This is rather good

Yes, it’s in The Guardian and it’s on economics. But it’s also rather good.

The one addition I would have made is to point out that Hayes was unimportant but bad. Sure, he fiddled Libor. But so were many others and the cumulative effect largely cancelled out.

The other fiddling, all the banks grossly under reporting in the crisis, was very important and good. Still fiddling of course, but who really would have wanted to see 14 day Libor being quoted as infinite?

16 thoughts on “This is rather good”

  1. “who really would have wanted to see 14 day Libor being quoted as infinite? ”

    Me. LIBOR was an artificial set of figures and should never have been given the weight it was. It seemed to have grown into the Emperor’s New Clothes – banks self reporting what they thought other banks would charge them for borrowing money is not a benchmark deserving of any reputation. And it was done this way largely so that there would be a complete set of figures every time.

    Note the sleight of hand in the article: “The rate measured how much it cost them to borrow from each other. Every morning, each bank submitted an estimate, an average was taken, and a number was published at midday.”

    An estimate is not a measure. An average of several estimates is still not a measure. Markets rely on signals and by taking the estimates approach rather than basing it on actual lending and accepting there would be gaps in the data, LIBOR was a dishonest one.

  2. I read this last night. Was hoping it would appear on here as I found it rather interesting but have absolutely no fucking clue about banking and was wondering how accurate it was…. being in the Guardian afterall.

  3. As Bob Diamond pointed out, the FSA were well aware that there was no interbank lending and everyone was making it up. It suited their ‘what crisis’ stance at the time.

    The first bank to break ranks would have been subject to the mother of all runs.

    As I often say, there was plenty of blame to go round for the crash and sometimes the banks weren’t the sole culprits.

  4. “it’s in The Guardian and it’s on economics. But it’s also rather good.”

    It satisfies a necessary condition: it’s not by Mr Cheekiebotty.

  5. Pingback: LIBOR and the Prisoner's Dilemma - L'Ombre de l'Olivier

  6. @Gareth

    I agree. If Libor is to have such importance why not calculate it from the actual trading data rather than asking for estimates that can be fiddled? Better still, make the methodology and the full trading data public so anyone can check the calculation.

    “who really would have wanted to see 14 day Libor being quoted as infinite? ”

    The answer to that should be everyone, if that is what the rate is.

  7. Ed, from memory there was no publicly available trading data or history, unlike equities, there was no exchange, no trade reporting. The methodology was public. There were, sort of, publicly available quotes for the interbank market, but, in the absence of exchange reporting, they were very definitely not the equivalent of the bid/offer quotes from market makers or the order book that you could execute at, or rely on at all. ISTR looking at pages that hadn’t been updated for a few days, and that would have been in the 90s, well before the crash.

  8. Ed

    The problem is that people are not necessarily transacting at all maturities and in all currencies, which meant there was a dearth of data. This has made the finding of a substitute complicated. So the Wheatley report has just regulated it more.

  9. who really would have wanted to see 14 day Libor being quoted as infinite?

    Fairly trite point, but if it were generally felt that if the benchmark could spike dramatically in the normal course of events, then it wouldn’t have been used as a benchmark!

    IIRC (again), during the latter part of the 90s, a fair few people were getting a bit antsy about the growth of the OTC derivatives markets, and some of the benchmarks used, probably sparked by LTCM. I think that someone once estimated the interest rate at which margin calls would cause the issuers’ to hold the entirety of the US sovereign market or somesuch as collateral, and it was really quite high compared to AAA sovereign yields, but, worryingly, fairly normal when compared to junk. I think Tim might have written about it.

    A clause in the contracts regarding the suspension of the calculation or valuations of the benchmarks or underlying was bog standard. Not sure what the effect would have been if Libor had been suspended for much longer than a few days.

    Like Tim, I’m not much fussed over Hayes. Bit unfair if he’s the only one sent down, but to encourage Les and all that. Not entirely convinced that the activity would have netted off to be costless, as it could well have caused margin calls for collateral, which could have very wide effects. Slightly surprised the SFO went with fraud, instead of market abuse under FSMA 2000, but presumably that would give rise to the same charge against the reporters for lowballing their numbers in order to survive at the height of the crunch. Tricky. But it would explain why Barclays and others accepted the fines. Although I really would have liked to see some heads on spikes at the FSA, BBA, Treasury and BoE, as the system they were supposed to be overseeing did have this bloody great hole in it.

  10. DuckyMcDuckface, yes the information required may not be available at the moment but the regulators could require an appropriate exchange or exchanges (or perhaps something blockchain based) to be set up and then require the market participants to not trade by any other means.

    Ken, lack of trading resulting in a lack of data is a serious problem but I think it would be better for everyone who makes use of Libor to negotiate how to handle the situation where their chosen Libor rate simply isn’t available separately in their contracts rather than have those involved in setting Libor magic a figure out of nothing, whether this is done legally or illegally.

  11. Is it just me or does anyone else find the fact the article says he ran his book on an Excel spreadsheet puzzling? No way is that even remotely true unless UBS really was a shitty bank with no control and deserved everything it got.

    To run a complex rates book on excel? I assume that he used excel as a front end with an add-in to access the database with the trades on and he was able to slice and dice at will but the trade data was held centrally.

    I know the article is quite good but why are newspapers and other media for that matter so woeful when it comes to understanding how complex the world of finance is?

  12. Two major omissions were (i) no mention of *why* LIBOR exists – because the banks gave up trusting governments and the official interests rates which they manipulated for political reasons, so they wanted an honest (which it originally was) measure so that they could insulate themselves from the volatility of bank rate when offering their best customers a cost-plus loan; (ii) why no-one has gone to jail for misreporting a LIBOR submission (Tom Hayes was guilty of bribery and conspiracy to defraud, among other things) is that it wasn’t illegal because there was no laws about LIBOR. The USA has wire fraud and RICO under which it could charge Tom Hayes (skipping over the minor point that he was in Tokyo at the time so subject to Japanese law not American) but there is no law anywhere that governs the reporting by a bank official to the British Bankers Association

  13. @ DuckyMcduckface
    One reason for using LIBOR rather than Bank Rate was the risk of politcal spikes in Bank Rate e.g. two jumps from 10% to 15% in the same morning.

  14. Andrew again,

    Yes, you’re correct. A lot of traders use Excel for what if capability. Especially if they’re trading exotics where the latest quant models haven’t been industrialised yet, or if they’re trading an instrument with little or no market data history. What’s happening in the front office valuation world, where products are being created and trialled almost daily, the big IT systems can’t possibly keep up.

    Once a trade is actually booked, it will be on the strategic trading systems, which feed into the books and records. Discrepancies between model valuations will be manually adjusted and independently signed off.

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