back to article How to screw LIBOR and alienate people

The financially illiterate arts graduates MPs who tried to question Bob Diamond last week never stood a chance of getting down to how it was possible in the first place to screw with the single most important set of numbers in finance. So if you know an MP or someone at the Financial Services Authority, pass this on to them. …

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  1. Chris Miller

    Thanks for the explanation, Dominic. My time in Financial Services (never in banking, thank $DEITY) has left me knowing what LIBOR is and how it's calculated. In my naivety, however, I'd assumed that the rates submitted by the various banks had some basis in reality; that Bank X had really (or, at least, could have) borrowed money overnight from Bank Y at the rate they'd quoted. It turns out that they could and would just make up any old rubbish to suit their needs and submit that. I wonder if any of our esteemed political leaders were aware of this?

    1. Yet Another Anonymous coward Silver badge

      They are buying and selling money - the price is the same made up number as buying and selling houses, gold, Van Gogh paintings or props from episodes of Star Trek.

      You punt what you think people will pay, the only difference here is that there are only a few sellers and they all collude on the prices - just like LCDs, DRAM, CPUs, and everything else in computers.

      1. Anonymous Coward
        Anonymous Coward

        buying and selling money

        I think the trouble with the system is that banks and Governments treat money, as a commodity in it's own right to buy and sell for profit. Where their true role should be a guardians of capital and to purely administer an efficient system where money is a means of exchange, in accordance with the physical assets in an economy as a whole.

        If you were to commoditise money as it stands today, it would be nothing more than the promise of a Government to exert labour out of existing and unborn generations of citizien workers. i.e. Debt to be paid off by future tax revenue. The way Government debt is accumulating today and when it is apparent that there is no guarantee that future generations will submit to this prior arrangement. Then whole system and the value of money will fail.

        On a personal level I will always see money as "choice". i.e. The lotto winner saying "money doesn't bring you happiness" = an idiot that had too much choice and didn't use it wisely.

  2. Anonymous Coward
    Anonymous Coward

    The curious thing about all this..

    ... is that the government then and now want lower LIBOR rates so as to make it easier for businesses and individuals to borrow and thus help in an economic recovery.

    Barclays are accused of fixing the rate so that everyone's borrowing is cheaper.

    Go figure.

    1. Anonymous Coward
      Anonymous Coward

      Re: The curious thing about all this..

      I think the point you're missing is that Barclays weren't fixing the rate for the wider good, they were doing it to mask the impact of market mistrust, which then might arguably have avoided a run against them, and kept them in business without government intervention. You might still see that as a better outcome than a part nationalisation, but actually Wanklays still required government intervention to stay afloat - excepting that it was the government of Qatar that ponied up a big chunk of the cash (plus a few walk on parts for the likes of Abu Dhabi and others). You might still say that was beneficial to the UK tax payer, but of course our agents in government would simply have minted the cash out of thin air anyway, and regardless Barclays behaviour still amounts to fraud.

      Look at it this way, if you lie materially about your income or outgoings on a mortgage application, that would be deception that could be punished under a variety of laws - and if it came to light the bank would probably reposess your house (as they would call in your debt, and other than by lying again you'd not get a new loan elsewhere). Potentially they'd report you, and you'd be prosecuted (I've seen mortgage fraud cases reported before).

      Would you support different standards of honesty for overpaid City trading twats compared to yourself? All in some greater good, of course.

      1. fatchap

        Re: The curious thing about all this..

        Isn't the analogy more like when you went to buy a car you said to the sales guy that a competitor was doing it cheaper and so convinced them to drop their sales price a bit. The fact that nobody had offered it to you cheaper is besides the point. It is not fraudulent to say that someone else is doing a better deal than they are.

        1. Anonymous Coward
          Anonymous Coward

          Re: The curious thing about all this..

          "It is not fraudulent to say that someone else is doing a better deal than they are."

          Technically it is, because the liar is telling the porky to secure a commercial benefit. That meets most dictionary definitions of fraud. As part of the normal bartering process you and I might agree that it is acceptable, and that the seller is at liberty to walk away, and will also lie back about the terms of discounts that they are able to make, on delivery promises etc etc.

          However, in the case of Barclays, the fraud was perpetuated to avoid an unwelcome outcome for bank management, and undoubtedly to secure fat bonuses for the traders, and the difference is that in your example the seller could have refused to sell at a discount, but Barclays were manipulating the basis for trillions of pounds worth of international contracts, and those who might be negatively affected would not be able to change the rules and say, "Don't like that, can we use the Dubai Interbank Offered rate instead?"

          1. fatchap

            Re: The curious thing about all this..

            Well technically they could have done. But they had to do when they agreed the deal. Caveat Emptor surely?

            Why choose to base my deal on something that relies on the honesty and integrity of those who may have a vested interest in manipulating it. It is not right if they do then manipulate it but I can hardly claim that I have no choice in doing the deal.

            1. Dominic Connor, Quant Headhunter

              Re: The curious thing about all this..

              I'm all for "caveat emptor" when a deal is fairly struck...

              But Barclays was in the position where if they took your funding away, your firm would collapse and they dressed the LIBOR swaps up as insurance to people who couldn't understand them. My *introduction" to Swaps course book is >200 pages and uses maths I did at university.

              1. BlueGreen

                Re: The curious thing about all this.. (@Dominic Connor)

                "they dressed the LIBOR swaps up as insurance to people who couldn't understand them"

                Maybe I misunderstand but as I see it:

                * I do my homework so I understand the seller's complex guff, or

                * I force the seller to explain it to me in ways I can understand, and can evaluate with my simple spreadsheet models, and that I can hold them to legally in a way that's satisfactory to me, or

                * I do neither and choose to believe the nice man so I get screwed because I'm stupid.

                Caveat emptor maintains.

                I admit there are a shocking number of people in the third group but that's an observation not an excuse.

                1. Yet Another Anonymous coward Silver badge

                  Re: The curious thing about all this.. (@Dominic Connor)

                  >>"they dressed the LIBOR swaps up as insurance to people who couldn't understand them"

                  > I force the seller to explain it to me in ways I can understand, and can evaluate with my simple spreadsheet models, and that I can hold them to legally in a way that's satisfactory to me, or

                  But in this case they sold you swaps as an insurance. eg. Buy this product and you are covered if LIBOR changes and your interest rate goes up. But the same people who sold you the insurance are able to rig the LIBOR rate.

