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Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

The Genesis of the LIBOR Crisis

Interest-Rates / Banksters Oct 03, 2012 - 01:11 PM GMT

By: Rob_Kirby

Interest-Rates

Best Financial Markets Analysis ArticleThe roots of the LIBOR crisis can be found in the broad based sub-prime FRAUD in America circa 2000 - 2007.  The sub-prime fraud involved American investment banks securitizing [bundling] poor mortgage credits into “pools” – then working hand-in-hand with credit rating agencies like S & P and Moodys – having these pooled securities rated AAA.

In Q1/2007 American investment bank - Bear Stearns, a major player in this sub-prime securitization – had a number of these sub-prime pools FAIL to perform.


The failure of AAA credit – up till then – was UNHEARD of in modern finance and precipitated a GLOBAL CREDIT CRISIS where banks became UNWILLING TO LEND – even to one another.  The sanctity of triple “AAA” credit had been violated.

So by August 2007, Global Credit Markets were “locked up” – Commercial Paper markets, which function on “creditworthiness” – are the oil that greases the wheels of world industry.  These critical markets were brought to a standstill.

America Panicked

In response to Global Credit Markets being locked up – the U.S. Treasury [Hank Paulson] in conjunction with the U.S. Federal Reserve [Benjamin Bernanke] undertook EXTREME MEASURES – via 7.5 TRILLION of off-balance sheet, OTC [over the counter] Derivatives Trades done with J.P. Morgan Chase. 

The reason we definitively know this is EXACTLY WHAT HAPPENED is that Morgan’s “less than 1 year” portion of their OTC swap book grew by 7.5 Trillion in Q3/2007 only to contract by virtually the same amount in Q4/2007 [data available at the OCC's Quarterly Reports].   FRA’s are the ONLY OTC Swap instrument at allows a bank to grow their book by such an amount in one quarter and have it reverse itself in the following quarter.  Given the fact that banks were not lending or extending credit  to anyone at the time – and FRA’s require TWO WAY CREDIT – the notion that Morgan could put 7.5 Trillion in these instruments on in such a short period of time TELLS US that their counter party in this trade was NON BANK.  From here, it’s academic – who has the motive and means to conduct such trade??? The Answer is a universe of ONE!!!!!!

Acting for the U.S. Treasury was the Exchange Stabilization Fund [ESF] – a clandestine division of the U.S. Treasury which is beyond oversight/supervision by Congress and U.S. Law.  The trades the ESF engaged in were “brokered” by the N.Y. Federal Reserve [Turbo Timothy Geithner] and specifically targeted to J.P. Morgan Chase to “compel” them to purchase TRILLIONS in short dated U.S. Government T-bills [maturities of 1 yr. and less].  Procedurally, this is how this worked:

In Q3/07, the U.S. Treasury [ESF] gets the N.Y. Fed to ask the treasury at J.P. Morgan to place multi-Trillion dollar bets on what 3 month LIBOR will be in one or two months in trades called Forward Rate Agreements [FRA’s].  If you purchase a FRA you are “synthetically borrowing money”.  Morgan showed a price [bid] at a yield less than the yield on 3 month T-bills.  When the U.S. Treasury “hit” Morgan’s bid – at say .28 basis points – J.P. Morgan hurriedly went into the T-bill market to purchase virtually unlimited quantities of 3 month T-bills – at say .33 basis points to “lock in” perhaps a 5 basis point risk free profit on their gargantuan trade.  THIS DID HAPPEN!!!

These trades were undertaken/administered in a defibrillator like fashion to “jolt the frozen credit markets” into once again purchasing commercial paper.  This practice worked “in part” but only gained “traction” when the U.S. Treasury/Fed introduced a host of ‘swap programs’ where holders of illiquid commercial paper were allowed to “freely” swap their dubious paper for the “perceived safety” of U.S. Government Securities [T-bills].

                                             

As a result of these MASSIVE J.P. Morgan led T-bill purchases – short term T-bill rates plummeted 200 basis points in Q3/2007 from roughly 5 % to 3 % in a matter of days.  However, this did nothing to solve the core issue at first – namely, that banks were unwilling to lend which is/was reflected by the 3 month Eurodollar Futures contract [a proxy for LIBOR] refused to decline [and in fact initially went up] with plummeting T-bill rates; hence the TED Spread widened significantly from roughly 25 basis points or less to well over 200 basis points:

The difference [expressed in basis points] between the 3 month T-bill rate and the 3 month Eurodollar Futures rate is called the TED Spread.  As the TED Spread widened dramatically – LIBOR was seen to be “broken” – because LIBOR rates [rates posted by the likes of Barclays, UBS etc.] were not reflecting falling short term Treasury rates.

Why LIBOR [London Interbank Offered Rate] is important?

The British Bankers Association [BBA] has historically been responsible for polling member banks daily for reference rates as to where they would be willing to lend to their most creditworthy clients in periods ranging from “overnight” to 1 month and right out to 1 year.  These reference rates stand as the basis for resets in floating rate corporate loans as well as floating rate / reference rates for hundreds of Trillions worth of OTC Swap transactions.

Conclusions

  1. LIBOR would NEVER have appeared broken in the first place – if U.S. ratings agencies had done their job and properly rated poor credit U.S. Mortgage paper appropriately.
  2. LIBOR would NEVER have appeared to be broken if the U.S. Treasury has STAYED OUT of the markets.  Of course, this also means we would have already had a VERY SEVERE, BUT CLEANSING, ECONOMIC CONTRACTION.  Instead, government intervention / Central Planning has kept the economy somewhat moving along – albeit at an ever burdened pace with the costs being the sanctity of our capital markets – EVERYONE in global finance is awakening to the fact that our capital markets are rigged.
  3. The U.S. Treasury’s ESF and U.S. Federal Reserve – utilizing derivatives - had a LARGE, DIRECT hand in precipitating the LIBOR crisis.  The “free” mainstream media – which is really and truly complicit, and bought-and-paid-for could have / should have spotted this FRAUD a mile away. 
  4. Imperialist U.S. monetary policy is factually being enacted through the trading desks of banks like J.P. Morgan, Citibank, Goldman Sachs, BofA and Morgan Stanley – all in the name of National Security and preservation of the U.S. Dollar as the world’s reserve currency.  This gives these “insider institutions” privileged insider information as to the near term direction in interest rates and makes possible a multitude of further abuse of our capital markets.
  5. Interest Rate Derivatives broadly classified as OTC Swaps are regularly utilized by the U.S. Treasury to manipulate the entire U.S. yield curve.  The specific instruments employed to do this are Forward Rate Agreements [FRA’s] which influence T-Bill rates in the < 1 yr. space and Interest Rate Swaps [IRS] – with embedded U.S. Government bond trades - in the 3 – 10 yr. segment of the curve.

Got physical gold yet?

By Rob Kirby

http://www.kirbyanalytics.com/

Rob Kirby is proprietor of Kirbyanalytics.com and sales agent for Bullion Custodial Services.  Subscribers to the Kirbyanalytics newsletter can look forward to a weekend publication analyzing many recent global geo-political events and more.  Subscribe to Kirbyanalytics news letter here.  Buy physical gold, silver or platinum bullion here.

Copyright © 2012 Rob Kirby - All rights reserved.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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