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Mark Gongloff

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Citigroup Manipulated Libor More Than Any Other U.S. Bank: Reports

Posted: 07/20/2012 12:06 pm

So far Barclays has been the sad, British face of the Libor scandal, but there could soon come a day when an American bank could be the poster child for Libor manipulation. USA! USA!

Fortune's Stephen Gandel wrote on Friday about not one, not two, but three different studies that use charts and math to show that, of all the many banks just stone-cold manipulatin' Libor during the financial crisis, the champion Libor-mangler of all was apparently, drumroll please, Citigroup.

Citi did not respond to Fortune's request for a comment. It is no doubt one of 16 different banks, including fellow Americans Bank of America and JPMorgan Chase, getting the stinkeye from regulators over Libor.

Libor, for you Libor virgins who have somehow accidentally stumbled into this story, is an interest rate at which banks lend money to each other for short periods. It's the basis for hundreds of trillions of dollars' worth of loans and derivative contracts. Kind of a big deal, then.

The funny thing about this super-important rate is that it is almost completely bullshit. The banks who set Libor are on an honor system to report their borrowing costs, so you can see where this is going. Barclays was accused of manipulating Libor up and down, sometimes to help its traders make more money, other times to make its financial condition look healthier. Other banks are under investigation for allegedly having a cartel of Libor manipulators, helping each other make money on trades.

During the financial crisis, no bank in its right mind wanted to be seen as having to pay a high interest rate to borrow money, so they lied and lied and lied when setting Libor. Pretty much everybody was doing it, but according to the studies Gandel cites, including one by the Wall Street Journal back in 2008, Citigroup was often the biggest liar of all.

In each study, the banks' Libor submissions were compared to other measures of their borrowing costs. The bigger the gap, the bigger the lie. Citi was one of the weakest banks around at the time of the crisis, so it makes sense that it had to bend the truth about its borrowing costs more in order not to stand out from the pack of other banks setting Libor.

This doesn't necessarily mean that Citi will end up paying more than Barclays or other banks in fines or legal settlements, the high-end estimate of which has recently risen to about $35 billion. As Gandel points out, regulators may come down harder on banks that monkeyed with Libor purely for profit, as Barclays did.

Nobody has produced any evidence yet that Citi was doing that with Libor -- though Citi did get in hot water with Japanese regulators last year for allegedly manipulating Tibor, the Japanese version of Libor, purely to make money on derivatives.

Banks like Citi that were just doing what they had to do to get by during the crisis may be treated more kindly. Certainly the New York Fed and other regulators didn't lift a finger to stop Libor manipulation at the time. And the low rates helped borrowers, so almost everybody won!

Almost everybody, except for cities and states and school districts and other municipalities that had interest-rate swaps with banks. They suffered when rates were held artificially low, meaning Citi and others could still be slapped with lawsuits over even supposedly victimless rate fraud.

Loading Slideshow...
  • BARCLAYS

    The UK bank has been at the centre of a very public storm since U.S. and British authorities fined it more than $450 million last month for its part in manipulating Libor. The ensuing backlash cost chief executive Bob Diamond and chairman Marcus Agius their jobs. The pair have appeared before a parliamentary committee to testify about what went on at the bank, in a scandal which has drawn in British central bankers and government ministers.

  • BANK OF AMERICA

    Bank of America is among the banks being investigated, a person familiar with the matter told Reuters last year. The bank did not comment in its 2011 annual report. It is one of 11 banks accused of conspiring to manipulate Libor in two lawsuits filed by discount brokerage and money manager Charles Schwab.

  • BTMU

    The Swiss Competition Commission said in February that Bank of Tokyo-Mitsubishi UFJ was among those it was investigating on suspicion of conspiring to manipulate rates. The Japanese bank did not comment on any probes in its 2011 annual report. This month, the group suspended two London-based traders as a result of a probe into manipulating interbank lending rates, but the bank said that was not to do with their conduct at BTMU. They had previously worked at Dutch lender Rabobank.

  • CITI

    Citigroup said its subsidiaries had received requests for information and documents as part of investigations in various jurisdictions. The U.S. bank said it was cooperating. The bank is also subject to a number of private lawsuits filed in the U.S. against banks that served on the Libor panel. In December, Japan's financial regulator said it would penalise the Japan securities units of Citigroup and UBS after finding that an individual who worked at UBS and then moved to Citi had, along with his boss at Citi, attempted to influence the Tokyo interbank offered rate (Tibor).