                  It's as if the person selling you life insurance is also repairing your car's brakes

                  1. Stuart Moore

                    Re: The curious thing about all this.. (@Dominic Connor)

                    It's as if the person selling you life insurance is also repairing your car's brakes

                    Not quite - if they're selling my life insurance, it's in their interest that I don't die, so they'll do a good job.

                    This is more like the person repairing your car's breaks casually mentioning "By the way, I've just taken out life insurance on you, I win big time if you pop your clogs. There, as good as new..."

                    1. BlueGreen

                      Re: The curious thing about all this.. (@Dominic Connor)

                      @Yet Another Anonymous coward, @Stuart Moore

                      Not the same thing. Fixing libor --> heads must roll. Shafting numpties who won't perform their own due diligence is another (again: "they dressed the LIBOR swaps up as insurance to people who couldn't understand them". That's taking advantage of stupidity. Illegally warping libor denied necessary information to the buyers - totally other thing).

        2. Vic

          Re: The curious thing about all this..

          > It is not fraudulent to say that someone else is doing a better deal than they are.

          Yes it is.

          Section 2 of the Fraud Act 2006 says :

          "A person is in breach of this section if he—

          (a)dishonestly makes a false representation, and

          (b)intends, by making the representation—

          (i)to make a gain for himself or another, or

          (ii)to cause loss to another or to expose another to a risk of loss."

          Vic.

          1. fatchap

            Re: The curious thing about all this..

            I stand corrected

          2. fatchap

            Re: The curious thing about all this..

            Although thinking about it if I honestly make a false representation I am free. So if I say "I don't think this is true but if it was would you lower the price" I am not committing fraud. So if I make my Libor return and "say we know this is not the correct figure but it is close because by its very nature it is a flawed calculation" is that still fraud.

            1. Vic

              Re: The curious thing about all this..

              > we know this is not the correct figure but it is close because by its very nature it is a flawed calculation

              That would seem to be a "best-effort" approximation.

              > is that still fraud

              Probably not.

              The same section of the Fraud Act 2006 says :-

              "A representation is false if—

              (a)it is untrue or misleading, and

              (b)the person making it knows that it is, or might be, untrue or misleading."

              If the statemement, as above, is not misleading, then it would not fall under this Section.

              Vic.

            2. Dominic Connor, Quant Headhunter

              Re: The curious thing about all this..

              One key word here is "reckless", you may not have thought through the consequences of your actions, but you intended to do the thing that caused them.

              ie if I shout *FIRE !* in a crowded cinema and someone gets hurt or killed then it is my fault, even though I didn't know that person would be crushed.

              And yes there is judgement here, look at your own finances: You may pay 4% on your mortgage and 24% on your credit card, so which is the right rate the reflects the market and your credit status ?

              I could argue that since the mortgage is secured and the credit card isn't the 24% is the more accurate figure, you of course would argue it was nearer 4%

      2. Anonymous Coward 101
        Thumb Up

        Re: The curious thing about all this..

        'I think the point you're missing is that Barclays weren't fixing the rate for the wider good, they were doing it to mask the impact of market mistrust, which then might arguably have avoided a run against them, and kept them in business without government intervention.'

        If Barclays suffered a run as a result of telling the truth about it's borrowing costs, we would all be much poorer as a result. Such a run would dwarf the Northern Rock run.

        If it really were the case that Barclays lies prevented a run (and that is hardly proven), then I am in favour of the lies.

        This will horrify the saints on these forums, but I believe self serving lies that happen also to prevent catastrophes are good lies.

        1. Anonymous Coward
          Anonymous Coward

          Re: The curious thing about all this..

          "This will horrify the saints on these forums, but I believe self serving lies that happen also to prevent catastrophes are good lies."

          Looking at the mushroom cloud that is still growing over the City, I have to say that I'm not sure that catastrophe was avoided. If Barclays hadn't been doing this, then they'd have needed to tap the government for funding, as many other banks did, but most have since paid it back with interest - job done, move on. And those loans (as opposed to equity investments) were rather profitable for the taxpayer, because the money was just magicked up. So you ask me for a fiver to tide you over, I print a new fiver, hand it to you, you pay me back six quid, and I then throw away the fiver and keep the quid.

          Now we can expect a vast volume of expensive court cases round the world, and the reputation of the City has taken a bigger knock than the financial crisis itself has delivered, because that was largely simple, everyday incompetence, but this is systematically dishonest. I don't see that the outcome has been good for the City (which generates a big chunk of our overseas trade), or for the taxpayer. Don't forget that Barclays weren't the only people involved - merely the first named. There's plenty of mileage in this yet.

    2. Anonymous Coward
      Anonymous Coward

      Re: The curious thing about all this..

      Just because the government *want* something though, it doesn't mean that people should be excused for breaking laws that coincide with the government's desire.

      cf: Key figures might really like to see many NotW staff dead in a ditch, but they wouldn't let someone off for the murder if they were caught red handed.

      The government and the law courts are two separate institutions.

  3. Andy 18
    Thumb Up

    Interesting

    Enjoyed that - thanks.

    Now could you explain why buying corporate debt is better than buying back national debt (as far as QE is concerned).

    1. I'm Brian and so's my wife

      Re: Interesting

      I would imagine that one aspect would be to support businesses so that they

      i) Survive

      Leads to retention of staff - greater tax receipts from employees + no benefits paid out

      ii) Prosper

      Leads to greater corporate tax receipts + possibility of hiring new staff (tax receipts, people coming off benefits).

      Of course, that's the theoretical ideal: in reality, YMMV...

      1. Dominic Connor, Quant Headhunter

        Re: Interesting

        The problem is *which* firms to support ?

        The government does not have the competence and the banks do not have the will.

        1. I'm Brian and so's my wife
          Coat

          Re: Interesting

          I beg to differ - for example there's...

          um...

          ah... I see.

        2. Yet Another Anonymous coward Silver badge

          Re: Interesting

          >The problem is *which* firms to support ?

          1, Banks - have to look after a chap. Old friends and everything

          2, Defense companies - don't want to look weak in the tabloids. And they do a good line in non-execs when you retire.

          3, Anything in a marginal constituency - at least tide them over till after the next election

    2. Tim Worstal

      Re: Interesting

      One reason is that the BoE seems to own about half of the national debt at present anyway.....

