The New York Fed knew all about Barclay’s / LIBOR as it happened:
The Federal Reserve Bank of New York said it became aware that Barclays Plc was underreporting borrowing costs for the London interbank offered rate as early as 2007.
A Barclays employee explained to a New York Fed staff member in April 2008 that “Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks,” the New York Fed said in a statement posted today on its website.
“The Barclays employee also stated that in his opinion other participating banks were also under-reporting their LIBOR submissions.”
According to the official press release:
As part of this broad effort, on April 11, an analyst from the Markets Group queried a Barclays employee in detail as to the extent of problems with LIBOR reporting.
The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks. The Barclays employee also stated that in his opinion other participating banks were also under-reporting their LIBOR submissions. The Barclays employee did not state that his bank had been involved in manipulating the rate for its own trading advantage. Immediately following this call, the analyst notified senior management in the Markets Group that a contact at Barclays had stated that underreporting of LIBOR was prevalent in the market, and had occurred at Barclays.
That same day – April 11, 2008 – analysts in the Markets Group reported on the questions surrounding the accuracy of the BBA’s LIBOR fixing rate in their regular weekly briefing note. The briefing note cited reports from contacts at LIBOR submitting banks that banks were underreporting borrowing rates to avoid signaling weakness. In accordance with standard practice for briefing notes produced by the Markets Group, this report was circulated to senior officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and U.S. Department of Treasury.
According to the briefing note:
Our contacts at LIBOR contributing banks have indicated a tendency to under-report actual borrowing costs when reporting to the BBA in order to limit the potential for speculation about the institutions’ liquidity problems.
Another analysis dated 2008-5-20 titled Recent Concerns Regarding LIBOR’s Credibility stated:
Around the time the WSJ article first reported on this matter in mid-April, we heard from several Eurodollars brokers and bank funding desks that many LIBOR banks were bidding for funds up to 25 basis points above their LIBOR quotes in the same maturity on the same day. The BBA also received a number of formal complaints along these lines. Several of these market participants suggested that discrepancies between funding rates and LIBOR quotes had existed since at least last August, but had gotten marginally worse since mid-March.
Additionally, around days on which the BBA’s efforts to address LIBOR have received media attention, there have been fairly dramatic increases in the LIBOR fixings. For example, in the two days surrounding the WSJ’s April 16 article, 3-month LIBOR increased 17 bps, which was the largest two-day increase in the rate since August 9. Earlier this week, as the integrity of LIBOR again received attention, 1-year LIBOR increased 21 bps, and OIS and fed funds-LIBOR basis swaps suggest that a large portion of this rise was not due to a re-pricing of policy expectations.
Geithner suggested to King in an eMail dated 2008-6-1:
1f the combination of best practices and audit recommendations in (1) above seems unlikely to be sufficiently effective in ensuring accLirate reporting, a complimentary [sic] approach might be to adopt the following process for collecting, calculating, and publishing LIBOR rates. The BBA could collect quotes from all members of the expanded panel, and then randomly select a subset of 16 banks from which the trimmed mean would be calculated. The tames and quotes for the 8 banks whose rates are averaged to calculate the LIBOR fixing would be published. The banks’ whose reports fall above or below the midrange would not be publicly identified, nor would the level of their outlying rates. This random sampling from an expanded panel would lessen the likelihood that the market would draw a negative inference regarding a particular bank’s continued absence from the list of published quotes
The Fed has also published a transcript of the April 11 call:
FR: Hmm.
: We were putting in where we really thought we would be able to borrow cash in the interbank market and it was
FR: Mm hmm.
: Above where everyone else was publishing rates.
FR: Mm hmm.
: And the next thing we knew, there was um, an article in the Financial Times, charting our LIBOR contributions and comparing it with other banks and inferring that this meant that we had a problem raising cash in the interbank market.
FR: Yeah.
: And um, our share price went down.
FR: Yes.
