March 20, 2023

DealBook: Scrutiny Intensifies on Collusion in Rate Manipulation Inquiry

Mervyn King, of the Bank of England, told Parliament he was not informed that Barclays' bankers might be breaking the law.ReutersMervyn King, of the Bank of England, told Parliament he was not informed that Barclays‘ bankers might be breaking the law.

While much of the scrutiny surrounding interest rate manipulation has centered on Barclays, regulators have said that traders at the big British bank colluded with rivals to influence a key benchmark.

As part of a three-year scheme, a senior Barclays trader in Europe worked with counterparts at Crédit Agricole, HSBC, Deutsche Bank and Société Générale, according to people with knowledge of the matter who could not speak publicly because of the investigation. Regulators are examining whether at least one other bank was involved, one of the people said.

In an effort to bolster their profits, the traders collaborated to push interest rates up or down, according to regulatory documents. By doing so, they aimed to eke out extra gains on their trades or limit losses. In its complaint against Barclays, the Commodity Futures Trading Commission described the bank’s trader as having “orchestrated an effort to align trading strategies among traders at multiple banks” to profit on their portfolios.

In June, Barclays paid $450 million to settle its case with the commission, the Justice Department and the Financial Services Authority of Britain. British and American authorities accused the bank of submitting false rates from 2005 through 2009. Regulators have also conducted investigations of others involved in the scheme.

As the rate-manipulation scandal spreads to other banks, the fallout could have major ramifications for the financial industry. Civil and criminal authorities around the world are investigating, and lawmakers in the United States have started their own inquiries. The civil and criminal actions, as well as private lawsuits, could cost the banks tens of billions of dollars.

The Barclays case centers on key benchmarks, including the London interbank offered rate, or Libor, and the Euro interbank offered rate, or Euribor. Such rates are used to determine the borrowing costs for consumers and corporations. The senior trader at Barclays who worked with the four European banks specifically tried to manipulate Euribor, according to regulators.

The Barclays case was the first to emerge from the multiyear investigation, which has also touched some of the biggest banks on Wall Street. Authorities in the United States, Britain, Japan and elsewhere are also looking into the potential involvement of JPMorgan Chase, Citigroup and UBS. The Financial Times previously reported the names of the four European banks that worked with the Barclays trader.

The broad investigation has prompted outrage from lawmakers in Washington and London. In recent weeks, British central bankers and regulators testified to Parliament about their role in the rate-manipulation scandal. In the United States, politicians are asking why regulators did not stop the illegal activities, even though regulators knew about potential problems as far back as 2007.

In 2008, the Federal Reserve Bank of New York suggested changes to the process, after learning that Barclays reported artificially low rates, according to documents. The regulator then shared those recommendations with the Bank of England, the British central bank. But the New York Fed did not end the rate manipulation at Barclays.

Top central bank officials are now signaling a willingness to change the system.

On Wednesday, Mark Carney, the governor of the Bank of Canada, said he and other central bank chiefs would discuss ways of improving Libor, or even replacing it, when they are scheduled to meet on Sept. 17.

“In terms of alternatives, there is an attraction to moving toward, obviously, market-based rates if possible,” Mr. Carney said at a news conference. Mr. Carney currently heads the Financial Stability Board, a body consisting of central banks and finance ministries that was set up in 2009 to coordinate global financial regulation.

Mervyn A. King, governor of the Bank of England, sent a letter on Wednesday to central bank chiefs inviting them to discuss Libor reforms at another meeting scheduled for September. The Bank of England did not respond to a request for comment. Jeremy Harrison, a Bank of Canada spokesman, confirmed the existence of Mr. King’s letter and its purpose.

The United States Congress is also delving into the matter, as lawmakers question why the rate-setting process was not better policed.

Representative Randy Neugebauer, the Republican chairman of the House Financial Services subcommittee investigating Libor, is seeking documents from the New York Fed about JPMorgan Chase, Citigroup and Bank of America, the three American banks involved in setting the rate. Last week, Mr. Neugebauer collected transcripts from at least a dozen phone calls in 2007 and 2008 between New York Fed officials and executives at Barclays.

The House committee has also homed in on Barclays. On Monday, Congressional staff will receive a briefing about Libor from the general counsel of Barclays in America and its chief lobbyist, according to a government official.

Peter Eavis contributed reporting.

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Hedge Funds the Winners if Greek Bailout Arrives

That, more or less, is the bet that a growing number of investors are making now as they load up on Greek government securities that mature in March. That is when Athens hopes to receive a potentially make-or-break bailout payment — a lifeline of as much as 30 billion euros ($38 billion) from the European Union and the International Monetary Fund.

Greece’s new prime minister, Lucas D. Papademos, has warned that without that infusion, his country might well default on its debts, a move that might force Greece to leave the euro currency union.

So even though Greece is already effectively bankrupt, some investors are buying and holding the country’s short-term debt — gambling that, at least in March, Athens will make a point of paying its creditors. The risks those investors run, though, include the possibility that their very actions could help prompt the European Union and I.M.F from handing Greece the March bailout installment that would enable Athens to pay make those debt payments.

With the stakes so high, investors are betting that Europe will go the extra mile to keep Greece afloat. And if the price to do that means that taxpayer funds end up bolstering the returns of a few hardy speculators — then, as far as those investors are concerned, all the better.

Such a trade-off, however, carries ramifications that go well beyond the profit motives of its participants.