      1. Destroy All Monsters Silver badge
        Devil

        Re: Interesting

        Previously, when the Moon was a green, lush planet teeming with life and intellectual activity, the Lunar Central Bank was situated exactly where Tycho Crater is now.

        Then the "The General Theory of Employment, Interest and Mooney" went to the printers...

  4. Richard IV

    Getting a basis in reality

    How difficult would it be to have a provable rate from the day before in conjunction with the estimates for today?

    Technically feasible but politically impossible would be my guess.

  5. Andy Fletcher

    It would be conjecture...but

    Is it possible to get an estimate of how much the bank stand to gain vs how much some third party (that'd be the UK population for me) stands to lose? If I read it right, it sounds to me like the bank are prepared to commit an act that makes them say £10 when it actually costs someone else £100, or do they simply make what someone else loses?

    1. Chris Miller

      Re: It would be conjecture...but

      Joe public isn't really directly affected by LIBOR rate fixing. We are, after all, talking about a few basis points (from 3.5% to 3.55%, say) rather than a doubling - which latter really could affect your mortgage repayment. It's more analogous to the old trick of stealing a penny from each of 10 million accounts to make £100,000.

      Like most derivative trading (as opposed to real investment), betting on movements in the LIBOR is a zero-sum game. If you've made a million profit, someone else must have taken an equivalent loss.

      1. Dominic Connor, Quant Headhunter

        Re: It would be conjecture...but

        Sorry @Chris Miller, that is fundamentally wrong.

        Barclays and some other banks used their position as lenders in a tough market to coerce small-medium firms to buy swaps, basically a form of insurance against interest rate moves. Unlike insurance a swap can cost you *far* more than the premium if it goes against you.

        If you work for firm whose swap contract with Barclays was based on LIBOR, it is entirely possible that it is under grave financial stress because of a rate that Barclays has admitted screwing with.

        As you say this does not directly affect mortgage rates much, but it can affect whether you have a job to pay your mortgage.

        Lastly, derivative trading is not a zero-sum game. On average it increases the amount of wealth in the economy, a fact that the actions of Barclays et al has obscured.

        1. Tom 7

          Re: It would be conjecture...but

          "Derivative trading is not a zero-sum game" It does increase wealth but only in the same way QE creates wealth.

          You can tell that by the way we are all so much better off right now.

          What really annoys me about this 'ere modern accounting is its very easily modelled on computer (shit even this laptop of mine can do over 1,000,000,000 floating point calculations a second so money is a piece of piss) but when the models show the truth its the model that's somehow wrong not the actualite.

          Some say economics is an understanding of the human condition. Only if the human condition is ignorance and malicious greed. All I can say is its not the science it could so easily be.

          1. Dominic Connor, Quant Headhunter

            Re: It would be conjecture...but

            Yes, Tom we *are* better off partly due to derivatives trading. Some of it has gone badly, but the net effect is still positive.

            And no, it is not easily modelled on a computer, it is very very hard and whole floor of banks consist solely of computers trying to calculate the price and risk of things.

            1. Tom 7

              Re: It would be conjecture...but

              The net effect is still positive? Is this result from the computers whiring away in the banks or from reality?

              Derivatives et all ride on the real wealth generating economy and every time they are given a free hand they grow to the point where their parasitising brings that real economy to its knees. Its only by regulation that they were kept at a level where they don't kill the economy which gives them many years of statistical 'proof' that they contribute to wealth.

              If you remove the imaginary fiat money that derivatives and the banks et all supposedly generated from economic figures and look at the economy these things are supposed to stimulate the picture is not good for them.

              I'm glad the economy is so much better than it was when I was a child and my father could work reasonable hours to keep a wife and kids comfortably off whereas now I have the luxury both partners working their arses to service a huge debt that, when looked at closely would buy 10 times the goodies that supposedly improve my wealth over that of my father.

            2. TheOtherHobbes

              Re: It would be conjecture...but

              "Yes, Tom we *are* better off partly due to derivatives trading."

              You may be personally. Most people aren't.

              Perhaps you missed that minor thing that happened in 2008. You know, the one caused by casino gambling which the rest of us are still picking up the tab for - because somehow we're responsible for the gambling debts of the inconvenienced ultra-rich?

              I think you need to get your head out of your arse and spend some time in the real world - that place where solvent businesses can't get credit because banks won't lend to them, where sovereign democracies are being bullied by whacko nutjobs from the IMF and the ECB who think that depressing an economy will somehow make it grow, and where disposable income is shrinking rapidly for most people.

              We're *better off* because of this? What colour is the sky on the planet you live on?

              What we should have done was taken Iceland's lead, nuked the unpayable settlements, and thrown the architects of chaos in jail.

              Luckily it seems that after LIBOR - and you and I know LIBOR was never the only game in town - jail time may happen anyway.

              And probably nuking too. The banks are only nominally solvent because of QE. If there's another loss of confidence - and I can't begin to imagine why there might be - we can look forward to fun times for all.

              And all on the back of derivatives, CFDs, CDSs, and other speculative 'instruments' that are almost totally divorced from real economic activity and real wealth creation.

              1. Anonymous Coward
                Anonymous Coward

                Re: It would be conjecture...but

                So many incorrect presumptions in one post....but I'll just take up a single point:

                "What we should have done was taken Iceland's lead, nuked the unpayable settlements, and thrown the architects of chaos in jail."

                Iceland was bullied by the UK in particular, leaving Iceland in penury, whilst bailing out rich British twats who ignored the exemplar of BCCI and invested their loot wherever they could see an extra fraction of a percent of return offered by foreign banks about whom they knew nothing. The whole affair is a stain on the UK's reputation.

                But more significantly, you might have noticed the attempt to pin some blame on the Tchenguiz brothers, resulting in dawn raids by the SFO, and an investigation that blew up in the SFO's face. Fairly early on in that episode, before it came to court, a politically connected contact of mine made the claim that both Icelandic and UK authorities knew that Technguiz was a mere bit part player in the Icelandic banking collapse, and that the real architects were far more important figures in the UK perhaps including the FSA and BoE, and in particular in the Icelandic political establishment. if you look at those jailed so far in Iceland, we're talking about low level individuals, not key decision makers. To be fair the former prime minister is also on trial, but do you think he did it alone?

