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LIBOR rigging: Difference between revisions
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This is the crux of the case: was this ulterior motive ''dishonest'' in light of the “''proper basis for the submission of those rates''”? The Crown alleged it was. | This is the crux of the case: was this ulterior motive ''dishonest'' in light of the “''proper basis for the submission of those rates''”? The Crown alleged it was. | ||
== Bedtime stories: LIBOR and other animals == | |||
This is not the only saucy carry-0n in the interest rate market. For something that is meant to be dullsville, after school chess club was quite the hotbed. | |||
What follows is not authenticated history, but something more like a fable or a [[Just so story|“just so” story]]. A bedtime story. It might differ from actual facts in important regards, but it stands as a simple device to paint a general picture. | |||
Remember from last time, in the good old days — specifically before [[Swap history|1981]]— if you wanted “exposure” to an interest rate, you had to actually borrow or lend money. There were no tradable instruments giving isolated exposure to “interest rates” — indeed, the idea of “isolated exposure to interest rates” would have seemed more or less incoherent, the same way a shadow seems incoherent, without the boy who cast it. | |||
Interest came with a loan, and depended on its ''term:'' if you wanted your money back at any time, there was no “term” — well: strictly speaking there was, but it was ''overnight'' — and your interest rate could therefore “reset” every day. If you didn’t like the new rate, you could take your money away, or pay it back, without penalty. Hence, interest on call deposits and [[Revolving credit facility|revolving credit facilities]] is calculated by reference to a floating rate. | |||
If you wanted to lend or borrow for a term, you could lock in an interest rate for that term — but you couldn’t have your money back, or voluntarily repay it, before that term, either, without incurring a “[[Breakage costs|funding break cost]]”. | |||
This was | |||
At about the same time, Britain’s commercial bankers were having fun at the hands of the caravan parks, flying clubs and property investment consortia of middle England. The [[interest rate swap mis-selling scandal]] is a many-headed hydra — it turns out most commercial banks in the UK had hit upon variations on the same idea independently of each other and then jammed it down middle England’s gizzard, but the gist was this: rather than just offering them straightforward loans, banks would offer floating rate loans stapled — loosely — to complicated hedging products. | |||
This would be odd enough if it were just a floating rate loan and a fixed rate swap — why not just lend at a fixed rate — but these swaps had all kinds of funky features that didn’t suit any obvious commercial need, and banks sold them often by appealing to the borrowers’ vanity or dubious interest rate risks. A fun example was the “enhanced dual fixed rate protection” under which: | |||
{{Quote|Borrower would pay 5.10%, if interest rates were between 4.75% and 6.25%, and 6% if interest rates were above 6.25% ''or below 4.75%''. Additionally the Bank had the right to terminate without penalty each quarter after five years.}} | |||
It is not obvious who this protects, or what it enhances, but it does not seem to be the borrower. | |||
== The criminal charges == | |||
====“A conspiracy to defraud”==== | ====“A conspiracy to defraud”==== | ||