Daily Archives: October 6, 2012

Tracking Libor’s Descent From Britain’s 1797 Bank Rate

The London interbank offered rate — which is set daily by asking banks what they would charge to lend to other banks — has formally existed since the 1970s, when the acronym Libor was first coined.

As a concept, however, it goes all the way back to 1797. It was known as “the bank rate,” and it referred to the one that the Bank of England would charge for an emergency loan. In effect, this rate became a barometer of market conditions, measuring the anxiety of borrowers and lenders alike.

The “bank rate” quickly became a trans-Atlantic benchmark, and by 1798, it was published in every major newspaper in Britain, the U.S. and Europe. It became the base rate for loans to farmers, homeowners and businesses around the world. The international cost of credit indirectly determined the price of flour in Baltimore and the price of slaves in New Orleans.

Setting the rate was simple during the 19th century and most of the 20th century. Britain’s biggest state-sponsored bank counted the gold in its vaults. If there was too much, the bank was sitting on unproductive gold and the rate needed to drop. If there was too little, too many ships were at sea, and the rate needed to go up. Over time, Bank of England governors (and government officials in Whitehall) discovered that the bank rate worked as an accelerator or a brake on the economy: Lower the rate to speed the economy, raise it to slow things down.

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Fed Rate

President Woodrow Wilson pushed a bill through Congress that created the Federal Reserve in 1913, freeing the U.S. from the British “bank rate.” U.S international financial supremacy emerged during World War I, allowing Americans to set “the rate,” which dictated merchants’ interest rates from China to Peru. The Federal Reserve measured its own gold reserves to set rates in the same way as the Bank of England had.

After the U.S. went off the gold standard in 1971, lenders around the world complained about the U.S. government’s tendency to push down interest rates to keep the economy booming. Lenders demanded a proxy, a mechanism that resembled the “bank rate” that the Bank of England had set from 1797 to 1913 and the Federal Reserve had set from 1913 to 1971. This prompted the creation of Libor.

Read on.

RBS Libor settlement Faces delays, deal now unlikely until late 2012/early 2013 – sources

* Deal now unlikely until late 2012/early 2013 – sources

* Regulators at different stages of investigation – sources

* Bank had hoped for settlement in early Q4 – sources

By Matt Scuffham and Steve Slater

LONDON, Oct 5 (Reuters) – Royal Bank of Scotland faces a delay in reaching a settlement over its role in the Libor interest rate rigging scandal because of difficulties agreeing a deal wi t h all the regulators involved, finance industry sources said.

The British bank is eager to draw a line under the affair and refocus attention on its recovery. The bank was partly nationalised during the financial crisis in a 45 billion pound rescue by the UK government.

Read on.

Still Debating the Merits of Sarbanes-Oxley, 10 Years Later

Law.com:

With the first presidential debate in Denver featuring a heavy focus on the economy, a debate staged on Wall Street on Wednesday examined the legacy of legislation that dramatically changed how public companies participate in U.S. capital markets: The Sarbanes-Oxley Act of 2002.

Despite its near-unanimous passage by Congress (only three people voted against it in the House of Representatives), the law has been vigorously attacked and defended for most of its decade-long history. The law’s sweeping changes to the country’s compliance regime—following the mega-meltdown accounting scandal at Enron Corporation—created the Public Company Accounting Oversight Board and required executives to vouch for the accuracy of a company’s financial statements.

SOX’s 10-year anniversary has fostered yet more occasions for discussion – with this latest one taking place at a new corporate social responsibility event called COMMIT!Forum. The debaters on stage at the iconic Wall Street locale Cipriani included the bill’s namesake, former Maryland Senator Paul Sarbanes, and John Allison, the former CEO of BB&T Corporation and new president of the Cato Institute, answering the question, “Has mandated corporate disclosure done more harm than good?”

Sen. Sarbanes opened the debate by setting the scene in late 2001, when Enron restated its financials and then filed for bankruptcy. “It turned out Enron was the canary in the mine shaft,” Sarbanes told the conference attendees. And in the months that followed, the market value of public companies across the U.S. fell by trillions of dollars, jobs were slashed, retirement savings evaporated.

“That was the challenge the Senate Banking Committee faced,” Sarbanes said.

Read on.

By the way: Mitt Romney not only proposes to repeal Dodd-Frank if he elected President but also Sarbanes-Oxley  http://bit.ly/T8dS4m

 

Judge tosses foreclosure suit by ‘living dead’ bank IndyMac

I wish that Justice Arthur Schack was duplicated in all 50 states..

