By Pam Martens and Russ Martens: May 23, 2023 ~
The Fed has been under non-stop scandals for the past two years. It pumped out trillions of dollars in repo loans to Wall Street’s casino banks beginning on September 17, 2019 and then made up a hokey excuse to cover up its massive bailout of banks it is incompetent to supervise. After former Dallas Fed President, Robert Kaplan, was caught trading like a hedge fund kingpin while sitting on confidential Fed information, the Fed’s Board of Governors had the audacity to refer the matter to its own Inspector General, who reports to the Fed’s Board of Governors and can be fired by it. Not surprisingly, 19 months later there’s still no word on this investigation. Then there was the President of the St. Louis Fed, James Bullard, who was caught giving a private meeting with Citigroup clients. The New York Fed has been allowed to quietly set up a second trading floor for itself near the S&P 500 futures markets in Chicago.
Senator Elizabeth Warren has correctly sized up the current state of affairs at the Fed as “a culture of corruption.”
The latest scandal comes courtesy of BBC correspondent Andy Verity’s new book Rigged: The Incredible True Story of the Whistleblowers Jailed after Exposing the Rotten Heart of the Financial System. The book won’t be released until June 1 but it is already being serialized in the Times U.K. newspaper and causing a major stir. After just one day of media buzz, news of the central bank plot has gone viral and there have already been calls for investigations by Parliament.
The central allegation of Verity’s book is that the Fed, the Bank of England (BOE), the European Central Bank (ECB), and other national central banks in Europe, orchestrated a conspiracy during the financial crisis in 2008 to rig the interest rate benchmark known as LIBOR. As part of that conspiracy, Verity claims that central banks secretly bullied the mega banks on both sides of the pond to lower their LIBOR submissions to artificially deflate interest rates.
LIBOR is the interest rate that determines what banks pay to borrow on a short-term basis from one another. Because of rigging scandals, it is being phased out and will be replaced by the Secured Overnight Financing Rate (SOFR).
What is not in dispute, as Americans now know thanks to an audit by the Government Accountability Office (GAO) that was released in 2011, is that the Fed was secretly pumping a cumulative $16 trillion in below-market rate loans from December 2007 to at least July of 2010 to prop up the same global banks that were making these LIBOR submissions. If one of these mega banks made LIBOR submissions showing it was paying a much higher interest rate to borrow than other comparable banks, it would be a signal to the market that the bank was in trouble, sending its stock price plunging and making it necessary for the Fed to sluice trillions more in loans to the bank or watch it collapse.
Because these mega banks were, and still are, heavily interconnected with trillions of notional dollars in derivatives, when one mega bank starts to teeter it sets off a chain reaction of contagion throughout the mega banks.
During and after the 2008 financial crisis, the largest borrower from the Fed under its emergency loan programs was the teetering Citigroup. It received more than $2.5 trillion in secret, cumulative loans from the Fed according to the GAO audit. The Fed battled in Federal courts for more than two years attempting to keep the names of the banks and the dollar amount of their loans secret from the U.S. media and the public.
Verity is helping move his book into the realm of bestsellers by Tweeting out titillating tidbits of evidence daily to support his claims. Before the sun came up in New York this morning, Verity had Tweeted out a link to a November 19, 2010 interview of Barclays’ trader, Peter Johnson, by two FBI agents, three investigators from the U.S. Department of Justice, three officials from the Securities and Exchange Commission and other U.S. and U.K. regulators.
At line 257 on page 221 of the transcript, FBI agent Michael Kelly says this:
“If we go to the first exchange here, Mr. Dearlove, [Johnson’s supervisor at Barclays] at the bottom of his first statement says ‘the bottom line is…you’re going to absolutely hate this and I’ve spoken to Spence about it as well, but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our LIBORs lower.’ You’ve mentioned the Bank of England already, there is reference here to the UK government.”
Johnson goes on to explain that it is his understanding that the Bank of England and the UK government were pressuring top management at Barclays to push down its LIBOR submissions.
The promo for Rigged says it “picks up where The Big Short leaves off.” The Big Short was the Michael Lewis bestseller that got a Hollywood treatment. It made a handful of short sellers on Wall Street famous while revealing a different “rotten heart of the financial system” – the rigged subprime market that drove housing in the U.S. into the worst collapse since the Great Depression.
