Something that I've seen in a couple of discussions of the Libor thing is that given that Libor was being manipulated in varying directions ad hoc to suit the needs of the banks, it's not clear who was injured. Which puzzles me, because it seems perfectly clear that the injured parties are the class of counterparties to the banks on deals where the rate was manipulated. I wouldn't be surprised if that plays out to 'essentially everyone in the securities market other than the banks involved'.
It just doesn't seem hard to figure out that if the rate was being manipulated to make deals more favorable to Barclays and its ilk, that those deals were less favorable to the other players as a result, and so the other players are the injured parties.
(This sort of thing, overall, is why I really resent having to have my retirement in securities. I want either gold coins under my bed, or a goddamn pension backed by some institution big enough to be less likely to the mark in this kind of scam.)(Admittedly, in nine months I will vest in a defined benefit pension. But not a significant part of my retirement for a while yet.)
It just doesn't seem hard to figure out that if the rate was being manipulated to make deals more favorable to Barclays and its ilk, that those deals were less favorable to the other players as a result, and so the other players are the injured parties.
Well, sure, but at any given time, the identity of those parties will be completely different. The main people manipulating the rate were the derivatives traders, so whether the rate was manipulated down or up depended on the net position of the trader/desk at the time, and what the date is (there are certain days that matter much more).
I wouldn't be surprised if that plays out to 'essentially everyone in the securities market other than the banks involved'.
Yes, this. Which is, essentially, the basic rule of the capital market.s
By the way, I do strongly recommend reading the regulators' documents. For once, they are really juicy.
Admittedly, in nine months I will vest in a defined benefit pension.
Are we talking about your morning sickness again?
Something that I've seen in a couple of discussions of the Libor thing is that given that Libor was being manipulated in varying directions ad hoc to suit the needs of the banks, it's not clear who was injured. Which puzzles me, because it seems perfectly clear that the injured parties are the class of counterparties to the banks on deals where the rate was manipulated.
Well, sure, those people were harmed, but that's the small potatoes harm. The articles you see saying "it's not clear who was harmed" aren't being written with those people in mind, or for people who have those people in mind. They're being written for the thousands and thousands and thousands of unrelated ordinary business people (and even homeowners) who have loans tied to LIBOR, and who are trying to figure out if they got screwed by Barclays manipulations of LIBOR. And the answer is that it's not really clear.
some institution big enough to be less likely to the mark in this kind of scam
This doesn't seem like a useful metric. Barclays is relatively big. And the even-bigger financial institutions haven't exactly proven themselves to be free of scandal in recent years.
1:it's not clear who was injured.
Let me link again for you, this time with enticing quotes
Big Losers in Libor Rate Manipulation Rittholz
Local Governments Which Entered Into Interest Rate Swaps Got ScalpedWe know that the big banks conspired to manipulate Libor rates, with the approval of government authorities.
We know that the Libor manipulation effected the world's largest market - interest rate derivatives.
But who are the biggest victims?
...
In a March 15th article on Counterpunch titled "An Inside Glimpse Into the Nefarious Operations of Goldman Sachs: A Toxic System," Darwin Bond-Graham adds these cases from California:The most obvious example is the city of Oakland where a chronic budget crisis has led to the shuttering of schools and cuts to elder services, housing, and public safety. Oakland signed an interest rate swap with Goldman in 1997. . . .
Across the Bay, Goldman Sachs signed an interest rate swap agreement with the San Francisco International Airport in 2007 to hedge $143 million in debt. Today this agreement has a negative value to the Airport of about $22 million, even though its terms were much better than those Oakland agreed to.
My mortgage rate is based on the 1-year constant-maturity Treasury rate, laydeez.
Dumb question - were they forcing rates up? or down? or either, depending on the day, and so just essentially insider-trading?
||
Barely related fer sure outlier bad apple bankster shenanigans
JP Morgan, Barclays Investigated For Manipulating Electricity Markets
Not an Enron scam, but some totally different new scam that is not yet totally understood. Science marches on...to the Future
|>
8: As I understand it, which is probably not very accurately, the latter -- unsystematically insider-trading, not consistently forcing it up or down.
3: They are indeed, but I thought that might just be me in this crowd.