: So it’s never supposed to be the prerogative of a, a money market dealer to affect their company share value.
FR: Okay.
: And so we just fit in with the rest of the crowd, if you like.
FR: Okay.
: So, we know that we’re not posting um, an honest LIBOR.
FR: Okay.
: And yet and yet we are doing it, because, um, if we didn’t do it
FR: Mm hmm.
: It draws, um, unwanted attention on ourselves.
Note that all this happened well before the famous post-Lehman 2008-10-29 Diamond / Tucker telephone call:
If we take Bob Diamond and Paul Tucker at their word, part of the Libor scandal at Barclays Plc (BARC) can be chalked up to a series of comic misunderstandings, like a children’s game of telephone. It’s a bit much to swallow, but the spectacle sure has been fun to watch.
Both men agree that on Oct. 29, 2008, while the financial system was on the brink, Tucker, who is the Bank of England’s deputy governor, called Diamond on the phone. Diamond, who resigned last week as Barclays’s chief executive officer, was head of the company’s investment-banking business at the time.
…
The supposed misunderstandings don’t end there. In his October 2008 file note, Diamond wrote that he asked Tucker “if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions.”
Tucker told members of Parliament’s Treasury Committee that he didn’t take that statement to mean there was cheating going on. He said he thought it meant that “when they come to do real transactions, they will find they are paying a higher rate than they are judging they would need to pay.”
Tucker also was asked about a 2007 meeting with banking- industry members of a Bank of England liaison group. Minutes show “several group members thought that Libor fixings had been lower than actual traded interbank rates.” Tucker, who chaired the meeting, said “it did not set alarm bells ringing.”
“This doesn’t look good, Mr. Tucker,” the committee’s chairman, Andrew Tyrie, said. “It doesn’t look good that we have in the minutes on the 15th of November 2007, what appears to any reasonable person to be a clear indication of low- balling, about which nothing was done.” Tucker replied: “We thought it was a malfunctioning market, not a dishonest market.”
So, the usual thing has occurred: the regulators were negligent, the situation blew up, and in a desperate attempt to save face the regulators have fined the most honest bank nearly half a billion bucks and vilified the most honest man they could find. Regulation. Feh.
Naturally, Bloomberg feels Barclays should pay extra:
The fund set up by BP Plc to pay claims related to the 2010 Deepwater Horizon oil spill offers one possible template. Banks could pool their resources into a global Libor victims’ compensation fund, appoint an independent administrator and create a transparent formula to calculate damages. Doing so might persuade angry clients to settle rather than pursue litigation that would serve mainly to enrich armies of lawyers.
Such a move would require a lot of cooperation and candor among the banks. For one, they would have to come up with an authoritative estimate of how much Libor was skewed as a result of their misreporting. Beyond that, they would have to decide what share of the payments each bank should bear. One bank — Barclays is a prime candidate — might have to take the lead in setting up the fund, as BP did after the oil spill, and press the others to pay their share later.
Related to all this is a related quote on an unrelated matter:
“In U.S. criminal law, we very rarely do hold people criminally responsible for failure to supervise,” he [Duke University School of Law professor Sam Buell] said. “You need to show not only outright knowledge but also willful blindness — having a strong suspicion that there is wrongdoing and then taking steps to avoid it.”
The Globe points out that corporates are on a tear:
Earlier this week, the Barclays U.S. corporate investment grade index fell to just 3.096 per cent, its lowest yield since the bank made started the index in 1973.
Not only are corporate bond yields dropping, but their spreads over Treasuries are collapsing as well. The Bank of America Merrill Lynch corporate bond index currently has a spread of 294 basis points over Treasuries, about 50 basis points tighter than the 348 at the start of 2012.
They also mention a Bloomberg story about corporate bond duration:
Corporate bonds have never been more perilous for investors who are scooping up longer-maturity debt at the fastest pace since 2008 in a bet the Federal Reserve will keep interest rates at record lows through late 2014.