A far more accurate description of Verity’s new book would be that it picks up where Nomi Prins’ 2018 book, Collusion: How Central Bankers Rigged the World leaves off. Prins comes right out and charges in the book that “G7 central bank collusion was the new black.” Prins describes the early colluding actions as follows:
“According to an October 8  Fed statement released at seven in the morning, several central banks (Bank of England, Fed, European Central Bank, Sveriges Riksbank, Swiss National Bank, Bank of Canada, and Bank of Japan) announced they had ‘cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.’ They would collude to cut rates together. It was planned and executed that way. The Fed opened the moves and cut rates by 50 basis points to 1.5 percent.
“Trichet [then President of the European Central Bank] realized that he would have to succumb to collusive forces. The ECB cut rates the same day, by half a percentage point to 3.75 percent. The minimum rate on main refinancing operations of the euro system fell to 3.75 percent, on the marginal lending facility to 4.75 percent, and on its deposit facility to 2.75 percent…
“Tricet’s ECB opted for another 50-basis-point benchmark rate cut to 3.25 percent on November 6. The same day, the BOE slashed its rate in one fell swoop by 1.5 percentage points, or 150 basis points, to reach 3 percent, the lowest level since 1954.”
We asked Prins for her thoughts on the new information from Verity. She responded: “Given the current information coming to light, central banks colluding with each other, or with major private banks to ensure all avenues of rates were tempered, is part of this overall playbook of power reach and crisis and liquidity reactions.”
Ben Bernanke was the Chairman of the Fed during this unprecedented collusion. (See our 2014 report: Fed Chair Bernanke Held 84 Secret Meetings in the Lead Up to the Wall Street Collapse.) Bernanke doesn’t fare well in Prins’ book. The author writes that “Bernanke was such a master of collusion that he made it appear as if the colluders didn’t include him but were somehow acting completely independently of the Fed’s policies and implicit or explicit directives.” In another passage, Prins writes that Bernanke “was the consummate magician. He provided the illusion of competence in his orchestration of global monetary policy collusion – so long as no one looked behind the curtain.”
Verity also profiled his book at the BBC yesterday. In his article, Verity reveals a smoking gun involving the poster boys for crony capitalism: JPMorgan Chase and the New York Fed. (See our report: These Are the Banks that Own the New York Fed and Its Money Button.) Verity shares this about that 2010 FBI interview with Johnson, the trader from Barclays:
“Mr Johnson also pointed investigators to a below-market offer in the dollar LIBOR market in New York made by JPMorgan Chase in late October 2008.
“Interviewing him in November 2010, the US regulator confirmed it had seen data that Chase New York had offered to lend at 4.68% — while putting in a LIBOR estimate of the cost of borrowing dollars that was much lower — at 3.25%.
“Mr Johnson said he believed the offer to lend at a rate still far below the market, mid-crisis, when other lenders were refusing to lend any cash, was done at the urging of the Federal Reserve Bank of New York.”
In yesterday’s article at the BBC, Verity seems very sympathetic to those 37 traders that were prosecuted for rigging LIBOR. He appears to believe that the traders were innocent because the central banks were also rigging LIBOR.
We’ve yet to see his evidence in that regard, but we are acutely aware that in some cases there was substantial evidence showing that the traders were rigging rates to benefit their own or the firm’s trading positions, thus helping their own bonuses and profits for their bank. In other words, two agendas were simultaneously taking place: the central banks had an agenda to preempt mega banks collapsing by artificially pushing down LIBOR rates and, at least some traders, were motivated by greed.
In the case of UBS and Citigroup trader, Tom Hayes, who was prosecuted and served five years in prison, there was a boatload of evidence that he was moving rates to benefit his and his firm’s trading positions – not because he was pressured to push rates down to appease a central bank. In fact, in some cases, he was pushing rates up, not down. As we previously reported:
The Tom Hayes case is a textbook example of how to bring a market rigging case. The Justice Department prosecutors had reams of chat room messages where Hayes requested other traders to move Libor in a specific direction in order to make profits for himself and UBS, the global bank where he worked. The unit of UBS that was involved, UBS Japan, pled guilty to felony wire fraud and admitted its role in manipulating Libor. UBS paid more than $1.5 billion to settle the charges with prosecutors and regulators in the U.S., the U.K. and Switzerland.