8: Both in the first period, which is why it's only the counterparties closing deals on those days who would be obviously harmed. Down post-crash when they wanted to show they were still a good credit risk.
8: there was some systematic artificially-deflating-the-rate from 2007-2009, to protect Barclays' market perceptions about Barclays' financial condition.
Other than that, there was arbitrary raising-or-lowering the rates to suit Barclays' derivatives positions.
to protect Barclays' market perceptions about Barclays' financial condition
Sorry, fixed.
Wouldn't it be not-very-funny if all the banks were trying to manipulate the rates, and then trade with each other, and so it all cancelled out?
How's this for a CYA email:
As the U.S. Dollar senior submitter said in October 2008 to his supervisor at the time, "following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices."
(Sadly, it appears this email was enough to clear this individual's conscience. It's not as if he took the email and went to the authorities.)
Boy, in practice I'd think an email like that would hang your ass way out in the breeze. He's saying "I know and acknowledge that what I'm doing is dishonest, and I'd rather not do it, but I'm going to do it because you asked me to." It drags the recipient of the email down with the sender, but it doesn't protect the sender at all.
I looks to me as if the sender intended to rely on the Nuremberg defense.
You know, investment bankers are better crooks than I could ever be. When I learned that Libor was basically just a survey, I thought "that's not going to end well," but it never occurred to me the way to make money from it was to shade it to benefit your derivative portfolio.
The fact that the Libor rates during the crisis were basically fictional was widely reported during the crisis. I wonder why it took so long to lead to a scandal.
20: I think that bit wasn't a scandal because it wasn't obviously corrupt -- that is, each bank believed the others were submitting unduly optimistic Libor rates, and didn't want to be the only one hanging out in the breeze being realistic. It's like the dating-site problem where describing yourself as anything other than 'slim and athletic' will read as 'obese', so someone neither slim nor obese attempting to accurately convey what they look like is going to say 'slim'. Not exactly lying, but following along with a peer group shading the truth in sync with each other.
This is still wrong, and shouldn't have happened, but the net effect isn't obviously corrupt. Monkeying around with Libor on a day-by-day basis to benefit the derivatives traders is straightforward corruption.
(This is obviously something d-squared isn't going to opine about publicly. I do wonder if he knows anything interesting.)
The fact that the Libor rates during the crisis were basically fictional was widely reported during the crisis.
Wait a minute, wasn't it the Libor rates that led Krugman and DeLong to scream OMG OMG OMFG give banksters trillions and trillions today or the living will envy the dead tomorrow?
I may have the direction of the lying crossed up, but my understanding is that the banks were shading Libor to make themselves look more, rather than less, viable. So if they'd been scrupulously honest with Libor during the crisis, people would have been even more terrified than they were.
22: But the true Libor rates would have made the Krugman/DeLong point even better.
21: The media seems obsessed with Barclay's behavior during the crisis, though. The derivative-trading thing is an astounding level of corruption, but it doesn't seem to be the scandal in the public mind.
21.3:LMAO. ROTFLMAO.
21.1: It is moderately interesting, and was at the time in that it could have been called a "capital strike" rather than a "liquidity crisis" and they might be the same thing* and it probably doesn't matter because the banksters own our asses and we will cover their gambling losses. We will, even though we are the suckers sitting on the poker table with them.
*same thing, even in Keynesian theory, but Keynesians do presume at least some level of competition and a minimal lack of monopoly and cartel organization
His twitter seems to have a lot on it, but my twitter knowledge is weak
21: ANALOGY FAIL. You may or may not be accurately describing the motivations of the various participants, but there is a very big difference between "someone neither slim nor obese attempting to accurately convey what they look" saying "slim", and someone falsely answering "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 a.m.?". "I don't really think of myself as 'slim', but I thought saying 'average' would give people the impression that I meant fat" is a very different thought process from "I can't really borrow at 2.485%, but if I say anything higher the market may perceive the bank as risky." One can reasonably be described as "shading the truth"; the other can't.
Damn. I tried following twitter in the fall, was fascinated for about two weeks, and then grew catastrophically bored. I hate that interesting people say interesting stuff over twitter, because I find it completely unsympathetic -- it's just too choppy for me.
