I’m on vacation this week, but I spent the morning watching Ben Bernanke’s testimony on TV because I wanted to hear what he says about the LIBOR (London Interbank Offered Rate) manipulation by Barclays Bank (and others), ongoing since 2008. This thing reminds me of the initial news in 2007 that a couple of hedge funds in Europe had closed because they didn’t know what their holdings were worth. That news was apparently ignored by the markets, but was the first overt indication of the coming financial armageddon.
I don’t like what he said, and I don’t like the way he evaded questions from Congress about why he and the Fed did not expose this problem when they knew about it. I think this stinks. Essentially, it seems that big bankers lied about the true interest rate transactions occurring in order to under or overstate LIBOR interest rates to benefit trading positions held by, you guessed it, big banks. Our Fed and our regulators knew about this for years, but never blew the whistle, although they claim to have been working behind the scenes with European regulators to try fixing the problem. My personal opinion is that they cut the banks some slack because they did not want any more of them to fail, thus further damaging the flawed financial system. In other words, the ends justified the means.
The possible implications are far reaching and market reactions to this kind of thing are unpredictable. Markets might depart from normal behavior in some drastic move. So, for the second time this year I have raised a lot of cash in client accounts to wait and see how this all plays out. I’m not predicting a crash, but the risks of it happening in my view, are very real.
My primary job for you, as I see it, is managing risk and avoiding a big hit to your life savings. Sometimes I will appear to be too cautious, and miss opportunities when the market shrugs off my concerns. That’s OK with me.
If you, however, are still far from retirement and want me to be more aggressive with your accounts, please let me know directly. I can put your money back to work right away and let you ride things out.
As always, thanks so much for your trust.