They Said It Couldn't Be Done . . . But Market Manipulation is Real

By Kevin Freeman
February 18, 2012Feb 18, 2012

One of the more prolific arguments against the findings of Secret Weapon has been based on the misconception that financial markets are simply too big to manipulate. Of course, size isn't always what matters. This past week, it was disclosed that there are serious inquiries into whether or not the London InterBank Offered Rate (LIBOR) has been manipulated. This is the benchmark rate on which  short-term interest rates are set. Short-term interest rates, in turn, are foundational to the pricing of nearly all financial instruments. By manipulating LIBOR it is possible to manipulate  other areas of the markets as well. This is an extremely important case as a result.

Here are some comments from Bloomberg Business Week:

UBS now appears to be at the center of the financial world's latest scandal: an alleged conspiracy by traders and brokers to rig the price of derivatives around the world by manipulating a key interest rate . . .

By allegedly conspiring to set Libor rates, traders and cash brokers appear to have been able to profit off of derivatives linked to it. Bloomberg News reports that UBS recently suspended a number of senior executives and traders in conjunction with the investigation . . .

The reports alleging manipulation by UBS involve the 16-bank panel responsible for setting the Libor rate for the yen. Traders at JPMorgan, Citigroup, HSBC, Deutsche Bank, and RBS were also allegedly involved in manipulation efforts. All six banks are on the yen Libor panel. Spokesmen for all six banks declined to comment when contacted by Bloomberg News this week.

The current thinking is that traders manipulated the LIBOR rate with a profit motivation. That may well prove to be the case. But, it is important to understand that if LIBOR can be manipulated for profit, it can be manipulated for other reasons including financial terrorism. The alleged activity began in 2007. The fact that it has taken this long to fully investigate is a serious concern.

This is not the first sign of troubles at UBS. We have already commented on the rogue trader there who loved to watch Al Jazeera. And, late last year there were two separate charges related to naked short selling, paying fines of $8 million and $12 million for two separate violations. And, to top it off, UBS misled clients about Lehman Brothers. According to Bloomberg Business Week:

Last fall, UBS paid fines of $8 million and $12 million in two cases involving indiscretions in the short sales of securities. In April, regulators ordered UBS to pay $11 million for misleading clients about the safety of debt issued by Lehman Brothers before it went bankrupt. In September, it was revealed that a London-based rogue trader cost the bank more than $2 billion.

All of this is significant because it connects many dots to the serious problems of 2008-09. While investigators continue to limit their thinking to profit-based motivation, the reality is that anything that can be done for profit is vulnerable to financial terrorism motives as well. The importance of this most recent revelation on LIBOR is to expose that even very large markets have been and remain vulnerable to manipulation. LIBOR is huge:

"Independent research has estimated that instruments with an outstanding value of approximately $360 Trillion (dollars) are indexed to bbalibor."

This is just the tip of the iceberg. The bottom line is that we can now dismiss those claims that the financial markets are too big to manipulate. Secret Weapons are out there and it's time that those charged with protecting our nation began to take notice.