27: I didn't mean to imply that it was no big thing, just that the motivation and effect appeared to be to falsely present the banks as viable while in the throes of the crisis, without much of any other effect once the crisis was passed. (They were probably quite a bit readier to mess with Libor given that they'd been doing the same thing for the benefit of the derivatives traders all along, of course.)
Not straightforward thievery, but lying to get through a crisis, affected by the belief that everyone else was doing it and that the markets would punish them for being honest if they were the only honest ones. It's still stuff the guilty parties should have lost their jobs for if regulators were doing their jobs properly, but it's not obviously stealing.
(This is obviously something d-squared isn't going to opine about publicly. I do wonder if he knows anything interesting.)
He seems to be saying "These guys at Barclays are shockingly corrupt. Most so-called "corruption" "scandals" among "bankers" are none of the three, but this is the sort of thing that gives us all a bad name. I have never met anyone who would countenance such a thing." I think it's now become clear that Barclays was not doing anything different from what their competitors were doing, though.
but it's not obviously stealing
This is true in the same sense that any company knowingly presenting false information to public markets is not obviously stealing.
Some dsquared twitter quotes:
But in the end, we fucked it all up [...] it turned out to be the last time that guys like us were ever given anything that valuable again
I really can't describe how angry I, and most of my friends, are.
I've spent the last five years telling people that investment bankers aren't all crooks, aren't all crass stereotypes ... thanks guys.
Huh. Guess I was wrong about the not opining.
I can't see how Barclays survives this, or any other bank that did the same thing. Liability would be huge just for the transactions which directly benefitted the derivatives traders, but there may well be liability to zillions of other people. Plus folks looking to systematically and opportunistically unwind contracts. I haven't thought a lot about this, so I may well be missing something.
It's more than that, though. Barclays were consistently among the highest Libor submitters* during the crisis, even with the manipulation down. They were also perceived at the time** to be among the strongest large banks. So most of the other banks' Libor submissions must, as a matter of logic, been even more dodgy.
* The exception being those special days I mentioned above, but that's kind of a separate point.
** Specifically between Northern Rock's collapse and the point when other banks started writing down their monoline exposures in earnest, but Barclays didn't (about mid 2009).
I guess I don't understand why this isn't a bigger deal. Isn't it clear that at least a few major banks are about to collapse, or at least pay out zillions of dollars in fines. Yet coverage still seems pretty specialized, and the fines imposed seem like relative peanuts.
Collapse seems unlikely. The Libor panelists are all huge banks, and even the most alarmist/aggressive analysis I've seen has put Barcap's potential lawsuit liability at a couple of billion pounds. That's enough to hurt shareholders, but not enough to bring down a bank.
Also, maybe it's not being treated as a big deal over there, but it's front page, top story on TV news over here.
No actual news is treated as a big deal over here unless it has some sort of electoral implications.
The thing that would put it at "collapse" level, I'd guess, would be not so much damages in lawsuits (though those would be large, and I'm drafting the complaint in my head) but that lots and lots of people could opportunistically rescind derivatives contracts entered into on the basis of the fraudulent LIBOR rates. But again I'm probably missing something.
15,16: I wonder if letting a CYA email like that serve to get the writer at least partially off the hook might not be in the public interest. It would lead to more CYA emails laying out in plain sight the illegality of the acts, which ought to make prosecuting the higher-ups easier. I'd be fine with letting that point-men on this walk if it meant collecting a few scalps from higher up the food chain. Too often it's the small fry who end up getting the majority of the heat. Only when the most senior guys have regular nightmares about orange jumpsuits will this shit end.
I wonder if letting a CYA email like that serve to get the writer at least partially off the hook might not be in the public interest.
I really don't think so. The guy who wrote that email was in a position to blow the whistle then and there -- he had been instructed to commit fraud, and he was doing it with a full understanding of what he was doing. You just can't say that that's fine as long as you leave a comprehensible paper trail for when the scandal actually breaks.
Really, I can't think what that guy was thinking. It's like the line from the committee meeting in the Wire: "is you taking NOTES on a criminal fucking conspiracy?"
In the update to the OP:
Via Parsimmon in the comments
I take it that's somebody else somewhere.
