Tuesday, 10 July 2012

Tucker maps out the road to ruin

Paul Tucker came down firmly on the side of New Labour today. In his evidence to the Treasury select committee, he denied that Labour ministers were involved in fixing LIBOR. George Osborne thinks otherwise. To which I say "so what". The Osborne versus Balls dingdong is a distraction.

The real story was the rest of Tucker's testimony. It was surreal. No, it was worse than that. It was a financial horror story. He conjured up nightmares and vistas that were unimaginable a month ago.

Tucker told the committee that the FSA is currently working through the implications that LIBOR could "collapse". This would cut the derivatives market adrift from its LIBOR pricing reference point. The notional value of the LIBOR dependent derivatives market is about $360 trillion. For comparision, Global GDP is a trival $70 trillion. Is this a likely event? What would be the consequences? Who knows? But it is the issue currently taxing the UK financial sector regulalator right now.

If that little scenario didn't frighten you, Tucker had another grenade in his pocket. He moved on to the question of LIBOR-related law suits. Again, the FSA is looking into the possibility that British banks would be hit by massive class-action law suits that could potentially ruin the UK financial sector.

Tucker then produced a third cracker. He wasn't confident that LIBOR tampering had stopped. UK banks could still be at it. Despite everything, the Banks may not have cleared things up. The implication must be that other banks could find themselves going through the same upheavals as Barclays.

He then argued that the FSA review into the scandal should be extended to other "self-certifying markets" where banks are fixing and minitoring prices. These markets include the gold and oil markets.

So while the Conservatives and New Labour are thrashing about with a tedious "he said, she said" pantomine, the deputy governor of the Bank of England told us four frightening possiblities about the UK financial system. First, the derivatives market could implode. Second, British banks may be confronted by ruinous legal action that threatens to bankrupt them. Third, Banks could still be meddling with LIBOR. Finally, he hinted that the abuse could extend to other key financial markets.

The juxtaposition of political ineptitude and financial and economic ruin could not be more stark.


droog said...

(Apparently Tory back-benchers are growing very dissatisfied with Osborne. Wonder if anything will come out of that. I find it interesting because politically it seems like a storm that Osborne is going to face alone without dragging Cameron down with him. Until now they have been paired as a strong team but now Osborne is being judged separately.)

With regards to Tucker's warnings, I wish this scandal could be used to de-couple derivatives from the real world. They are highly dubious as a class of financial investments, often resembling nothing more than the bets placed with the local bookmaker. But regulation across the world has been steadily letting them mingle with more solid financial mechanism. I'm not saying this has to be the time to act, but whenever I hear how derivatives may affect the rest of the economy I jump on my high horse and rant about it. Investment banks were allowed to mingle with savings & loans banks, and derivatives of all kinds were inserted into the equation as if they were of the same nature as solid assets, enjoying the same kind of insurance. AIG insured side bets on central bank rates with the same glee as property assets. It was madness, and we're still in it.

On the other two points raised by Tucker I have nothing to add. The wave of lawsuits and the fact that LIBOR manipulation may continue ensure a complete mess.

But we know the answer we'll get: give money to banks to steady the system and take money from everyone else.

dearieme said...

Perhaps HMG will nationalise the banks and then claim sovereign immunity. Don't laugh: I'll bet it's being looked into. Ah, the Blair/Brown legacy really is something, isn't it? They abolished boom and bust, you know. No, really.

Demetrius said...

My problem is that not only do I think you are right but there are other matters which make it worse.

Nick Drew said...

Indeed, Alice - and I think it's even worse than you say: the rest of the world may positively turn on us

meanwhile, Osborne strikes poses ...

Kitz said...

If the banks are sued they will drag the action out for years.
Ten would not be unthinkable . Then the law would be changed , retrospective changes are not unknown. The elite will look after themselves as usual .
As for Gold and Silver that market has been bogus for years , but it won't last for ever .
My dear departed grandma used to refer to change as silver and copper ,perhaps my grandchildren will do the same .

It doesn't add up... said...

Tucker only knows who his link man was. He doesn't know who was really pulling the puppet strings, and neither do we. Questions for Heywood, but he'll probably simply be economical with the actualité.

As to losing LIBOR as a benchmark, it could doubtless be replaced by FIBBER (Frankfurter Inter-Bank Bundes Euro Rate). Derivatives contracts have provisions for what happens when benchmarks are unavailable - usually with natural disasters or national strikes in mind - which will simply be extended on existing contracts. New contracts will be written on a different basis, and the world will go on, perhaps with banks generally and London in particular losing a lot of turnover (the main issue).

It's happened in lots of markets before, including the tin market which "dearieme" indirectly references with talk of appeal to sovereign immunity. Governments reneged on contractual obligations while trying to manipulate the market and took the 5th via a judgement in the House of Lords. The London tin market more or less shut for business for a couple of years, but the substitute market in KL, Malaysia soon had problems of its own, and London once again became pre-eminent - at least until the Chinese bought the LME last month.

Market tampering will go on until traders wind up in jail. If we want to stop it, then forget Parliamentary or Judicial enquiries: set the cops on them and two ticks will see a bonfire of their vanities. Integrity and fair dealing have to be seen to be the way to earn a good honest income for that to happen.

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