trillions worth of OTC
Swap transactions.
Conclusions
1 LIBOR would NEVER have appeared broken in the first
place – if U.S. ratings agencies had done their job and properly rated
poor credit U.S. Mortgage paper appropriately.
2 LIBOR would NEVER have appeared to be broken if the
U.S. Treasury has STAYED OUT of the markets. Of course, this also means we
would have already had a VERY SEVERE, BUT CLEANSING, ECONOMIC CONTRACTION.
Instead, government intervention / Central Planning has kept the economy
somewhat moving along – albeit at an ever burdened pace with the costs
being the sanctity of our capital markets – EVERYONE in global finance
is awakening to the fact that our capital markets are rigged.
3 The U.S. Treasury’s ESF and U.S. Federal
Reserve – utilizing derivatives - had a LARGE, DIRECT hand in
precipitating the LIBOR crisis. The “free” mainstream media
– which is really and truly complicit, and bought-and-paid-for could
have / should have spotted this FRAUD a mile away.
4 Imperialist U.S. monetary policy
is factually being enacted through the trading desks of banks like J.P.
Morgan, Citibank, Goldman Sachs, BofA and Morgan
Stanley – all in the name of National Security and preservation of the
U.S. Dollar as the world’s reserve currency. This gives these
“insider institutions” privileged insider information as to the
near term direction in interest rates and makes possible a multitude of
further abuse of our capital markets.
5 Interest Rate Derivatives
broadly classified as OTC Swaps are regularly utilized by the U.S. Treasury
to manipulate the entire U.S. yield curve. The specific instruments employed
to do this are Forward Rate Agreements [FRA’s] which influence T-Bill
rates in the < 1 yr. space and Interest Rate Swaps [IRS] – with
embedded U.S. Government bond trades - in the 3 – 10 yr. segment of the
curve.
Rob Kirby
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