  • CREDIT SUISSE

    Credit Suisse is one of 12 banks being investigated by the Swiss Competition Commission about alleged collusive behaviour among traders to influence the bid ask spread for derivatives tied to Libor and Tibor as well as the rates themselves. Credit Suisse said it was cooperating fully.

  • DEUTSCHE BANK

    The German bank said it was cooperating with investigations in the United States and Europe in connection with setting rates between 2005 and 2011. It has had civil actions filed against it in the United States related to the setting of Libor. Germany's market regulator has launched a probe into the bank over suspected manipulation of interbank lending rates, sources have said. Results are expected in mid-July. German magazine Der Spiegel reported, citing no sources, that two Deutsche Bank employees have been suspended after external auditors examined whether staff were involved in manipulating rates.

  • LLOYDS

    Lloyds said it was cooperating with investigations. It has also been named in private lawsuits in the U.S. related to the setting of Libor. It said it 2011 annual report that it could not predict the ultimate outcome of investigations or lawsuits. In May, the bank said two derivatives traders had been suspended following an investigation into possible interest rate manipulation.

  • HSBC

    HSBC has said it received demands from regulators for information in connection with Libor investigations and it was cooperating. It has also been named in lawsuits related to Libor in the United States. HSBC said in its 2011 annual report that it could not predict the outcome of the investigations and lawsuits.

  • HBOS

    The bank, now a subsidiary of Lloyds, said it was cooperating with investigations. It has also been named in private U.S. lawsuits related to the setting of Libor. HBOS said it in its 2011 annual report it was not possible to predict the scope, outcome or impact of the investigations and lawsuits.

  • JPMORGAN

    JPMorgan said it was cooperating with regulators and government bodies investigating the setting of Libor, Euribor and Tibor rates, mainly in 2007 and 2008. It has also been named as a defendant in private U.S. lawsuits over Libor.

  • RABOBANK

    Rabobank said it was cooperating with investigations into possible manipulation of Libor rates. It has also been named as a defendant in a number of civil lawsuits in the United States. Rabobank said it was confident the claims would be held unfounded and was conducting its defence as such.

  • RBC

    Canada's largest bank did not make any comment in its 2011 annual report on its involvement in regulatory probes into possible manipulation of interbank lending rates.

  • RBS

    Royal Bank of Scotland said it was cooperating with investigators, who had requested information. RBS said members of its group had been named as defendants in a number of lawsuits in the United States. The bank said it had substantial defences to these claims. Following a newspaper report last month that it faced a 150 million pound fine, RBS said there could not be any certainty as to the timing or amount of any fine or settlement.

  • UBS

    The Swiss bank said it had been granted leniency or immunity from potential violations by some authorities, including the U.S. Justice Department and Swiss Competition Commission, in return for its cooperation in the Libor manipulation probe. It did not specify what information it was providing. In December, Japan's financial regulator said it would penalise the Japan securities units of Citigroup and UBS after finding that an individual who worked at UBS and then moved to Citi had attempted to influence Tibor. It has also been the subject of U.S. lawsuits.

  • WEST LB

    The German bank was among those being investigated, a person familiar with the matter told Reuters in March last year. The bank made no mention of the probes in its 2011 annual report. In July last year it was dropped, at its request, from the panel of banks contributing to daily fixings of Libor for U.S. dollars.

  • NORINCHUCKIN

    The Japanese bank did not mention the investigations into possible Libor manipulation in its 2011 annual report. In April last year it was one of 12 banks sued by Vienna-based asset manager FTC Capital, accused of conspiring to manipulate Libor.

 
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So far Barclays has been the sad, British face of the Libor scandal, but there could soon come a day when an American bank could be the poster child for Libor manipulation. USA! USA! Fortune's Step...
So far Barclays has been the sad, British face of the Libor scandal, but there could soon come a day when an American bank could be the poster child for Libor manipulation. USA! USA! Fortune's Step...
 
 
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HUFFPOST SUPER USER
TN4th
Southern Thinker
09:42 AM on 07/23/2012
This manipulation is not victimless. For every trade there are two sides. If the banks' borrowers benefitted, then the banks' depositors were cheated. The banks made loans at artificially low rates, which in turn depressed the interest rates they paid depositors. Seems like a nice class action law suit to me. Wonder why no one has come up with this?
07:11 AM on 07/23/2012
The LIBOR issue has many far reaching implications - but the crude summary of this article does not really contribute much.

