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Barclay's Scandal: Ramifications of a No Trust Financial System
Pinnacle Digest writes: Scandal in Britain has erupted as Barclays' investment firm has been caught red handed manipulating LIBOR rates. Barclays is more than 300 years old and employs north of 140,000 people. Its CEO has resigned, pending an investigation into its role of providing daily LIBOR fixing to Thomson Reuters. The LIBOR rate, or the London Interbank Offered Rate, is the average interest rate estimated by leading banks in London that they will charge to other banks wishing to borrow funds. It has been a benchmark for setting interest rates around the world for decades. Pinnacle Professor and Chief Monetary Economist, Bob Eisenbeis at Cumberland Advisors, which oversees $2 billion in assets, gives his take on the scandal.
Eisenbeis explains that the people responsible within Barclays for providing the daily LIBOR fixing to Thomson Reuters, on behalf of the British Bankers Association (BBA), knowingly submitted inaccurate information at times. These false submissions were likely in response to pleading from derivatives traders seeking to protect positions that could be affected by the spreads posted across dollar, yen, and euro LIBOR rates of differing maturities.
What is most interesting is that other regulators and organizations outside the UK were also aware of irregularities in the Barclays LIBOR data, including none other than the Federal Reserve. What many have not yet realized is that Barclays Capital is a primary dealer who is authorized to deal directly with the Federal Reserve’s Open Market Desk.
Eisenbeis should know as he was Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta where he advised the bank’s president on monetary policy for FOMC deliberations and was in charge of basic research and policy analysis.
Early Thursday morning, ratings agency Moody’s changed its outlook for Barclays’ standalone bank financial strength rating, to negative from stable. Moody's cited the resignations of senior executives, including chief executive Bob Diamond, in the wake of an interest rate-rigging scandal. Famed investor Jim Sinclair recently came out and said that this scandal will lead to such a lack of trust and control that gold will climb to higher than $3500 an ounce.
Eisenbeis delves into the questions he wants answered such as, "Did the process bias interest rates significantly, and if so who gained and who lost in the process?"
He reminds us finally that, "The hundreds of trillions of dollars in transactions that are linked to LIBOR – even my own mortgage interest rate is linked to what now may be a bogus number – should concern us all."
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