                Tchenguiz was allegedly being pursued because it was expected that he could be villified, and because neither the UK or Icelandic politicians and bureaucrats were too worried if he went down, whereas their mates were going to be protected. You can decide whether you want to believe that, but isn't if funny that nobody from the heart of the City is on a trial, but a famous foreigner with some tangential involvement finds themselves in the dock? And the attempt to pin something on the older Tchenguiz brother left the SFO with a judge labelling them with the term "sheer incompetence".

                Curious as well that RBS did exactly the same as Kaupthing, we actually had to bail them out with UK taxpayers money, but yet we haven't prosecuted a soul. Another things that makes you proud to be British, eh?

              2. Anonymous Coward
                Anonymous Coward

                Re: It would be conjecture...but

                Derivatives do provide a benefit. Without them it is extremely difficult to manage and reassign/transfer risk. Misuse is a very big issue but we'd certainly be pretty screwed without them. How are you going to get a fixed rate loan when LIBOR is floating unless you can trade a swap? How are you going to ensure against future moves in exchange rates or crop prices without futures and forwards? Would you fancy being a farmer and producing your crop for an unknown price vs a hedge-able amount?

        2. Chris Miller

          Re: It would be conjecture...but

          I don't agree it's fundamentally wrong. 99.99% of the population (which is what the OP was asking about) haven't taken out interest rate swaps, and so aren't affected. And if your firm is going bust because of an interest rate swap, they shouldn't have taken out the swap - Barclays fiddling the rate may be the last straw, but the putative firm would still be in difficulties without it. (Swaps have been mis-sold by people on commission - who'd have guessed?)

          And derivative trading is essentially zero-sum - for every position taken, someone else is taking the opposite stance (though I'm sure there are some exceptions) - this is completely different from buying Apple stock in 1980, since when you would have made a 22,000% profit, but no-one else can point to a balancing loss. The fact that some middle-men (including traders) can make a lot of money by creaming a bit (or a lot) off the top doesn't affect that - and I agree that this increases the wealth of the economy, and may even increase tax take a bit.

      2. jonathanb Silver badge

        Re: It would be conjecture...but

        Barclays had written lots of interest rate swap contracts. Higher interest rates meant they had to pay out more money on these contracts. The total value of the LIBOR swap market was around $300tn, and Barclays is one of the largest players in that market. Barclays weren't the only bank involved in this scam, there were other major players who also stood to benefit from it.

        That brings us to the SME swaps scandal, where lots of small businesses were sold unsuitable swap contracts. For example the contracts went on for a lot longer than the duration of the loan they were insuring against. As a result of the LIBOR scandal these businesses had to pay out a lot more money to Barclays and other banks than they should have done, and quite a few went bust or had to downsize as a result, leading to redundancies and unemployment. That does affect Joe Public directly.

        Turning to compensation. The entire GDP of the UK is $2.2tn, so 0.7% of the swap market paid as compensation would wipe that out completely.

  6. Dominic Connor, Quant Headhunter

    Getting a basis in reality

    @RichardIV : Many numbers are found by looking directly at transactions, listed share prices, the FTSA aggregate etc. If there were a central counterparty (as exists for shares and option) through which interbank borrowing was conducted scooping the numbers would be trivial.

    What political issue do you see ?

    The financial issue is risk, if all interbank borrowing went through one outfit, then if that went titsup it would by necessity be a bigger mess than any plausible set of bank failures.

    It is possible to directly tap into bank systems to see what they borrow and lend, this is not *very* hard, I have personally directed a project that does something like this and would be happy to do it again for a fixed price that is in the low millions of quid because I did it before and it came in on budget (yes ,really).

    But I won't get it, partly because I am not a member of the cartel that supplies government IT and frankly there are others who could do it, however the set of outfits I'd trust to do it and those with a chance of getting the bid do not intersect.

    (9 months, 2 million quid including passing both bank and government security standard, and a bunch of analytics)

    Another reason it won't happen is that of course the sucking system would have to "believe" the numbers fed to it by the bank. That's easy to screw with. However it would be tough to do it in a way that would not leave traces if you went and looked. The fact that an audit trail existed would be a useful but incomplete deterrent).

    1. Richard IV

      Re: Getting a basis in reality

      "the set of outfits I'd trust to do it and those with a chance of getting the bid do not intersect."

      "the sucking system would have to "believe" the numbers fed to it by the bank"

      ^ these, plus the political momentum to get the politicians through the banks' making out that it would be far too expensive and complicated and would doom the economy(*)

      (*) Stop them doing quite nicely out of such information asymmetry.

  7. PerlyKing
    Headmaster

    Nice picture

    Nice picture of the Bank underground station sign - but why has it got the Mansion House in the background? Wouldn't it be more relevant to use a picture taken from the opposite direction with the Bank of England in it?

  8. Stephen Channell
    Meh

    At the height of the battle of Britain, parliament debated at length the legality of bombing munitions factories because they were private property and not covered by the declaration of war.. the world had not woken up to total-war, and some MP’s were distracted by the details.

    Fast forward seventy years and the credit crunch threatened financial Armageddon more serious than “simply” the interbank lending market, demanding unprecedented coordinated action to flood the market with liquidity and print money. While the Bank of England continues to provide unlimited “free money” to banks, LIBOR pretty much a notional measure. Fretting over LIBOR in total-economics is like fretting over property in total-war.

    At the height of the crisis LIBOR rates were so high relative to bond-futures that the money-markets froze and yield-curves (with LIBOR on the short end and futures on the long) pointed negative breaking financial models for every wholesale financial product including equities. In the circumstances it’s incredulous that politicians did not lean on Bankers (just as incredulous as Jeremy Hunt being the first to use an advisor as a back-channel), but if you’re going to mention a short rope at Blackfriars, you’re going to use a clean-line.

  9. Barely registers
    Flame

    Getting to the truth

    There are records of what Bank X lent to Bank Y and the rate of that loan.

    There are records of what Bank X and Bank Y reported to the LIBOR committee, and the people that made those reports.

    It is therefore a straightforward job to identify rogue reports, given access to the data.

    It is therefore a straightforward job to identify those banks and individuals that reported rogue rates.

    In the interests of national security (it's been used as justification for much less) demand those records. Identify, charge and prosecute. Get to work.

    1. Dominic Connor, Quant Headhunter

      Re: Getting to the truth

      >There are records of what Bank X lent to Bank Y and the rate of that loan.

      Yes, but you'd have to filter them for ones that matched the maturities used in LIBOR, fiddly but not impossible.

