June 16, 2024

News Cymru

Two sides to every headline

LIBOR Scandal, Paul Tucker’s Tesitmony – SONIA To Replace LIBOR? Cat Out Of The Bag?

Did Paul Tucker let the cat out of the bag during his testimony?

Let me first repeat the them of my commentary on the LIBOR “scandal”.

The way LIBOR is currently worked out, the current LIBOR system, rigged or not, is of massive benefit to people with mortgages and anyone whose borrowing is tied to LIBOR.

Banks are motivated to declare as lower LIBOR as possible as it makes them look strong. The lower the rate they can borrow at, the lower risk they must be.

Consumers benefit from this as it means lower borrowing costs.

If there is one democratic feature of the banking system, if there is one system that gives the consumer a voice in the banking system, it is the current LIBOR system, whether it is rigged or not.

Moving on the Paul Tucker’s testimony today.

A lot of his Commons testimony was pretty dry but at one point he did appear to go off on a tangent talking about SONIA.

His point was that SONIA was a much better figure to use instead of LIBOR.

Paul Tucker. Hearing highlights, BOE manipulates the LIBOR, Alastair Darling manipulated LIBOR, LIBOR is based on people’s opinions, SONIA is based on real numbers

He talked about how LIBOR was calculated and said that far too many things were tied to LIBOR, that markets had become too dependent on this figure.

He described the calculation of LIBOR being made up of three main areas, all of which involved the LIBOR panels saying what they thought would happen in the future. In other words, LIBOR is based on people’s opinions and predictions and not hard figures.

Given how LIBOR is calculated it seems to be next to impossible to prosecute anyone for LIBOR rigging as the LIBOR figure itself was not based on facts but opinions and what people thought.

Yet another reason why the UK taxpayer should not be on the hook for legal fees by trying to prosecute banks when the likelihood of success is extremely slim.

Paul Tucker highlighted how it would be much better if loan rates were based on something real ie the actual cost of lending, in other words a system like SONIA, rather than a system based on opinion.

He also highlighted how a system that is based on opinion is open to manipulation.

To recap, the manipulation of LIBOR by banks not only benefits them but also people looking to borrow.

And this lower interest rate must ultimately lead to lower revenues for banks so you can see why it is in their interest to move markets away from LIBOR and on to something like SONIA.

And that is why I ask if Paul Tucker let the cat out of the bag, intentionally or unintentionally. It is clear that banks will benefit from changing or moving away from the current LIBOR system, is it possible that this media frenzy is designed to give justification for banks to move away from LIBOR?

Are we looking at a classic case of Problem-Reaction-Solution?

With regards to the manipulation of LIBOR. Paul Tucker openly admitted that the Bank of England (BOE) manipulates the rate.

The BOE towards the end of 2008 was attempting to lower the rate with “packages” which involved the taxpayer and the Bank of England giving money to banks in trouble.

Why it is okay for the Bank Of England to manipulate the LIBOR but it’s apparently not okay for banks to do the same, is not clear.

The testimony also highlighted that The Telegraph had reported that Alastair Darling had manipulated the LIBOR rate.

Interest rate cuts, banks being told to fall into line and lower their mortgage rates. Good stuff from the Treasury. After all, with the base rate falling and Libor following it (so far at least) money should get cheaper for all of us. Shame Alistair Darling had to call all the banks into his office for a breakfast barracking to get it done, but it seems they saw the light.
Now that the banks have dropped their interest rates the question that remains is whether the Government will do the same. The Treasury is currently planning to squeeze a fixed 12pc annual dividend out of the banks, likely to be HBOS, RBS and Lloyds TSB, that take taxpayers’ money in the form of preference shares. With the base rate at 3pc, what chance the Treasury will cut the rate?
“It’s got nothing to do with it,” the Treasury spinner tells me amid much coughing and spluttering. “The two things are entirely separate.”

That’ll be a no then.

So it seems it is okay for the government to manipulate the LIBOR but not okay for the banks, again, it is not clear why.

So as I have been saying all along, the LIBOR is such a subjective measure it seems to me next to impossible to prosecute anyone for rigging it.

It is also clear that borrowers are benefitting in parallel with banks when the LIBOR is low-balled. So what is good for the banks is good the people, at least in this case.

Why anyone, especially the government, would want to sever this connection is beyond me, people are rightly unhappy with banks, surely the LIBOR system should be viewed as a way of the taxpayer getting their own back?

But the fact is the LIBOR has been dragged through the mud by the media, it is hard to imagine it remaining in existence for much longer and it looks like SONIA could be its replacement. And yet another democratic process that works for the people and balances to power dynamic with the big banks will be lost due to government meddling/ignorance/stupidity, complicity.

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