Two big issues for LIBOR (and other interbank rate manipulations: EURIBOR / TIBOR etc.):
i) Commercial banks were colluding and operating as Cartel. This is Anti-Trust / Racketeering - Central banks were involved, as were for sure American, European and British banks.
ii) Commercial banks distorted their apparent borrowing rate to improve their appearance - and hence their stock price.

Crime is not victimless. US consumers have been duped into taking loans at an incorrect rate (which may work in their favour), but many more may have been duped into purchasing stock which was incorrectly valued, or interest rate swaps sold on the premise that rates were to rise when the seller actively worked to manipulate them down.

Lack of enforcement of regulation has not helped, and certainly has contributed to the now systemic problem that the commercial banks now rely on fraudulent business models in order to remain in business. This will be quite painful to correct - particularly if the tax payer wrongly ends up footing the bill.
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lackofoversight
GOP --- Greed Over People
04:09 AM on 07/23/2012
"the New York Fed and other regulators didn't lift a finger to stop Libor manipulation at the time. And the low rates helped borrowers."

That's a crock. What borrowers? The banks weren't lending any money to any "borrowers" at that time.
09:41 PM on 07/22/2012
"The comparison of CDS spreads to LIBOR quotes is comparing apples to oranges since CDS spreads and LIBOR rate submissions measure very different things over different timeframes. CDS pricing reflects the perceived risk that the bank will default on its debt in tenors of a year or longer. LIBOR submissions reflect the rate at which the bank would ask for and accept offers of unsecured interbank borrowing of a reasonable size in a particular currency over a particular period of time (of a year or less) at 11 a.m. on a particular day in the London market.

"The studies merely note discrepancies between these two different metrics and speculate about possible reasons for those discrepancies.

"Even the authors acknowledge these two measures establish nothing by themselves and it would be irresponsible to cite these studies as evidence of rate manipulation."
falconfordd
Life is too short to drink cheap beer!
06:36 PM on 07/22/2012
Citibank seems to be engulfed in a culture of rule breaking and illegaly profiteering. Probably time to imprison their upper management and dismember them permanently. BOA would probably be the better scapegoat but seems as though Citi is more deserving. I hope the federal government does something about Citis cheating this time.
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peakresources999
Conspiracy FACT, no theory about it...
10:31 AM on 07/22/2012
CitiGroup, Bank of America, Chase, all of them...... they are ALL criminal institutions that fuel their business activity with illegal money, illegal trading, manipulation of markets and assets, and fraud.

The documentation for these crimes is thorough and extensive.
10:41 AM on 08/06/2012
Agreed. They are criminal enterprises for the wealthy and enabled by republicans.
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peakresources999
Conspiracy FACT, no theory about it...
10:20 AM on 07/22/2012
WHAT? Criminal activity at Citibank? The SHOCK.

Folks, this bank, among others(Bank of America, etc.), have been KNOWN AND DOCUMENTED drug money-laundering-banks for a LONG time. All you gotta do is look it up. There's a thousand sources online and in book and articles thoroughly documenting this. Money laundering, fraud, deceptive loans, inside trading, you name it.... It's NO conspiracy theory. It's a matter of record. Our financial institutions fuel the economy, fuel YOUR economy with drug money, hold and manage money for criminals, and elect financial and political criminals to their boards.

Without the liquid cash from drugs and other criminal actitivites that flow through Wall Street every year(to the tune of about a Trillion dollars give or take), our economy WOULD NOT function. A country that no longer manufactures any of its own goods, must have an altenate income source that keeps our economy lubricated. That lubcrication, that life blood comes in the form of liquid cash from criminal activity.

YOUR GREAT AMERICAN economy is rotten. It is corrupt. We are fuelled by dishonest money. If you don't believe me or can't be brought to believe this about our great nation, and bring yourself to think anything about bad about America, well then I cannot help you.

This should come as no surprise to any American that Citibank manipulated the Libor situation, tried to hide it, and cover it up.

Conspiracy fact folks, conspiracy fact. Let's the drop this "theory" nonsense.
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HUFFPOST SUPER USER
Drg40
Representative Democracy is all we have.
07:03 AM on 07/22/2012
Just a teensy weensy error in your report. Barcalys were not accused of manipulating Libor. As Diamond pointed out at great length to the select committee, most of whom seemed not to be able to follow his point, Barclays submitted rates which were falsely low, BUT STILL TOO HIGH TO BE USED IN THE CALCULATION OF LIBOR. The calculation method in use discards the highest and lowest submissions (one suspects for exactly that reason) so you could rightly accuse Barclay's of false submission but their submissions had little impact on Libor. Indeed, you are going to have to ask all the US banks why their submissions were all so low, because they were acting as a cartel, it would seem?