      >There are records of what Bank X and Bank Y reported to the LIBOR committee, and the people that made >those reports.

      I'd bet money that the records who submitted are incomplete and in any case they were being asked to make a judgement, not state a fact.

      >It is therefore a straightforward job to identify rogue reports, given access to the data.

      It is not straightforward, having some knowledge of these systems I reckon it would be a couple of man years per bank.

      >It is therefore a straightforward job to identify those banks and individuals that reported rogue rates.

      Sadly it is tough.

      Firstly you'd have to show that *this* person typed *that*, the way the systems are set up makes that hard and may be impossible. IDing the bank is easier.

      >In the interests of national security (it's been used as justification for much less) demand those records. >Identify, charge and prosecute. Get to work.

      It's scary that that national security legislation is now getting used for pretty much everything from Iceland's financial issues (yes really) to who has put the wrong thing in their recycling bin.

      As it happens, you don't need it anyway, the FSA has the powers to do this, but you don't make incompetent people more useful by giving them more authority.

      To get as far as can be done, I'd out the number at 4-5 million per bank, including forensic costs and some good statisticians and DBAs, so somewhere between 75-100 million.

      The stats I'd start with are negative correlation between their actual borrowing costs and quotes and then short term positive correlations pairwise between banks. I'd be 99% confident of identifying some banks who did the wrong thing, 90% sure of identifying some people who input numbers that were wrong, but <20% of getting evidence that could be used in court.

      The only 100% I have is that >50% of the people responsible left no footprint on any system.

      A criminal trial would be horribly expensive,, I'd guess 5 million per person tried with at best 50% chance of conviction.

      You might argue with the 50%, it's just a number, but what probability of conviction would you choose at £5 million per head ?

      Is it worth £150 million to convict (say) 5 rogue traders for acts that would get them 1-2 years in prison ?

      That's 15-20 million per year, maybe with political pressure on the judges you might get 4 years, still a lot of money.

      Put it another way...

      How much would you be prepared to take out of spending on things you like per year of imprisonment for the guilty ?

      Be very clear that the taxpayer will pay for this, *you* will pay for this and the money doesn't just appear.

      1. Vic

        Re: Getting to the truth

        > I'd be 99% confident of identifying some banks who did the wrong thing

        Isn't that a "Murder on the Orient Experss" moment? "They all did it".

        > Is it worth £150 million to convict (say) 5 rogue traders

        Yes.

        The value of such convictions is not in getting some sort of revenge against those traders, it is to discourage others from following in their footsteps.

        Vic.

        1. dave 158

          Re: Getting to the truth

          "The value of such convictions is not in getting some sort of revenge against those traders, it is to discourage others from following in their footsteps."

          mmmm, dunno about that, it only seems to discourage people until a new cycle of grads get to the required position to execute their "brand new scheme" to fleece someone. Drexel, Leeson, etc - still get insider trading, still have boiler rooms.

          short term-ism and greed is the killer - if party a can screw party b for 1mm, get a bonus and be gone before the contracts up, party a's already got their pen out. Merrill and Melvin would be spinning.

          Cheers

          D

          1. Dominic Connor, Quant Headhunter

            Re: Getting to the truth

            I'm intrigued by the idea that short-termism and greed are somehow seen as in any way unique to banking ?

            I've worked in several industries and seen it there as well.

            The phone hacking scandal in the media is a clear example of greed and short termism.

            The pitiful peasant activity that politicians insist on calling "UK manufacturing" was destroyed by the unions being greedy and short termist in competition with managers who were just the same, and when car plants, mines, the phone system, electricity and the railways were run by the state we saw short termism by politicians to a terrible degree. Partial privatisation has often meant two greed/termism process both screwing with the outfit at the same time.

            Anyone who has ever had any financial dealings with local government will see short termism, corruption and greed in a manner that would shock most bankers.

            Last year, I attended a film financing round table and hardened bankers, some of whom have been in the news for their "activities" repeatedly queried what they were being told because film financing, it's accounting practices, naked venality and corruption was so extreme that they did not believe it.

            Earlier this year I was at some press drinks, talking to a PR manager about some banking IT when she said "here's some pretty girls", pointing at her juniors, with the clear expectation that I wasn't going to talk to her much because she was (I guess) early 30s and thus past it. Before you ask, no that's not because I have a reputation, in fact the woman did not have a clue who I was.

      2. AdamWill

        Re: Getting to the truth

        "Be very clear that the taxpayer will pay for this, *you* will pay for this and the money doesn't just appear."

        Oh, the irony. Yep, that's right - money only 'just appears' for banks, not for anything else...

    2. Tim Worstal

      Re: Getting to the truth

      It's public information too. OIC. Those are the rates at which deals actually took place.

      So, look at the spread between Libor and OIC. Declining from 2000 to 2006/7, then blows out in the crash.

      This is actually well known (in certain circles I mean). Available on a Bloomberg screen near you, certainly.

  10. Schultz

    Market fixing

    This is just another step towards the grand realization, that bankers are greedy capitalists (guess why they were drawn to the financial industries). But while they robbed their clients, they managed to keep their compensation (= bonuses) sufficiently detached from the ill-gotten gains (= earnings for the bank) that it'll be the stockholders who pay the penalty.

  11. Ian Johnston Silver badge
    Holmes

    They're watching you - but how?

    " Yanks call them cellphones for good reason and it’s really not hard to spot that two SIMs have a high location correlation and that traders whom you claim not to know or have met are often in the same bar at the same time as you."

    How, exactly, would a bank obtain location data for two SIMS withot subsequently starring in Leveson II: The Finance Houses and probably the Old Bailey too?

    1. Trygve

      Re: They're watching you - but how?

      Presumably by snitching you to the FSA, City of London Police or SOCA, who can get all that info from the phone companies at the drop of an email .

      1. jonathanb Silver badge

        Re: They're watching you - but how?

        If the authorities want to know the location data for 07700 900 123, they can get that easily enough.

        Getting location data for a pay as you go phone that has a strong correlation to the location data of a bank issued phone, and probably isn't on the same network, isn't so easy, if that is all the information you have to work with. And this is back in 2007-2008, and they probably don't keep the data for that long unless they were asked to at the time.

      2. Ian Johnston Silver badge
        Holmes

        Re: They're watching you - but how?

        Oh right, so he's saying that he only considers head hunting people smart enough to cover their tracks when they do something illegal, is he?

