Rob Kirby: The Genesis of the LIBOR Crisis

By SD Contributor Rob Kirby:

The 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.


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.


  1. Thanks Doc–Rob is one of the most perceptive and honest observers we have.  Any more of this patent medicine from the quack doctors at the Fed, and the patient will be residing at the morgue.

    LOL–ad for GLD popped up on SD. “Precise in a world that isn’t” is their motto. Precisely a fraud, that is.

    AGXIIK–good luck on the surgery and get better soon!!

  2. The larger unasked question that seems to be ignored on mere rote presumption of greed is … why has the financial industry been so driven to create ever-less qualified loans at an increasingly frenetic pace over the past two decades? In posing that question to myself, I can derive no better answer than that it has no choice. ‘Debt saturation’ around the globe has dropped borrowing below the critical point where interest service funds isn’t being created to keep the currency float inflating. Amortization of principal and interest from a shrinking currency base portends the onset of a ‘domino line’ of progressively larger defaults.

    Exponentiality … the faster it goes, the faster it goes … the worse it gets, the worse it gets.  

  3. Actually, the root cause of the sub-prime mortgage mess can be traced directly back to the Clinton regime.  At that time, it was considered a measure of success if a country had a rising home ownership rate, so Clinton tried to jawbone the banks into giving loans to financially unqualified minority groups.  When the banks balked, Clinton threatened them with charges of racism and said that the US Justice Department would aggressively pursue ALL cases of racial discrimination.  The banks caved and started making loans to people whom they KNEW could not repay the loans.  The theory here may have been that in a rising real estate market, an unqualified buyer would be able to grow their home equity to the point that they could cash some of it out and refinance into a higher class of mortgage.  This would expand home ownership and their rising equity would ensure that the loans got repaid.  Unfortunately, this worked right up to the point when the US real estate bubble began to deflate.  That put the reverse of this theory into play and rapidly destroyed equity, guaranteeing that these sub-prime loans could not be repaid.  To top this off, many of these sub-prime mortgages were packaged, sliced, and diced until no one could really tell what their credit quality was and they were re-sold by the banks to investors as CDOs.  Insurance companies, retirement systems, and other investors ate these “AAA rated” CDOs up… until they discovered that they were a lot closer to “BBB rated” than AAA rated.  Because their value depends on the rating of their debt quality, they dropped rapidly in price once their true debt quality became known.  The banksters, of course, knew that this toxic financial waste was not only not AAA credit quality but truly worthless glop that was sold so they could recover some of the money lost via having to create sub-prime mortgages in the 1st place.  Yes, the banksters were more than culpable in this case but without being egged on / threatened by the government, this entire fiasco may never have happened.

    Another stinky facet of all this is that this same sort of government pressure to create sub-prime mortgages continued under the Bush II regime.  It should not have continued but it did.  By the time 2008 rolled around and the toxic effects of all this economic tinkering by the US government, it was too late to stop it from collapsing the US economy.  To patch up this terrible mistake, other mistakes were made, such as TARP, $787B in “shovel ready” stimulus, QEx, etc.  It’s turned into a real tar-ball and it is impossible to touch without getting tar all over you.

    While letting the banks go bankrupt was an option, it should be remembered that the banks main trouble was caused by the US government and not because of bad banking policy.  Because of this government involvement, there is plenty of blame to go around.

      Ed_B, the ‘root cause of the sub-prime mortgage mess’, is ultimately traceable to adoption of the banknote scheme. The currency automatically inflates by complex compounding interest. To ‘control’ this mechanism, the ‘central bank’ facility is indispensible for ‘setting’ current interest rate. Also, it’s crucial that new borrowing of currency into existence is kept sufficient to offset the interest service funding. It was presumed early on that while business expansion exceeded the interest burden (thus, the ‘gas pedal’ and ‘brake’ analogy of the 40s and 50s), the scheme would be sustained and if business activity contracted, interest rate manipulation could ameliorate the effect or ‘jump-start’ resumption. As legacy interest service burden magnifies, however, new borrowing becomes immensely important to generate.

      Neither the ‘Party’ in control of Congress, nor the occupant of the White House has ANYTHING to do with the mathematical exigencies slowly building in the banknote scheme. Political parties merely white-wash financial ‘necessities’ according to public sentiment. The criticality of ramping up borrowing (interest service fund creation) arose and the magnitude was such that the only way was to significantly reduce origination quality, despite the implied risk.

      It’s one of those inconsequential ‘chicken-egg’ questions as to whether government or banks conceived of the banknote scheme. The most important thing to fathom is its utter futility. Once a majority of folks grasp that fact, a better world will dawn on us all.

  4. These people have a lot of chances and times to avoid the LIBOR scandal but even after all these warnings, it still happened and they didn’t do anything and they don’t care. It’s like if they done that on purpose which means that they don’t care about the others. They only care about the big and rich corporations. That’s why we shouldn’t accept their corrupt currency and by doing that, we will destroy them and their tools!

    • Sumkid, the ‘LIBOR scandal’ was an eventuality. The degree of ‘control’ presumed by banks, through local and regional use of current interest rate ‘influence’, has proved ineffective. Ever greater criminality by banks and governments is un-avoidable, the worse the banknote scheme overtakes productive capacity (of even internal consumption norms) to offset its interest accumulation. Delusion among politicos and bankers, that their Maw can be shrunken into ‘managability’ again is pure fantacy butting up against real-world limits and those of mathematical operation.

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