Fishing, Markets, the UK and the Scandal of the Libor Scandal!

Blain’s Morning Porridge – May 22^nd, 2023: Fishing, Markets, the UK and the Scandal of the Libor Scandal!

“like some 15^th Century chronicle, shrouded in mystery, swamped in all manner of nasty twists and turns..”

Markets remain obscure and uncertain, but the UK’s virtuous sovereign trinity and financial exceptionalism is at stake as political graft mounts and a previous financial scandal comes back as a new one – the Libor Scandal needs investigation.

Man versus fish. Forget landing on the moon. Understanding and playing to the motivations, habits and psychology of the Hampshire chalk stream Brown Trout is about as a complex as life can get, but fortunately more satisfying than trying to understand the behaviour of markets. Just like in bonds, there are days when the Trout just ain’t biting, but you will never know if it’s the fish, or poorly executed tactical choices in the titanic man vs fish battle of wills.

I don’t really care. Any day, especially in May on the River Test is Karmic. Yesterday I was in heaven.

It’s fair to say my efforts to entice a beautiful 3 lb trout I was watching left the fish singularly untroubled. I came close. It “sniffed” the fly, but I fluffed the strike leaving it spooked. My efforts to “match the hatch” as the hazels gave way to mayfly before the midge swarmed, to choose and time the right fly vs emergers, and mend their course on the river, were defeated by a combination of catching hooks in the trees, a poorly tied trippet, and the disinterest of the fish. Try what I could, and casting well, every time the fish rose I was in the wrong place. It went for the real thing every time.

Yet it was absolute bliss. I watched the river for far longer than I fished. The sun rose and sank. Perfect. Just a really happy day.

Oh well. The weekend is over..

The thing about chalk-streams is how wonderfully clear they are. Unlike global financial markets – which remain muddy, turbulent and very confusing. I shall spend the morning observing them to understand them with the same steely determination as I did the river, and maybe a greater likelihood of success.

This morning it’s the same old, same old:

• Fighter jets for Ukraine – it will only take a few months to train the pilots.
• What are central banks thinking about – pretty much how much more they will raise rates to address sticky inflation. ECB’s Lagarde warns the indications are looking bleak – they won’t be pausing further rate hikes.
• Recession or recovery. I’m looking at split outcomes. Recession in Yoorp and recovery elsewhere.
• Janet Yellen now says X-Day, when the US runs out of dosh, will be June 15^th. I don’t know why she bothers… the politicians are talking but not listening.
• And something interesting from Greece, where the right wing government did surprisingly well in the polls telling us the public want experience, clarity and certainty – the economy is in recovery and may even win back investment grade status, but Greek friends tell me it still feels like austerity.

However, I am expecting many of my cohort in the markets will be displeased this morning. There is a sniff of something rotten in the air – and it’s not just the UK Prime Minister flying back from the Tokyo G7 meeting to yet another raft of graft, corruption and entitlement scandals. Today marks the day the Tories have been in power longer than New Labour’s Tony Blair/Gordon Wilson administration… and what an “interesting” experiment in political dumbf**kery it’s been since 2015.

I feel sorry for Rishi Sunak. He seems a decent man. He has proven himself a competent adult in the room – reversing the undeniable incompetence of the Truss, Johnson and May post Brexit FUBAR administrations. Personally, I blame Labour for enabling Boris. They were such a useless opposition under Corbyn even I voted for Boris despite all the evidence he would be an incompetent. I can’t give Sunak my vote when the next general election comes – 13 years of Tory government is too long – but he does have my respect.

The UK papers this morning line up multiple reasons its time for a change. They are full of the multiple calumnies of the Suella Braverman lining herself up for a pop at the Tory leadership, migrants and folk with the temerity to accuse her of speeding. The failures of corporate governance in Teeside where a chumocracy of rich men and the Tory mayor look to have eaten all the cake, or maybe it’s the British Iranian businessman whose companies sit at the centre of a massive money laundering scheme who just happens to be among the largest donators to the Conservative Party. Or maybe its Liz Truss, the disgraced failed premier, spouting her mouth off for cash and unbalancing the game of diplomacy being played with China over Taiwan last week?