(Reuters) – Something scary has been haunting a homeowner facing foreclosure in Brooklyn — a “living dead” bank that a judge compared to Dracula.

In a decision Thursday involving an apparent case of robo-signing, Kings County Supreme Court Justice Arthur Schack questioned how the failed thrift IndyMac Federal Bank could have initiated a foreclosure on a $460,000 mortgage when the bank ceased to legally exist three weeks earlier.

For IndyMac to have standing to foreclose on homeowner Mendel Meisels’ property “would be the legal equivalent of a vampire — the ‘living dead,'” Schack said.

The judge, a frequent critic of mortgage servicing abuses, also chastised the law firm that brought the foreclosure action, Fein, Such & Crane.

The firm faces possible sanctions from Schack for “engaging in frivolous conduct” by bringing the case on behalf of the defunct bank, the decision said.

Schack compared Fein Such to Dracula’s servant Renfield in the 1931 film about Bram Stoker’s vampire staring Bela Lugosi.

“[Fein Such], similar to Renfield, throughout its papers and at oral argument demonstrated its loyalty by not betraying its client and Master, the ‘living dead’ IndyMac Fed,” Schack wrote.

Derrick Hanna, a lawyer for Meisels at Hanna & Vlahakis, said defense lawyers and the courts won’t stand idly by while banks file fraudulent and forged documents supporting foreclosure cases.

“Proper documentation in compliance with current laws should be the only documents filed in court,” he said in an email. “The banks have rights, but the consumer homeowner does as well and the law protects them equally.”

Read on.

Lehman Brothers’ European and US arms reach landmark deal that covers $38bn (£23bn) of claims against each other

The administrators of the US brokerage division of Lehman and the bank’s European arm struck a deal that covers $38bn (£23bn) of claims against each other. It brings to an end almost four years of legal battles between the two sides.

“To say the agreement is very significant is to understate it,” said Tony Lomas, administrator for Lehman Brothers International Europe (LBIE), the London arm of the bank. “It has literally taken three and a half years of constant work.”

Administrators on both sides of the Atlantic have been working to liquidate and distribute Lehman’s remaining assets since the bank filed for bankruptcy in September 2008. Its decision to file was the trigger for the most tumultuous stretch of the financial crisis, in which banks in London and on Wall Street turned to taxpayers for bail-outs.

Under the deal, Lehman Brothers Inc (LBI), the US brokerage arm of the bank, will waive a $13.8bn claim it had against LBIE. Meanwhile, a $15bn claim LBIE had against its US counterpart has been cut to $7.5bn. The London arm will also receive $4bn from a property claim it had against LBI.

Read on.

Royal Bank of Scotland is under pressure from a government body to shrink its global investment arm

If only this would happen with the big banks here. Memo to US government: Pay attention to what is going on overseas by foreign government’s actions to the foreign banks.

Royal Bank of Scotland (RBS) is coming under renewed pressure to scale back its investment banking arm as it seeks to exit a costly Government insurance scheme.

I have learned that the taxpayer-backed bank is being urged to shrink its global banking and markets (GBM) division, as well as to reconsider its ownership of Citizens, the giant US retail bank.

RBS is resisting the pressure, which has emerged in recent weeks as the bank attempts to finalise its departure from the Asset Protection Scheme (APS).

The APS was set up in the aftermath of RBS’s rescue in 2008 to insure more than £300bn of toxic assets on the bank’s balance sheet.

RBS has since wound down or sold the vast majority of those loans. The insurance scheme is now worthless, since the bank will never be able to claim under it, but is costing RBS a £500m annual premium.

Executives at the bank have been asked to revisit its presence in investment banking as well as to assess whether RBS’s value would be enhanced by selling Citizens.

Read on.

FEDSPEAK | TREASURY REPORT REVEALS PERFORMANCE OF LARGEST SERVICERS: EVERYTHING IS NOW OFFICIALLY A-OK IN LOAN MOD LAND

On Friday, Treasury released the Making Home Affordable Program report, which details performancefrom the nine largest servicers participating in the Making Home Affordable (MHA) program.

OneWest followed GMAC closely at second, with a 95 percent RPC ratio. Bank of America established a 93 percent RPC ratio, followed by Homeward Residential (92 percent), which will be acquired by OcwenFinancial. Wells Fargo also had a notably high RPC ratio of 90 percent.

The report also revealed servicers’ performance when converting eligible trials into permanent modifications on or after June 1, 2010. Homeward Residential and OneWest had the highest conversion rates, with both seeing 90 percent of trials turn into permanent modifications. The report stated the average trial length is 3.5 months.

More here…