For months now, Greece has desperately been trying to persuade its private sector creditors — its bondholders that are not other governments — that it is in their interest to exchange their existing Greek bonds for longer-term securities, while accepting about a 50 percent loss as part of the bargain. The negotiations are known as the private sector involvement, or P.S.I., to employ the widely used shorthand.

A few months ago such a deal looked doable, as the large European banks that held most of this private sector debt, estimated to be about 200 billion euros, recognized that it was probably a better alternative than a default by Greece, which could wipe out their holdings. Moreover, the banks were vulnerable to political pressure from their home countries, where they have a big stake in remaining on good terms with the government and important officials.

But as the talks have dragged on, many of these banks, especially big holders in France and Germany, have sold their holdings. Among the buyers have been London hedge funds and other independent investors that are now questioning why they should accept a loss — if at least in the short run Greece keeps meeting its debt payments.

And as the number of such hedge funds holding Greek debt has grown, so has their ability to forestall a restructuring private sector agreement, thus bringing them closer to being able cash in on their high-stakes gambit.

“They are calculating that Greece will not default before March,” said Mitu Gulati, a sovereign debt expert at the Duke University School of Law and a co-author of a recent paper on the dynamics of the debt restructuring process in Greece.

Mr. Gulati points out that it is these investors that are in many ways behind the delay in executing a private sector involvement. deal. “If you own a bond that matures in March and it is January, then you have every incentive to delay,” he said.

Yet private sector involvement could prove a crucial component of the set of provisions that Greece must meet to receive its next lifeline payment from Europe and the I.M.F.

The private sector loss agreement was expected to lower Greece’s borrowing expenses by as much as 100 billion euros through 2014. The agreement was also supposed to reduce Greece’s ratio of debt to gross domestic product to 120 percent by 2020, down from about 143 percent today. In short, the private sector involvement represents a crucial pillar of the 199 billion euros in financing that Greece will need from outside sources in the next three years.

The German chancellor, Angela Merkel, the most vocal proponent of requiring some sacrifice on the part of private sector lenders, has been the most forceful political leader in pushing for a resolution of the negotiations. Mrs. Merkel met with Christine Lagarde, the managing director of the I.M.F., in Berlin on Tuesday. They issued no statement, but aides said Greek debt was high on the agenda. Ms. Lagarde was then to meet Wednesday with the French president, Nicolas Sarkozy, in Paris.

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I.H.T. Special Report: Net Worth: Keeping a Wary Eye on the Euro Zone

Q. How much worse can the European debt crisis get?

The European crisis potentially still has a long way to run, with the crisis now affecting the core as well as the peripheral economies. While the euro zone leaders have said they will effectively do what it takes to defend the euro, actions speak louder than words. The politicians have been guilty of talking too much and doing too little over the last year.

Going forward, there is still a very real risk that things could get substantially worse in the euro zone, with serious ramifications for the global economy.

Q. Where is the global economy particularly vulnerable? What areas should investors watch?

The euro zone is key, and Italy, in particular, is in the firing line. The Italian bond market is the third largest in the world, and there are doubts whether it would be possible to bail it out. The risks are significantly to the downside.

Outside of Europe, there has actually been better news on improving growth in the United States and falling inflation in China.

Q. Will the euro survive?

We think that the euro will survive because there is no mechanism for any country to leave. In addition, the cost to both the countries that leave and those that stay would be huge, with the cost of exit far higher than the cost of staying.

Any further deterioration in Europe would probably lead to euro weakness against the U.S. dollar and other currencies. By many measures, the euro remains overvalued against the dollar and other currencies. We expect Asian currencies to perform well, although they could weaken if a major crisis developed.

Q. In the current environment, what should investors be buying, or selling?

We still see great value in equities, particularly relative to cash and bonds, which both look particularly unattractive over the next couple of years. With this in mind, now is not the time to panic and sell out of equities. With any investment, the right time horizon is key, and equity investors need to exhibit greater patience than they have done in recent years.

What is important is to have a sensible, diversified portfolio across all asset classes that is designed to meet an investor’s needs in line with their risk profile.

Q. Where do you see the best investment opportunities?

China is looking very attractive for the coming 12 months. With the prospect of slowing inflation, the central bank has the ability to ease monetary policy, a situation developed countries could only dream of. In addition, we see valuations are favorable, particularly after the recent sharp sell-off, and global investors are underweight China, which should create attractive upward pressure when investors return.

Q. What about commodities? Has their rally run its course?

Commodities do offer compelling investment opportunities, and there is certainly no drought of likely influences that can impact prices over the next 12 months. We see challenges faced in production and geopolitical risks, not to mention the overriding macro headwinds threatening global economic growth coming from the developed world, and Europe in particular. Gold looks potentially in bubble territory and trading as a safe-haven asset, but, nevertheless, risks remain for price appreciation in the near term, given the uncertainty in the macroeconomic environment.

Q. Is Asia the answer, or will Asia stall and enter a period of prolonged slowdown?

We remain very comfortable with the outlook for Asia and remain overweight. The ongoing nature of the euro crisis is causing risk aversion across the globe, and, as such, some investors are shunning Asia and focusing on developed markets such as the United States.

However, longer term it is clear that the global economy is going through a structural shift and rebalancing towards Asia and the emerging markets. This will give Asian equities a strong tailwind as investors begin to strategically increase their weights to the region.

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