UBS is represented by legions of lawyers from the most prestigious law firms around the world. Does anyone really think it paid $1.5 billion when its traders did nothing wrong?
On December 19, 2012, when the Justice Department first unsealed its criminal complaint against Hayes and Roger Darin, another UBS trader, it explained the case as follows:
“Beginning in September 2006, UBS Japan and Hayes orchestrated a sustained, wide-ranging and systematic scheme to move Yen LIBOR in a direction favorable to Hayes’ trading positions, defrauding UBS’ counterparties and harming others with financial products referencing Yen LIBOR who were unaware of the manipulation. Between November 2006 and August 2009, Hayes or one of his colleagues endeavored to manipulate Yen LIBOR on at least 335 of the 738 trading days in that period, and during some periods on almost a daily basis. Because of the large size of Hayes’ trading positions, even slight moves of a fraction of a percent in Yen LIBOR could generate large profits. For example, Hayes once estimated that a 0.01 percent movement in the final Yen LIBOR fixing on a specific date could result in a $2 million profit for UBS.
“According to the charging documents, UBS Japan and Hayes employed three strategies to execute the scheme: from November 2006 through September 2009, Hayes conspired with Darin and others within UBS to cause the bank to make false and misleading Yen LIBOR submissions to the BBA [British Bankers Association]; also, Hayes caused cash brokerage firms, which purported to provide market information regarding LIBOR to panel banks, to disseminate false and misleading information about short-term interest rates for Yen, which those banks could and did rely upon in formulating their own LIBOR submissions to the BBA; and Hayes communicated with interest rate derivatives traders employed at three other Yen LIBOR panel banks in an effort to cause them to make false and misleading Yen LIBOR submissions to the BBA.
“As alleged in the charging documents, Hayes, Darin and other co-conspirators often executed their scheme through electronic chats. On Nov. 20, 2006, for example, Hayes asked a UBS Yen LIBOR submitter who was substituting for Darin, ‘hi . . . [Darin] and I generally coordinate ie sometimes trade if ity [sic] suits, otherwise skew the libors a bit.’ Hayes went on to request, ‘really need high 6m [6-month] fixes till Thursday.’ The submitter responded, ‘yep we on the case there . . . will def[initely] be on the high side.’ The day before this request, UBS’s 6-month Yen LIBOR submission had been tied with the lowest submissions included in the calculation of the LIBOR fix. Immediately after this request for high submissions, however, UBS’s 6-monthYen LIBOR submissions rose to the highest submission of any bank in the contributor panel and remained tied for the highest, precisely as Hayes had requested.
“Another example of such an alleged accommodation occurred on March 29, 2007, when Hayes asked Darin, ‘can we go low 3[month] and 6[month] pls? . . . 3[month] esp.’ Darin responded ‘ok’, and the two had the following exchange:
Hayes: what are we going to set?
Darin: too early to say yet . . . prob[ably] .69 would be our unbiased contribution
Hayes: ok wd really help if we cld keep 3m low pls
Darin: as i said before – i [don’t] mind helping on your fixings, but i’m not setting libor 7bp away from the truth. . . i’ll get ubs banned if i do that, no interest in that.
Hayes: ok obviousl;y [sic] no int[erest] in that happening either . . . not asking for it to be 7bp from reality anyway any help appreciated[.]
Hayes received the help he requested.
“In addition, the criminal complaint charges Hayes with colluding with a trader employed at another LIBOR panel bank in May 2009, in violation of the Sherman Antitrust Act. Hayes allegedly engaged in the collusive scheme to fix the price of derivative instruments whose price was based on Yen LIBOR. In electronic chats, Hayes asked the trader to move 6-month Yen LIBOR up due to a ‘gigantic’ position Hayes had taken. For the trade in question, UBS trading records confirmed that each 0.01 percent movement in LIBOR would generate profits of approximately $459,000 for Hayes’ book. The trader at the other bank responded that he would comply, and his bank’s submission moved by 0.06 percent compared to its submission the previous day, for which Hayes thanked him.”