The Butterfly Effect, and The $650 Trillion LIBOR Manipulation?
By: DK Matai
Jul 06, 2012
Does the flap of an electronic butterfly’s wings in London or Tokyo set off a financial tornado in New York or Zürich? We strive for predictability, which eludes us more than ever before, yet we don’t often stop to ask ourselves: Why? According to the butterfly effect, the slightest disturbance in one part of a system can trigger a chain of events that creates a hurricane in another part of the world. Sometimes people can joke, laugh and be dismissive of the butterfly effect. However, such effects are critical in shaping our thinking and our interlinked complex systems both man-made and natural. They predicate and have the capacity to modify our behavioural patterns and lifestyle almost immediately. What is becoming clearer, and what we shouldn’t ignore, is that the “inappropriate behaviour” in regard to the London Interbank Offered Rate or LIBOR manipulation by a “small number of traders” in reality has consequences far beyond the immediate concerns of those traders themselves. Traders who we have to assume were probably motivated more by their own immediate financial gain than by some grand conspiracy to disrupt the markets. Yet, this is what they may have inadvertently done!
Reputational Damage and Class Action Law Suits
If one listens to the former CEO of Barclays, Bob Diamond, at the Treasury Select Committee hearing in the British parliament, one might be forgiven for concluding that the LIBOR scandal which has involved Barclays and, which might possibly spread to engulf the entire banking sector, was but a small blip by a small team in a relatively specialised segment of the marketplace. However, the traders’ emails and text messages that were made public as part of a $450 million settlement of Barclays with US and UK regulators, suggest that interest rate swaps traders in New York and London asked Barclays employees and employees at other banks to move rates in directions that benefited their trading positions, according to the bank’s settlement with the Commodity Futures Trading Commission. Indeed the scale of the fine imposed amounted to little more than two weeks’ profit for the super-bank, which would probably do little to convince the general public that the transgression required little more than a slap on the wrist. However, Barclays is still counting the cost of its reputational damage. Class action law suits against Barclays and other banks accused of rigging LIBOR may follow in the near future.
Financial DNA: $650 Trillion Manipulation?