The UK’s reputation for financial excellence, and our Virtuous Sovereign Trinity of a stable currency, a sustainable bond market and political competency is being tested to destruction – and maybe beyond. We are about to be overtaken economically by Poland… and even Italy is doing better.

Yet, the headlines this morning expose something that has been darkening the soul of UK finance since the first decade of the millennium – The Libor Scandal.

Journalist Andy Verity of The Times has exposed what we all long suspected: there are rules for the powerful in society, and a completely different set for those beneath. It turns out the traders who went to jail for turning Libor into their personal casino were just doing their jobs. The evidence is all there that Global central banks were just as complicit in collectively agreeing to manipulate Libor and Euribor as banks.

Those of us in finance with any inkling of how interbank lending rates are set were well aware the charges about the supposed collusion between bank treasuries and Libor setters were groundless and largely fabricated. We should have stood up and said it more loudly – but we were caught up in our own stuff. The authorities got away with painting simple commercial decisions as evidence of corporate criminality. On any given day some banks will be axed to borrow and some to lend. Any one bank pushing for a low rate will be matched by another wanting it high.

The UK Serious Fraud Office called it “massive interest-rate manipulation” – on the basis PC Plod understands finance better than any banking intern. (US Readers – Sarcasm Alert.)

In the wake of the 2008 GFC and bank bailouts, the markets needed villains to punish. After a series of emails were uncovered, trader Tom Hayes got 11 years after an appeal (but still by far the longest stretch ever imposed for white-collar crime), for co-ordinating Libor fixing (even though he was trading from Tokyo!). He served 5 years in high security prison with murderers, thieves and rapists. He was beaten up and considered suicide. His marriage and family, wealth and mental health were destroyed. His life was destroyed. His trial was a farce. Expert witnesses for the prosecution were anything but. The SFO has apparently “lost” all the paperwork.

Around 40 other traders around the City saw their careers destroyed. 9 others were handed jail-time. Yet, not a single bank team leader or board member was ever taken down to stich mailbags at his majesty’s pleasure. Rigging Libor wasn’t considered a crime in Europe (where the Germans refused to extradite accused bankers). Even the US courts declared it a non-crime. Libor has now been replaced, with a great kerfuffle keeping lawyers and accountants in well-paid fees and to the general detriment of markets.

The only real issue with real significance on global interest rate manipulation about “Libor rigging” wasn’t banks wanting high or low rates, but “lowball” demands – from Central Banks and government finance officers!

At the height of the Global Financial Crisis in 2008 global central banks launched a coordinated cut in interest rates. They all did what they could to pull lending rates lower. The ECB said it would push down Euribor. The UK Treasury wanted Libor lower. Mark Dearlove (senior trader at Barclays, whom I worked with in the 1980s) was told by RBoS’s senior treasurer (who I also knew) to stop holding Libor high. The Bank of England also pressured Barclays to Lowball. It’s all on record.

To quote from the Times:

• “Mate, I’ve been on fire tonight,” Dearlove said, sounding stressed and dreading what he was about to order Johnson to do. “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.” Johnson — who later would be jailed for Libor-rigging — replied: “So I’ll push them below a realistic level of where I think I can get money?”

There is one law for the little people, and another for the great and good of society. Heads should be rolling and restitution made. The UK’s reputation as the epicentre for global financial markets rests on the quality of our people and the services around them, the integrity and expertise of those in the markets, and our honesty. It’s increasingly clear the Libor Scandal was anything but the whole basis of how finance works was crushed. It was allowed to happen. How?

Five Things to Read This Morning

FT                     Calpers signals “appetite to increase bets on private equity

FT                     “Boomy” talk about Chinese economy is a charade

BBerg               China’s Missing Recovery Leaves Metal Bears in Charge

Businessweek   SVB’s Collapse Resurrects the Idea of Banking Without Bank Runs

WSJ                  Biden, McCarthy Attempt to Revive Budget Takes as Debt Default Looms

Out of time, and back to the day job…

Bill Blain, Strategist – Shard Capital