The duration of global company bonds, a measure of the securities’ price sensitivity to yield changes that rises with longer maturities, reached a record high yesterday, according to Bank of America Merrill Lynch index data.
…
Average yields on investment-grade corporate bonds reached a record-low 3.15 percent yesterday on the Bank of America Merrill Lynch Global Broad Market Corporate index. That’s helping push modified duration, which gauges the price change of a security for a given shift in yield, to an unprecedented 5.84 years as of yesterday, compared with 5.59 years at year-end and last year’s low of 5.28 on March 30.
I’d say we’re sowing the seeds of the next crisis ….
American houses are getting even larger:
The percentage of new single-family homes greater than 3,000 square feet has grown by one-third in the last decade, according to data released last month by the U.S. Census Bureau. The increase has occurred even while 4.3 million homes have been foreclosed upon since January 2007, a result of the housing- bubble collapse and economic meltdown. Slightly more than 1 in 4 new homes built last year were larger than 3,000 square feet, the highest percentage since 2007.
…
The Census Bureau reports that the average size of a U.S. house rose in 2011 to 2,480 square feet, up from 2,392 square feet in 2010. The 2011 figure is 62.6 percent larger than the 1,525-square-foot average size in 1973.
I don’t understand why people feel they want so much space. I grew up living in a shoebox in the middle of the road.
DBRS updated its report on CIU, proud issuer of CIU.PR.A, CIU.PR.B and CIU.PR.C:
DBRS has today updated its report on CU Inc. (CUI or the Company). The credit quality of CUI is based on the Company’s low business risk, which stems from the regulated nature of its operations supported by a reasonable regulatory environment, strong portfolio of diversified regulated businesses and strong financial profile.
…
CUI continues to generate significant free cash flow deficits as a result of the ongoing large capital expenditure program (estimated to be $5 billion to $6 billion in the 2012-2014 period). The Company has financed its capital expenditure with a combination of dividend management to its parent (Canadian Utilities Limited (CU), rated “A” by DBRS) and debt/preferred share issuances. As a result, CUI has been able to maintain its balance sheet leverage in line with its current rating category. DBRS expects the parent to continue to provide support to CUI through continued dividend management and equity injection in order to partially finance the Company’s future cash flow deficits.
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 7bp, FixedResets gaining 1bp and DeemedRetractibles winning 12bp. Volatility was average. Volume continued to be pathetically low.
HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly |
| Index |
Mean
Current
Yield
(at bid) |
Median
YTW |
Median
Average
Trading
Value |
Median
Mod Dur
(YTW) |
Issues |
Day’s Perf. |
Index Value |
| Ratchet |
0.00 % |
0.00 % |
0 |
0.00 |
0 |
-0.1008 % |
2,289.2 |
| FixedFloater |
0.00 % |
0.00 % |
0 |
0.00 |
0 |
-0.1008 % |
3,424.4 |
| Floater |
3.18 % |
3.22 % |
70,550 |
19.20 |
3 |
-0.1008 % |
2,471.7 |
| OpRet |
4.78 % |
2.76 % |
44,262 |
0.94 |
5 |
0.1464 % |
2,525.0 |
| SplitShare |
5.49 % |
4.97 % |
77,419 |
4.71 |
3 |
0.2812 % |
2,755.7 |
| Interest-Bearing |
0.00 % |
0.00 % |
0 |
0.00 |
0 |
0.1464 % |
2,308.9 |
| Perpetual-Premium |
5.36 % |
2.66 % |
90,833 |
0.50 |
28 |
-0.0719 % |
2,259.2 |
| Perpetual-Discount |
4.97 % |
4.91 % |
107,753 |
15.60 |
6 |