        Having two phones doesn't seem particularly suspicious to me. I don't, by choice, have a work mobile, but many of my colleagues do and they all have personal mobiles as well, just as I have work and private email addresses.

  12. IHateWearingATie
    Thumb Up

    Naughty Barclays...

    A couple of posters are mixing the fixing of LIBOR during the financial crunch with the attempted fixing they did pre-crunch to make a profit. The argument (which I don't scubscribe to incidentally) that the LIBOR fixing during the crunch was a good thing doesn't apply to most of their nefarious actions.

    Thanks for the article Dominic - I knew what LIBOR was and vaguely how it was calculated, but didn't know the subtle details you set out. The thing you miss in your defence of derivates trading in your comments is that (certainly in theory) the positive effect should be in the overall placing of the costs of movements in price where they are lest economically damaging.

    Misselling notwithstanding, one of the really important uses (at a macro economic level) of derivatives is to give companies certainty of a cost, even if that cost ends up being more than it would have been if they had taken the risk on that cost. Unfortunately this has been somewhat lost in the increasing complexity of the financial markets, and the move of financial transactions being divorced from their groundings in the real economy (or more simply, the move from completing a financial transaction because someone needs it, to bascially gambling).

  13. John I'm only dancing

    Truth

    Is the truth and finance mutually exclusive. The financial genius's in Government at present are still peddling the lie that the UK's deficit was unsustainable to allow them to make their savage cuts. The reality is, the UK Government budget deficit under Labour fell as a percentage of GDP by FOUR percentage points from 1997 to 2008. It was only the Banking sector's greed which caused it to rise subsequently through QE.

    Source: International Monetary Fund... For a brief summary see here: http://www.scoop.it/t/deficit-myth

    1. Anonymous Coward
      Anonymous Coward

      Re: Truth

      "Is the truth and finance mutually exclusive"

      I couldn't say, but logic and your argument clearly are. Lets take your figures as gospel - what does the sustainability of the deficit have to do with a modest proportionate change in the rate at which increases? The sustainability refers to the total public sector debt value, not the rate of increase. You've also assumed that QE is real money - it isn't, and has nothing to do with the budget or trade deficits.

      SInce you want some truth, fact of the matter is that over the past ten years or so, idiot politicians have saddled the UK taxpayer with an extra £500billion of debt, largely on everyday public sector spending. And the current shower are still spending around eighteen billion pounds a month more than they get in taxes, and that's cash, not magicked up QE.

  14. Eduard Coli
    Trollface

    Welcome to 2012, where the banks rob you...

    Obfuscation aside, how can the little guy not take a beating in this as the banks push their "extra" interest rate costs from borrowing onto his mortgage, etc.

  15. Dan Paul
    Mushroom

    Arcane Economics & All Derviatives Trading should be banned outright

    The fact remains that if no one can ever truly understand or predict the arcane economics of this situation then their use should be banned and the practice of derivative trading regulated just like gambling is since they are the same thing.

    As I understand this, it is not so far away from the same kind of derivative trading crap that caused the housing market to crash across the USA. Has no one learned any lessons from the past 10 years?

    If the banks themselves cannot begin to understand what it is that is being traded, then they are already negligent. If they trade in derivatives then they should do so at THEIR OWN RISK, NOT OURS!!!!!!!

    That negligence needs to be punished severely. A slow painful Death is not enough punishment for these people.

    1. Stephen Channell
      Unhappy

      Re: Arcane Economics & All Derviatives Trading should be banned outright

      Economics is called “the dismal science” because understanding is incomplete and predictions come with huge margins for error driven by human behaviour.. if you used understanding/prediction to ban derivatives, you’d ban a lot more as well and damage the real economy.

      Derivatives were first created to finance mid-west farming; Forex-options for global trade; interest-rate swaps for price stability and CDO’s for pension-funds facing a drought of AAA debt to invest in. The evil is not derivatives or bankers especially, but the asset-bubbles fuelled by greed, gullible fools; demands for double-digit grown with flat inflation and quite a few spivs… but those spivs are mostly not bankers.

      1. Mark 65

        Re: Arcane Economics & All Derviatives Trading should be banned outright

        @Stephen: Indeed, ironically, a lot of the pressure on banks for double-digit growth, dividends etc that led to reckless behaviour comes from shareholders - the very people totally reamed but the result of their desires. In fact most people desire healthy pension returns to fuel their retirement. The companies that invest that money are under pressure to deliver it or lose FUM so these big institutions place pressure on the major listed companies, of which banks are some, to continually deliver these returns (and dividend growth) and the reckless behaviour begins.

        It's easy to point the fingers at big bonus "earning" bankers but where does the greed really sit? I'd argue it is within all of us collectively as a society but it's just easier to blame the guy with the big pay packet than look in the mirror and say "I played my part".

        The GFC was home loan driven yet the public weren't to blame. No, it was the bank's fault for lending me the money. They lent me too much and I could never pay it back. There is ample evidence of fraudulent applications and bad behaviour all round but it makes me sick when I hear people blame others instead of stepping up and admitting they got f*cking greedy and wanted something they couldn't afford and were willing to do whatever it took because "shit, we thought it would be worth more in a year's time".

  16. Anonymous Coward
    Anonymous Coward

    Wrong in the first sentence, and never got any more accurate, but entertaining.

    While a conversation in a coffee shop of almost unbelievable coincidence (that I would have thought the realm of the CIA had I not been camping with the bloke,) about vodafone, and a reluctant Barcap was quite entertaining, all the bankers in the world or at least London, seem to be missing a few facts, and I'm not just talking about missing a few facts because you're typical headset wearing, pinstripe endowed, slightly overweight, arrogant, out for yourself Afrikaans speaking Investment banker, I'm talking about being so far into your own publicity, that you believe you're a master of the universe due to the fact you've reached the top of "help everyone but everyone but yourself" territory.

    HOWEVER

    The reality is that previous governments have all been deselected because they failed, and the government preferred someone else, because of how they come across. In this instance, they come across as "My friends and I from Eton have been raised to believe it's your job to do what we tell you, not the other way round. This is why we f*ck consultant surgeons who get angry about us using his hospital for, well anything we decide really. We would rather destroy a man for not showing us Etonites the god given respect we demand, than keep his hospital open."

