Receiving Wide Coverage ...

LIBOR Reform: The U.S. is better positioned to crack down on manipulation of the London Interbank Offered Rate than the U.K., the FT says. The fine extracted by American authorities from Barclays was nearly quadruple the penalty taken by the British government, the paper notes. The Justice Department and FBI have active criminal investigations of Liborgate, "while the various UK enforcers have essentially held fire." And despite ongoing complaints in this country of lax treatment of financial wrongdoing, compared to its counterparts across the pond "the DoJ has far more experience of bringing cases based on complex financial products and trading, their laws are more on point and prison sentences tend to be longer." Also, in case you were wondering if someone can really be prosecuted for giving a b.s. answer to a hypothetical survey question (and by "b.s." we mean "disingenuous and misleading" — you can't lie about an imaginary situation, can you?) the FT notes that our Commodity Exchange Act "makes it a crime to transmit a false report that would affect the price of a commodity." Sooner or later, we bet some lawyers will be racking up billable hours disputing the objective "falsity" of the what-if rates that banks quoted to the British Bankers Association survey. But the real-world impact of these machinations may be harder to dispute. According to the FT's Gillian Tett, who began reporting on LIBOR mischief five years ago and takes a victory lap in her column today, "an estimated $350tn of derivatives contracts have already been written using Libor as a reference point, and about 90 per cent of US commercial and mortgage loans are thought to be linked to the index, too." The index was susceptible to manipulation because "it was based on private reported quotes, not tangible deals," she writes, but LIBOR would be hard to replace with another benchmark since it's now "hard-wired into the system." Hence the focus is on reforming LIBOR, with even the BBA now asking for its process to be regulated. One more thing worth pointing out: there was no neither-confirm-nor-deny, we-are-pleased-to-resolve-this-distracting-litigation blarney from Barclays; as noted matter-of-factly at the bottom of a Journal story today, the bank admitted its traders "tried to increase their profits by rigging the bank's submissions" and that "it also submitted artificially low quotes to the U.S. dollar Libor panel during the financial crisis to try to protect the bank's reputation."

Diamond's Head: Will it roll? The headlines today are much less oblique than yesterday about Barclays CEO Bob Diamond's future. Instead of the weak "pressure," he now faces a "political firestorm" (New York Times); he's "on the hot seat" (Wall Street Journal); "engulf[ed]" by the "Libor firestorm" (Financial Times — geez, a lot of pyrotechnics going on here); and Diamond is "in the rough with Libor scandal" ("Heard on the Street" in the Journal — and we saw that pun coming). The best title dispenses with metaphors and just comes out and says what it wants to say: "Difficult task to replace at-risk Diamond" (FT again). We do give the British tabloid The Sun points for this one, though: "Sign on You Crazy Diamond" (you can read the paper's story on Diamond here, but be careful about visiting other parts of the site, which are borderline NSFW).

 

While We're in the U.K. … Our cousins may have their own Bank Transfer Day. The Guardian newspaper asks its readers if they're fed up enough to switch bank accounts, following an IT mishap that's prevented customers of several institutions there from accessing their money for more than a week. And on the commercial side, several British banks have agreed to compensate small and midsize business customers for selling them interest rate swaps without properly disclosing the exit costs or "ascertain[ing] the customers' understanding of risk." Interesting comment from an FT reader on this one: "Some guy pressured me to buy a copy of the Big Issue [a newspaper sold by homeless people on the stress of London] this morning. But I didn't really know what it was, and I didn't think it was the thing for me, so I said no. I wonder why other people do not adopt a similar approach when it comes to interest rate derivatives? But the thing about a swap is it's quite difficult to misunderstand it: it does exactly what it says on the tin." One might reply that the "tin" on an interest rate swap is a bit harder to read than packaging for sardines … but that's more than enough of the Brits for today.

JPMorgan: You can't get any more American than Jamie Dimon, can you? The FT's Tom Braithwaite says the bank's loss to date on the London Whale's trades in its second-quarter report will be $5 billion, following reports earlier this week by an independent journalist, who was followed by the Times, that the bank expects the damage to eventually total $9 billion. We may have to wait until July 13, when JPMorgan reports second-quarter results and provides an "update" on the Chief Investment Office, to find out the official number. Meanwhile, the Journal says the OCC has "stepped up scrutiny of [the bank's] internal controls" by asking JPMorgan "to demonstrate that its risk models are designed and working properly." Students of risk management will appreciate the comment thread on this one: The inevitable and perfectly fair question — "Why was this request not made BEFORE the portfolio BLEW UP?" — is answered by another reader who apparently works as a risk quant: "The regulators should come in ONLY AFTER there is a problem. It is the bank's responsibility to invest in a proper model validation team with senior management support to prevent such situations from occurring." Finally, Bloomberg News has the details on ousted Chief Investment Officer Ina Drew's retirement package.

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