One can see why Diamond stood up to be counted so quickly. The US is never ever going to pursue US banks to any real extent over Libor, so if Barclays came clean with admission of their submission fiddling in an atmosphere untainted by US protectionism, they can't get stuck with the cartel complaint as the innocent (sort of) foreigner at the feast.

Mark my words, when the Americans face up to the fact that it is US banks, again, which are the major players in this Libor fiddling, all the accusations will vanish like the morning dew. They can't afford to fail another bank.
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Educated Black Man
I am not African-American, I am simply an American
02:19 AM on 07/22/2012
Citi was the most mismanaged bank in the history of banks. I worked there for 5 years and saw it first hand. I don't think that it was purposeful, for the most part, they simply had no controls.
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HUFFPOST SUPER USER
CPAwADD
Always look on the bright side of life.
11:17 AM on 07/22/2012
A bank without internal control does not have financial statements which are meaningful.
06:28 PM on 07/27/2012
I'm investigating these claims and would love to have an off-the-record conversation about your experience. What is the best way to reach you?
This user has chosen to opt out of the Badges program
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01:38 AM on 07/22/2012
After cutting the prime rate from 6% to 4% early in 1930, the Fed added almost no money to the shrinking economy. Treasury Secretary Andrew Mellon announced that the Fed will stand by as the market works itself out: "Liquidate labor, liquidate stocks, liquidate real estate… values will be adjusted, and enterprising people will pick up the wreck from less-competent people." At the beginning of 1930, unemployment was 3.2%. By the time Roosevelt was inaugurated, unemployment had reached 24.9%, peaking at about 25.3% that year.

The Fed cannot abolish economic cycles any more than psychiatrists can abolish human nature; but an active Fed can use counter-veiling measures to reduce the volatility in the economy and shorten economic downturns.”
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This is utter nonsense. A president with persuasive power and a national bank under the control of the Treasury Secretary can accomplish the same thing. A big central bank is not a prescription for success, but it cand and did make our depression worse. The FED today can't prevent the next depression any more than it could prevent the downturn in 2008 or 1929.

In 1907 Teddy Roosevelt was able to use the richest men in Wall Street and the country to end the financial panic without using the public's money. Today we have a Fed which uses the taxpayer's money to bail out business and the banks regularly. The exact opposite of what TR did in 1907.
02:40 AM on 07/22/2012
In 1928 Hoover tried to do the exactly the same thing as Teddy Roosevelt did in 1907 and got the opposite results. Something fundamental had changed. What had changed was the amount of money in the stock market that had been invested on margin, loaned money being used in the stock market, creating an overheated economic bubble of massive proportions not unlike the 2008 implosion.
You are right, however, that the Fed cannot prevent the next Depression. It should be starting pretty soon, 2015 at the latest. Because we haven't addressed the principal problems that led to the financial crisis of 2008.
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12:38 AM on 07/22/2012
And banker says, "Kick my assets."
This user has chosen to opt out of the Badges program
12:37 AM on 07/22/2012
Some asses need kicking
This user has chosen to opt out of the Badges program
10:14 PM on 07/21/2012
Given the insane levels of debt, rampant inequality, currency debasement, failure to punish financial fraud, letting the private banks take over the system of credit creation, de-linking of fiat money from anything real, growth of the too big to fails, repeal of Glass-Steagall, refusal to rein in derivatives, sovereigns taking on banks’ debt, crony capitalism, endless war, and other shenanigans … our financial crisis was entirely foreseeable.
This user has chosen to opt out of the Badges program
09:52 PM on 07/21/2012
Speaking of manipulation:

It's impossible for a single man to become so rich so quickly without manipulating and cheating the markets

The Birthday Party: How Stephen Schwarzman became private equity’s designated villain
http://www.newyorker.com/reporting/2008/02/11/080211fa_fact_stewart
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HUFFPOST SUPER USER
Joe Meeker
Nos sunt legio.
09:52 PM on 07/21/2012
The idea that $35 billion would be at all reasonable when this affected trillions of dollars is laughable. With $800 trillion total tied to Libor, even a very small manipulation could possibly swing hundreds of billions or perhaps even trillions.