Barclays Bank Could Not Manipulate LIBOR By Itself

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Over the last two weeks, Barclays Bank has admitted that staff in 2008 (in the chaotic financial markets following the Lehman Brothers collapse) had sought to manipulate the daily fixing of LIBOR (the London Interbank Offered Rate).  LIBOR is a key set of interest rates, indicating the short-term borrowing costs on the inter-bank market of the largest and most active banks in the world.  Trillions of dollars of loans have interest rates set in relation to LIBOR, and hence even small variations in LIBOR can lead to billions of dollars of higher (or lower) profits.

The scandal is a serious one.  Barclays Bank paid a fine of 290 million British pounds (equal to $453 million), the Chairman of the Board Marcus Agius resigned, CEO Robert Diamond resigned, there have already been Parliamentary hearings, and there will be further repercussions for Barclay.  Barclays’ stock has plummeted.

But what is odd is that, so far, there do not appear to have been major implications for other major banks that participate in the LIBOR setting process.  To see this, it is important to understand the rules under which LIBOR rates are set each day.  The process is organized by the British Bankers’ Association (BBA), which provides a good description on its web site.

LIBOR is set each day by submissions from panels of major banks, with separate (but overlapping) panels of banks for each of the 10 currencies being covered.  For borrowing in US dollars, 18 banks participate.  Each submits in London, at 11:10 am local time each working day, a figure which that bank indicates would be the cost for it to borrow funds from other banks were it to do so on that day at 11:00 am.  Separate submissions are provided for each of the time periods for such borrowing, from over-night funds to twelve month funds.  The three and six month periods are probably the most common dollar LIBOR figures the market focuses on.

The BBA (or to be more precise, BBA Libor Ltd.) takes the daily submissions, examines the data for any obvious errors, excludes the top four and bottom four submissions from the 18 banks (for the US dollar rates) for each of the borrowing periods (from over-night to 12 month), takes the simple arithmetic average of the middle ten submissions for each of the borrowing periods, and then publishes this by 11:30 am.

The important point here on the question of whether Barclays alone could have manipulated these rates is that the top four as well as the bottom four submissions are excluded from the calculations of each of the LIBOR rates each day.  If the Barclays submission alone were an outlier, it would not have mattered as that submission would have been excluded from the calculation.

Hence Barclays attempt to manipulate the LIBOR market could not have succeeded unless it was in either tacit or explicit collusion with at least four other banks.  Yet while investigations continue by both the UK and US bank regulators (and probably others), the markets do not appear to have paid much attention to the possibility that other banks will be charged with colluding with Barclays in attempting to manipulate the LIBOR rates.  There are three US banks on the US dollar LIBOR panel of 18 banks:  Bank of America, JP Morgan Chase, and Citibank.  But while the price of Barclays stock has dropped 15% in the two weeks since the LIBOR manipulation charges came out, the prices of these stocks have been largely flat.  The other banks on the 18 bank panel include three others from the UK (in addition to Barclays), three from Japan, three from France, two from Switzerland, and one each from Germany, the Netherlands, and Canada.

Waiting for Medicare While a Cancerous Tumor Grows

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A startling news report tells of a New Jersey woman who waited until her 65th birthday (when she would become eligible for Medicare) before going to a hospital to treat a rapidly growing tumor in her body.  The tumor was cancerous, and had grown in size to 51 pounds by the time of the operation to remove it.  Her body weight had ballooned from her normal 120 pounds to 170 pounds while she waited until she could receive Medicare coverage.

The case illustrates why we need to make sure all Americans can have access to affordable health care insurance.  Without health insurance, the lady was unwilling to seek treatment.  The doctors said they would have treated her regardless of her insurance status in such a condition, but the hospital might still have gone after her to seek whatever compensation they could.

It would have made sense for all for her to have received an early treatment.  Not only would her own likelihood of recovery have been better, but the expense of the operation (done earlier rather than later, before the tumor had grown to 51 pounds) would have been far less.  Indeed, it would have made sense for Medicare itself to have paid for an earlier operation, if it were legally possible for it to do so.  The lady would have gained, Medicare would have gained (as it subsequently covered a far higher cost), and society would have gained.

Yet we still operate in a country where over 50 million of its citizens do not have health coverage.  Not only is this a human tragedy, but it is also financially foolish.  It leads to postponed medical care that can often cost far more than earlier intervention would have.

Romney On Obama’s Health Care Reforms: A Tax or a Penalty?

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Mitt Romney and his campaign have gone back and forth in recent days on whether the fees that would be paid under the “individual mandate” by those able to get health insurance but don’t, should be labeled a “tax” or a “penalty”.  As Governor of Massachusetts in 2006, when Romney signed into law a similar individual mandate that was central to the Massachusetts health care reforms, Romney insisted on calling the fee a penalty.  On July 2, a senior official in the Romney campaign said that the similar fee in the Obama health care plan also was a penalty.  But this then raised a fire-storm of criticism by many Republicans and others on the right, who had been arguing that with the June 28 Supreme Court decision that the fee was constitutional because it was within the authority of Congress to tax, Obama had signed into law in the health care plan a massive tax increase.  Mitt Romney then reversed course, and in an interview on July 4, said that it was a tax and not a penalty.

But the whole argument is absurd.  Whether one calls it in popular discourse a “tax” or a “penalty” is a matter of semantics.  More importantly, the fee (the neutral term I will use here) will only apply to those who are financially able to purchase health insurance, and choose not to.  This is necessary for private health insurers to be prohibited (as provided in the law) from denying coverage to individuals with pre-existing health conditions.  Without a mandate to purchase health insurance, someone could choose not to buy health insurance until they come down with some serious health condition (such as cancer or heart disease requiring an operation), and then enroll only then, on the day of their operation.  These would be free-riders, purchasing insurance only when they develop some health condition requiring expensive treatment.  It would be like insurance companies allowing people to buy fire insurance on their homes at the point when the homes are already on fire.

The fee (or tax or penalty) that would be charged would only apply to those able to buy health insurance, but then choose not to.  It would not apply, for example, to those whose lowest health care insurance option would cost over 8% of their income.  Nor would it apply to those with income below the income tax filing threshold, and there would be exemptions for religious reasons, for American Indians, for those without coverage for up to three months, and for financial hardship.  The fee that would be charged those who still choose not to purchase health insurance would then be 2.5% of household income (or $695 up to a maximum of three times this for a family, if greater).  Such a fee is low, and well less than the costs imposed on society of free-riders who believe it is better for them not to purchase health insurance until they have a major medical expense coming.

Ideally, the amount to be collected under this fee (or tax or penalty) would be zero, as everyone who can purchase health insurance, does so.  It is far from the “largest tax increase in the history of the world”, as Rush Limbaugh has labeled it (confusing the fee associated with failure to purchase health insurance when you can, with other provisions in the law).  And while there are probably some in the country who would like to be free-riders, I doubt there are many.  Personally, I know of no one who does not want to have health insurance coverage if they can get it.  The problem, rather, is the opposite, where individuals desperately want health insurance coverage, but are either denied it or are only offered expensive coverage that they cannot afford because of some medical condition.

The Obama health care reforms would make it possible for everyone to have access to affordable health care.  It is being done through private health insurance, as conservatives have long insisted.  But for this to work, without the private health insurance companies going bankrupt, the potential free-rider problem had to be resolved.  The fee that would be charged such free-riders is aimed at doing this.