No actual news is treated as a big deal over here unless it has some sort of electoral implications.
This doesn't?
Not obviously. I mean, I can't figure which party in the US benefits from a UK banking scandal.
I'm drafting the complaint in my head
Triple damages, of course. This is the case civil RICO was made for.
David Dayen at FDL picks up the "scandal" Mostly linking to the Rittholz, but also to a piece at the Economist
The second task is to change the way finance is run--and the culture of banking. This after all is not the first price-fixing scandal: Wall Street has had several. A witch hunt would be disastrous (see Bagehot), but culture flows from structure....Economist. Interesting. DeLong loves Bagehot.
Nothing will change. Ah well, back to Harvey.
If my characterization of the Marxian categories is correct, then this shows no priority can be accorded to any one spatio-temporal frame. The three spatio-temporal frames* must be kept in dialectical tension with each other in exactly the same way that use value, exchange value, and value dialectically intertwine within the Marxian theory.
*absolute, relative, and relational spacetime. Does the Higgs reside in Absolute Space-Time? Then it supports banksters.
Naked Capitalism has had a whole series of articles on Libor-gate which are accessible by typing "Barclays Libor" in the search box
41: Maybe you are right. Still, I think the bar to actually blowing the whistle is much higher in practice than it seems to an outsider. You take the risk of becoming effectively unemployable in your profession and you are guaranteed to fuck up all of your short term plans for just plain living your life, not to mention the issues with retaliation. Even if the courts find you did everything right by blowing the whistle and the retaliators end up severely punished you could easily be looking at five to ten years of hellish stress.
Really, I can't think what that guy was thinking.
"I'm gonna be at the front of the line for an immunity deal when they go to fry the big fish."
49 gets it right. The message it sends is "if I'm going down, you're going down with me" which is not at all the norm for Wall Street scandals.
But by having access to that email, which implicates both you and your boss, the feds no longer need your help or your actual testimony in order to implicate your boss.
...you could easily be looking at five to ten years of hellish stress
I think you need to specify 'unpaid hellish stress' as the other kind isn't really avoidable.
48: Oh, I'm not surprised he didn't blow the whistle, it's just that a bitchy email doesn't actually do anyone any good that it's worth rewarding him for. All of the idiotic "Anything for you, big boy," emails are just as useful, mostly.
But by having access to that email, which implicates both you and your boss, the feds no longer need your help or your actual testimony in order to implicate your boss.
They're for sure going to want that guy looking a jury in the eye and telling them how he repeatedly warned the jefes that they were doing illegal things.
Harvey:
We cannot say that the value relation causes the factory to close down, as if it is some external abstract force. It is the changing concrete conditions of labor in the absolute spaces of Chinese factories that, when mediated through exchange processes in relative space-time across the world market, transform value as an abstract social relation in such a way as to bring a concrete labor process in the Mexican factory to closure. A popular term like globalization functions relationally in exactly this way, even as it disguises the value form and its reference to class relations. If we ask: "where is globalization?" we can give no immediate material answer.
I note how that this thread has bored down to a concrete individual and his actions, escaping the relative and relational levels. This is the way methodological individualism (sexually harassed worker) and scientific objectivity (Higgs is mathematically and empirically proved to "exist", though 7 people can understand the proof) both protect Capitalism by making the relative and relational levels (exchange value and value) invisible.
All of the idiotic "Anything for you, big boy," emails are just as useful, mostly.
Not if you're trying to establish intent beyond reasonable doubt.
I think if dsquared were here, he'd want to remind us that the vast majority of bankers have never been convicted, and that the real tragedy of this mess would be if someone said something unkind about them as a class.
I do wonder if he knows anything interesting.
just a note to say that the prospect of dealing with Bob McManus is, specifically, the reason I'm not posting here.
I'm sure you can find a way to ignore him, most people do. The very shape and size of his posts are distinctive so once you detect the pattern you don't have to read a single word.
57:(Note the Bagehot reference in the Economist quote at 46)
Or did anything that damaged the confidence of banksters or confidence in banksters
Libor might go through the fucking roof if we scared anybody, thereby obliging us to give banksters more billions
58:Note 30 by Cryptic ned
Free floating hostility projected on a scapegoat.