    So, with that in mind, Bob Diamond and friends, David Cameron has sat down with Gideon, and they've said. "Tony and Gordon may have put up with these f*ckers because they thought the country would be worse off without them, and maybe it's true, but that's just throwing in the hand, and I'm simply not going to stand by and let these people think they can tell me what to do. They do what I tell them, not vice versa. I want them to lend money, they won't. I destroy their life and ensure they don't work again. I don't care what they think. I went to Eton. They do what _I_ tell _THEM_. I don't care how much money they earn. Alastair Darling proved what a ponce he is, after the collapse of Lehmans when they demanded help and he gave it to them. What he should have done, is introduce a retrospective "CEO tax" that told them who was in charge. "

    So, bankers, your call. Expect to see more lives destroyed unless your help dig out of recession, instead of just profiting from it. I thought you were all supposed to be clever, how come your haven't noticed the trumped up charges?

  17. Anonymous Coward
    Anonymous Coward

    Most people are missing the point

    This is not a matter that is open to finely finessed arguments. Barclays have already admitted to the US and UK financial authorities that LIBOR rates were being manipulated. Having copped a plea and paid a fine in order to save their banking license they are now singing like canaries to the US Securities and Exchange Commission. Any trader who thinks that they are going to be protected because it is difficult to prove who was adversely effected by each particular LIBOR rate fix are deluded. Their employers will only be too happy to provide the authorities with any evidence necessary to fit them up. Moreover, criminal prosecutions are really only a minor part of the whole crisis.The really big deal is the fact that the LIBOR benchmarks used in contracts worth trillions of dollars are now open to legal challenge. This means that the parties to these agreements may ask the courts to declare them void . They may not even have to prove direct loss from the actual LIBOR rate set itself to get such a judgement. It may simply be enough to establish that the contracts were signed on the basis of unsound LIBOR information. Once the contracts are voided then the parties will have the opportunity to seek sseparate damages from the banks involved in the LIBOR fixing for the pontential financial losses arising from the unravelling of each deal. The Banks are likely to get very poor while the lawyers grow very rich.

  18. Dominic Connor, Quant Headhunter

    If we banned things we didn't understand...

    There seems to be a bit of peasant pitchforks going on here about "banning things *we* don't understand."

    Would someone who actually does a real job like to explain to me what they do understand ?

    We don't really understand how anaesthetics work.

    You *cannot* predict with reliability what any non-trivial program will do.

    Ask any decent lawyer about anything outside their very specific specialty and they get all vague.

    Climate change people use models that they know don't work, with the majority trusting the models that the modellers don't trust.

    Dog breeding: Think about the number of different types of dog, most of which are less than 500 years apart from other breeds, no way is that mutation, so where did all those types come from ?

    Why do you piss more water than you drink ?

    How does the keyboard on which I'm typing remember that I've pressed Num Lock ?

    Who here has any formal education in solid state electronics that even goes as far as holes ?

    Let's not kid ourselves.

    We stopped understanding what we do, even in the things we get paid to understand roughly at about the time some bastard stabbed Caesar.

    You want to only use things you understand ?

    Fine, explain to me how the crystal structure of flint makes for better stone knives than granite and the job of caveman is yours.

    1. AdamWill

      Re: If we banned things we didn't understand...

      That's fine, sure. I don't think anything should be banned just _because_'we' don't understand it. What I think is problematic is the _opposite_ position, which is heard far too often from those in the financial industry: "you can't regulate us because you don't understand us".

      I think that's just as untrue. For a long time the argument was 'we understand what we're doing and you don't, so don't try and make sure it's being done properly, don't worry, we'll just look after it, and everyone will keep making money forever'. Now the mantra seems to be 'You don't understand the giant mess we made of everything, we do, so butt out and let us fix it'. That's highly...unconvincing. I mean, even other industries don't act the same way: when they get caught with their pants comprehensively around their ankles, they usually try and take some kind of action to try and convince the rest of the world that they're really looking after things. They recognize that the only way to avoid external regulation is to do a convincing job of admitting their mistakes, doing a suitably bloody public execution job on a few scapegoats, and doing some effective self-regulation.

      The financial services industry seems to consider itself above this, though. Who's come out and said 'well, yeah, apparently we can't just trust each other to not screw things up all the time, we're sorry we comprehensively fucked over the world's economy, we'll fire a representative sample of bastards, and here's exactly what we're going to do in a thorough and transparent way to ensure it doesn't happen again'? Bloody no-one, that's who. You all have come out and more or less said 'The best way to make sure this never happens again is to give us lots of money and then go away and let us get back to doing exactly the same thing again'. That's not _exactly_ a recipe for confidence.

      So no: the rest of the world doesn't need to understand mathematically precisely how derivatives work in order to recognize that the extremely lightly regulated trade in derivatives turned out to be an epic fail, and the future needs to involve some kind of rather more rigorous oversight of said activity. Sorry, the 'we know what we're doing, you don't, please go away' handwave isn't going to get through any more.

      1. Anonymous Coward
        Anonymous Coward

        Re: If we banned things we didn't understand...@AdamWill

        "The financial services industry seems to consider itself above this, though. Who's come out and said 'well, yeah, apparently we can't just trust each other to not screw things up all the time, we're sorry we comprehensively fucked over the world's economy,... "

        If I might correct you. The fundamental financial problem that the world has is excessive borrowing by people/companies/countries/banks that they now cannot repay. So lending money to hillbillies in the US brought on a mortgage crisis that shook their banks down. Governments in the "developed" world have been spending trillions on tick, that they are increasingly struggling to service or rollover their debts (you know, all of Southern Europe, and Ireland). Property investors across much of Europe bid up prices in their market, invested in un-needed assets at OTT prices, and now can't service or repay their debts. Individuals maxed out on credit for that new car/big telly/holiday etc. Private equity companies loaded up their acquisitoons with laughable levels of debt that could only be sustained whilst the good times rolled, and that's now all gone bad (big part of RBS' problems, this last one).

        Now, you may blame the banks, but who borrowed the f***ing money? Are spendthrift governments innocent? Are property speculators victims? Are housebuyers entitled to guaranteed debt that they can't service? Were private equity companies poor helpless orphans? The lenders are culpable to a big degree, but so are the borrowers, and regulators. And all we're talking about is regulating the lenders' leverage - derivatives play a modest role in all of this, and in the grand scheme are more of a canary in the mine than anything else.

