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The Rupp Report: Another Trick-or-treat From The Bankers

Jürg Rupp, Executive Editor

At the end of 2008, the Rupp Report wrote the following words: "If future generations are looking back in the history books, they will probably see 2008 described as an historic year. They also will notice that mankind didn't learn anything but to forget." (See " The Rupp Report: Farmer Or Hunter?" TextileWorld.com, December 9, 2008.) Of course, these words were based on the unbelievable shock of the financial crisis, caused by some "global leading banks." And, unfortunately, it seems that these sentences — written not quite four years ago — were more than true. It seems, too, that the more computers are increasing their capabilities, the more the human brain is losing its ability to remember bad things.

Insiders Know More
But the facts are even worse, and they correspond with the financial crisis that happened when banks — in a Ponzi scheme that eventually collapsed — handed over the responsibility with so-called "structured products" to other institutions and, finally, to the people. The rest is history.

However, this new story is beyond the imagination of Joe Blow next door: A number of major international banks are accused of manipulating the London InterBank Offered Rate (LIBOR) interest rate from 2005 to 2009 using false information in order to disguise their actual funding costs. The United Kingdom-based Barclays Bank had conceded the first financial institution misconduct of some of its dealers and was fined US$500 million. Financial experts estimate that the institutions involved in the scandal could have to pay fines up to $14 billion through 2014.

The LIBOR Interest Rate
The term LIBOR is quite known among business people, especially those borrowing funds from the bank to, for example, build a house. The LIBOR (see box below) is calculated once a day in London and displays on what terms banks lend money to each other. It is based on information provided by important financial institutions and serves as a reference for loans to businesses and individuals, and other financial transactions amounting to $360 trillion per annum.

From 2007 to 2009, several banks apparently manipulated the rate to set in order — in reality, to disguise — their financing costs and make additional profits. The Governor of the Bank of England, Mervyn King, in a letter to leading central bankers, had to urge central bank circles to "radical reforms in the Libor system." Now, the credibility of the LIBOR and the banks has been totally damaged.

No Reaction
It is just about disgraceful that four years ago, the U.S. government apparently pushed the Bank of England to make changes in setting the LIBOR. There is some evidence that in June 2008, U.S. Treasury Secretary Timothy Geithner, at that time head of the Federal Reserve Bank of New York, urged King in six e-mails to strengthen the credibility of the LIBOR rate, and there was no reaction from the Bank of England. In his messages, Geithner suggested introducing new testing procedures to fix the LIBOR, also in order to avoid unintentional or deliberate misreporting.

How To Control Power?
As a matter of fact, it is not easy to monitor the inner circle of global financial power. One possibility might be to abolish the LIBOR. Barclays and other British banks cheated not only millions of customers, but also the federal controlling authority. The authority only started its action after repeated investigations from the U.S. government. The questions remain: how to control the fairly lawless square mile of the City of London, which seems to be the center of the scandal; and whether one can even rely on information from the same source. In the wake of the scandal about the manipulated LIBOR rates, one is left more or less helpless.

Jeopardized Economy
One may say that writing about financial problems is not the duty of the Rupp Report. However, the whole global textile industry, like any other market segment, is very much dependent on trust and faith. As the Rupp Report informed its readers about the recent ITMA Asia + CITME 2012, the Asian business for textile machinery is heavily disrupted by European political and financial problems. After the already mentioned problems of 2008 and 2009, many textile companies suffered — and are still suffering. Many textile companies rely very much on loans from the banks. So the statement from independent prominent textile entrepreneurs that "we are not dependent on bank money" is gaining more significance. It is somewhat of a horror scenario that the banks are getting cheap money by manipulating interest rates, and the companies on the other side that fight to survive are financing this system by paying phony calculated interest rates.

Experts doubt that anything will change in the City of London, where bankers and politicians have been entwined for centuries. In retrospect, the investigation by the Parliament at Westminster of the LIBOR scandal appears to include a long list of omissions and misunderstandings. However, there is some hope: British parliamentarians are pushing the government to abolish "the gentleman approach" of the City of London. The next hearings will be in September 2012.

The London InterBank Offered Rate, or LIBOR, is the average interest rate at which a select group of large, reputable banks that participate in the London interbank money market can borrow unsecured funds from other banks. There are many different LIBOR rates (maturities range from overnight to 12 months) for numerous currencies, including U.S. dollars. In the United States, the most common LIBOR maturities used in pricing loans are for one, three, six and 12 months.

Back in the mid-1980s, the world banking system adopted the LIBOR as a much-needed benchmark for short-term, interbank loans. The LIBOR rates are now internationally recognized indexes used for pricing many types of consumer and corporate loans, debt instruments and debt securities across the globe. For example, LIBOR is used as an index for the vast majority of interest-only loans in the United States. LIBOR rates are fixed every British business day by the global media corporation Thomson Reuters, in association with the British Bankers' Association (BBA), a said-to-be nonprofit trade association.

August 28, 2012