Libor Story Raises Legal Stakes For Banks

Includes: IYF
by: Craig Pirrong

Last March I noted that in my two previous trips to teach in Geneva, there had been squeezes in the coffee market, and I said I was going to buy coffee spreads before my next trip. Well, that trip is coming up in about 3 weeks, but somebody in the market (perhaps the Noble Group (OTCPK:NOBGY), according to the FT) beat me to the punch. There is a good squeeze underway in the robusta market, with spreads going from contango to a $182/ton backwardation. That ain’t a hill of beans.

Note to self: put on the trade earlier next year.

When I was in Geneva last year the Li(e)bor story came to life after having faded from view for several years. That story has now exploded into prominence, with numerous disclosures over the past several weeks.

Indeed, the story has taken a major turn. Whereas suspicions as to motive originally focused on the idea that banks were attempting to make themselves look sounder than they were by exaggerating their ability to borrow unsecured, the new stories claim that there is evidence that some traders were manipulating rates specifically to influence the value of derivatives positions tied to Libor.

This is a major development because specific intent to manipulate the price of a derivative is a necessary element of a manipulation case under the Commodity Exchange Act. If confirmed, these allegations regarding motive dramatically increase the legal stakes for the banks.