        Remember "an end to boom and bust" and "the Goldilocks economy", and all that crap? Why were interest rates so low that people were encouraged to believe that mountains of debt weren't a problem? I think you'll find that trail stops with the respective central banks (ie regulators and politicians).

        1. AdamWill
          Stop

          Re: If we banned things we didn't understand...@AdamWill

          The problem wasn't really the mortgages, though. It was the fact that the process of bundling them up and selling them on was implemented in such a way that the assessment of the risk attached to them got screwed up.

          From the perspective of the _overall economy_, it's not necessarily a problem to sell subprime mortgages to people who are barely on the borderline of being able to pay for them, _as long as the risk is correctly assessed_ by whoever winds up holding the mortgage. As long as whoever's holding the mortgage is aware that there's a high risk it will be defaulted upon, and takes appropriate steps, everything can work out fine, or at least not as terribly as it did. (It's not a strict parallel, but take the payday loan industry, which more or less specializes in loaning money to people who have a relatively high risk of not being able to pay it back; they've managed to make that one work out pretty well for years, because they're quite aware of the risks involved and take appropriate steps to handle them).

          It precisely was the unregulated trade in derivatives which led to the risk attached to the mortgages being wrongly assessed, and it's that failure rather more than the high level of default itself which caused the problem, or at least made it far far worse than it would otherwise have been. Without the derivatives, maybe a few organizations would have made some losses that they would have been prepared for, as they would have understood the risks attached to the mortgages and planned accordingly. With the mortgages being bundled up and sold basically as HAPPY FUN MONEY MAKING MACHINES to any financial organization that was interested, things went much much more wrong. If the risk had been accurately assessed, then the organizations who bought up the bundles wouldn't have bought them at all, or would have bought far fewer: the risk assessment is the key mechanism which ultimately ensures that too many risky mortgages aren't offered, or to put it another way, that only as many are offered as the industry can actually afford to risk.

          1. Anonymous Coward
            Anonymous Coward

            Re: If we banned things we didn't understand...@AdamWill

            "The problem wasn't really the mortgages, though. It was the fact that the process of bundling them up and selling them on was implemented in such a way that the assessment of the risk attached to them got screwed up."

            You are correct that the bundling and on-selling was a disaster waiting to happen, but you are incorrect that the problem wasn't the mortgages - the loans would have gone bad anyway because they were not prudent and they were not priced according to the risk in the first place. So all that the CDO's did was to move the damage around to different financial institutions. If CDO's hadn't existed, then the housing bust would still have occurred, but it would have been a repeat of the 1980's US Savings & Loan's crisis, which decimated the US thrifts (equivalent of British building societies for UK readers). As it was the CDO's moved the loans off the original lender's balance sheet and onto the Wall Street/ Fannie/ Freddie balance sheets, and I don't see that as a better or worse outcome, really.

            The reason that the lending was under-priced had nothing to do with derivatives, and everything to do with a global under-pricing of risk, led by the US Federal Reserve holding down interest rates that had an affect globally on pricing of risk in emerging markets, corporate bonds, etc etc, and this was apparent in the very early 2000's, visible to regulators through dramatic declines in the spreads on (for example) junk bonds. There were other things that the regulators and politicians did that made the dodgy US mortgage lending occur in the first place, using a variety of levers to force lenders to lend to non-credit worthy groups. I'm not specifically blaming CRA, but I am blaming the CRA related and publicly documented regulatory interventions that forced banks to have to consider "alternative credit histories", to raise LTV ratios, and how these apparently marginal developments spread to laxer practices in the wider mortgage market. You can argue that CRA wasn’t the cause, but it certainly encouraged regulators to actively support relaxed lending standards, to ignore mis-priced risk, and overlook capital adequacy, which went hand in hand with the wider global impact of the Fed's interest rate policy.

            So again, it isn’t the derivatives, all those did was to move a pre-existing risk. In your condemnation of derivatives, you overlook those that spread and mitigate risk, because there are plenty of derivatives that do that - and indeed the CDO's were actually doing that for people with the better rated tranches. Evidence supports your assertion that the risk was mis-priced, but certainly the mechanism ensured that those with better rewarded higher risk tranches took the losses first.

            Had the Fed kept interest rates at sensible levels, and regulators not watered down lending standards, then the risks of the original mortgages would have been properly priced, and the loans wouldn't have been made because the borrowers couldn't have afforded them.

            Although convenient and fashionable to blame derivatives and speculation, CDO's were a product of poor lending, not the cause.

  19. AdamWill

    As an outside observer...

    ...the thing that always amazes me about the financial industry is what a comedy operation it is.

    I mean, the whole thing appears to revolve around a handful of corrupt utter bastards calling each other up and agreeing on things with a wink, nudge, handshake, and gallon of Bollinger. Why in the name of crap did anyone ever think it was a remotely sane idea to run the world's finances on the basis of a number which is produced by asking bodies that have giant conflicts of interest for a number - _no matter what that number is_ - and then trusting the answer blindly? I mean, really? Where does this amateur hour shit come from? I've worked in corner stores with better practices. Dominic, if you'd write an article on the topic I'm sure it'd be fascinating...

    1. Mark 65

      Re: As an outside observer...

      It's a bit like politics then. Which really brings home the point that, given they were all found out for being financial frauds fiddling their expenses, ripping the taxpayer off at every opportunity, and thus proved themselves to be utter lying bastards it now seems a bit rich that politicians think they can preach to anyone about integrity.

      1. AdamWill

        Re: As an outside observer...

        Rather a lot like it, yeah. But notice what happened in the politics case: dozens of resignations / not standing for re-elections, and substantial stiffening of the relevant oversight mechanisms. As I wrote, this is what's par for the course for virtually any other organization / industry that gets caught with its pants down. The thing I find amazing is that the financial industry is trying to get away without it.

        'Look, we know we told you for years that it was vital you didn't check on what we were doing, and that we knew what we were doing and that everything would be fine, and we know that events have proven that was clearly not true. Now the best way to deal with this is that you give us lots of your money, then carry on leaving us alone and not checking on what we're doing. Don't worry, nothing can possibly go wrong THIS time!'

  20. Cucumber C Face
    Thumb Up

    But the BBC told me...

    "Bob Diamond is a very naughty man. It's all the nasty Tories fault. Labour MP says 'They should be sent to prison'. And now a three hour interview with Mrs Miggins whose mortgage was foreclosed on in 1991"

    More quality reportage like this article on the Register please.

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