0.2946 % |
2,505.8 |
| FixedReset |
5.01 % |
2.96 % |
191,987 |
4.05 |
70 |
0.0094 % |
2,412.4 |
| Deemed-Retractible |
4.98 % |
3.72 % |
149,887 |
2.84 |
46 |
0.1217 % |
2,332.8 |
| Performance Highlights |
| Issue |
Index |
Change |
Notes |
| W.PR.H |
Perpetual-Premium |
-1.54 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-01-15
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : 1.24 % |
| NA.PR.M |
Deemed-Retractible |
1.01 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-15
Maturity Price : 26.00
Evaluated at bid price : 26.92
Bid-YTW : 0.88 % |
| FTS.PR.C |
OpRet |
1.06 % |
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-08-12
Maturity Price : 25.25
Evaluated at bid price : 25.78
Bid-YTW : -12.03 % |
| CIU.PR.A |
Perpetual-Discount |
1.94 % |
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-13
Maturity Price : 24.94
Evaluated at bid price : 25.24
Bid-YTW : 4.60 % |
| Volume Highlights |
| Issue |
Index |
Shares
Traded |
Notes |
| IGM.PR.B |
Perpetual-Premium |
191,412 |
RBC crossed blocks of 20,000 and 75,000, both at 26.40. Desjardins crossed blocks of 23,400 shares, 15,000 and 17,500, all at 26.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.32
Bid-YTW : 4.92 % |
| ENB.PR.F |
FixedReset |
143,745 |
RBC bought 39,500 from TD at 25.30, then crossed blocks of 75,000 and 10,600 at 25.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-13
Maturity Price : 23.22
Evaluated at bid price : 25.35
Bid-YTW : 3.61 % |
| MFC.PR.I |
FixedReset |
121,566 |
RBC crossed blocks of 19,500 and 45,000, both at 25.00; then bought 10,000 from National and 10,000 from anonymous at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 4.36 % |
| ENB.PR.H |
FixedReset |
65,024 |
RBC crossed blocks of 25,000 and 15,000, both at 25.15.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-13
Maturity Price : 23.15
Evaluated at bid price : 25.15
Bid-YTW : 3.40 % |
| BMO.PR.P |
FixedReset |
58,525 |
Scotia crossed 50,000 at 26.68.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.72
Bid-YTW : 2.96 % |
| BAM.PR.B |
Floater |
30,156 |
Nesbitt crossed 25,300 at 16.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-13
Maturity Price : 16.75
Evaluated at bid price : 16.75
Bid-YTW : 3.15 % |
| There were 8 other index-included issues trading in excess of 10,000 shares. |
| Wide Spread Highlights |
| Issue |
Index |
Quote Data and Yield Notes |
| CIU.PR.A |
Perpetual-Discount |
Quote: 25.24 – 26.30
Spot Rate : 1.0600
Average : 0.7648
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-13
Maturity Price : 24.94
Evaluated at bid price : 25.24
Bid-YTW : 4.60 % |
| IAG.PR.A |
Deemed-Retractible |
Quote: 23.01 – 23.59
Spot Rate : 0.5800
Average : 0.3982
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.01
Bid-YTW : 5.75 % |
| HSB.PR.C |
Deemed-Retractible |
Quote: 25.75 – 26.44
Spot Rate : 0.6900
Average : 0.5335
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-08-12
Maturity Price : 25.50
Evaluated at bid price : 25.75
Bid-YTW : -4.68 % |
| IAG.PR.E |
Deemed-Retractible |
Quote: 25.93 – 26.70
Spot Rate : 0.7700
Average : 0.6204
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.93
Bid-YTW : 5.39 % |
| PWF.PR.F |
Perpetual-Premium |
Quote: 25.20 – 25.60
Spot Rate : 0.4000
Average : 0.2658
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-08-12
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : -7.46 % |
| ENB.PR.B |
FixedReset |
Quote: 25.30 – 25.58
Spot Rate : 0.2800
Average : 0.1640
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-13
Maturity Price : 23.27
Evaluated at bid price : 25.30
Bid-YTW : 3.52 % |