But he is demanding an "easy and friendly audience"
d2 your trusted source? I'm the bad guy? Heck, I haven't saved a country by restructuring their social programs in weeks.
1) DD can post over at CT. Not only do I not mess with the posts there much, but he has the power there to create and maintain a supportive comment thread.
2) h-g and LB have the power here. Delete me. Delete all of the above.
It's more fun making you beg for it.
For three years, I've posted nothing but comments that relate the topic of the original post to the writings of Rosa Luxemburg and somebody keeps changing them into jokes.
Busted! Sorry I couldn't come up with anything funny.
58, 59: if you really want a (technical) solution, feel free to email me.
And they're such lame jokes, too. I'd totally take your case if you wanted to sue. Uh, you're not a member of a recognized tribe, are you?
An Irishman and a Jew go into a Montana bar in 1900.
Bartender says, "We don't serve Indians here.
Irishman say, "That's OK, he's paying."
28: I hate that interesting people say interesting stuff over twitter, because I find it completely unsympathetic -- it's just too choppy for me.
I started in the same time period and find that I still follow a core group. Roger Ebert probably the best.
I was curious about the context of this recent one of dsquared's London is the financial centre where pros come to play games that aren't allowed back home. Other centres take money from domestic rubes.
I think it's not a bigger deal just because the scope of any one bank to manipulate the Libor is limited. It's an average where they throw out the highest and lowest quarter of the responses.
Call me cynical, but I'm not surprised that some people did this, because some people are crooks, some people think they're immortal and some people will do anything for the quiet life. What surprises me is that people as savvy as I take Barclays' traders to be on the whole discussed the whole thing in emails, ffs, which they must know hang around forever. They might as well have put up a billboard saying "LIBOR fraud tonight! Get your tickets here!"
I think if dsquared were here, he'd want to remind us that the vast majority of bankers have never been convicted
Bob Diamond actually said that "We must help our customers and clients recognise that on the majority of days, no requests [to lowball Libor] were made at all".
Barclays - Honest More Often Than Not!
There are two separate issues here.
1) During the crisis, was Barclays lowballing in order to appear stronger than it actually was?
2) Before the crisis, was Barclays lowballing in order to skew the Libor fixing and make money from doing so?
1): yes. So, it is pretty clear, were lots of other banks.
2): yes. But it is very difficult to see how Barclays itself would be able to make money from doing so. If you gave a major bank CEO a +5 Amulet of Libor Alteration, which allowed him to set the libor fixing at will, he wouldn't know what to do with it; because it would be almost impossible for him to know whether his bank was overall long or short Libor at that particular moment. And their position would change by the minute.
Individual traders, however, would know what their Libor exposure was - and it seems that they were the ones calling their friends on the Libor submissions desk and asking for the numbers to be changed.
74.5 or thereabouts. So are you arguing that Barclays, recently at least, was lowballing Libor not as anybody's strategy but as the effect of a number of ad hoc bent calls by traders who weren't thinking any further than their personal advantage over the next 24 hours? That seems plausible on the face of it, and leads me to think:
1. Barclays' (and presumably a bunch of other institutions') top management are still culpable because they had no mechanism in place to catch this if it happened;
2. Barclays' (and presumably a bunch of other institutions') top management are still culpable because they had permitted a culture to develop in which a significant number of traders thought this was OK;
3. Nobody will ever really trust the value of Libor again. It has historically been set on the assumption that the numbers called were real, but why would anybody continue to believe this going forward. The rate might as well be set using a random number generator.
75.1: yes, I am. And your three points are also sound - with the caveat that a lot of people haven't really trusted Libor for a while already, because suspicions that, as one headline put it, Libor Isn't Working go back at least to 2007. All sorts of people in the financial press and elsewhere were saying "look, everyone's lowballing".
If you want a better measure of how risky the banks really think each other is (are? GRAMMAR FAIL) then the CDS markets might be a good place to start.
But they have to have a rate to do business, even if nobody trusts it, which is an interesting situation. Is there any chance they'll dump the current method and agree to a more robust formula, even a function of some number out of the CDS markets?
There are ways to improve it: stopping publication of bank submissions would solve problem 1) in my list. Solving 2) would be rather more of a challenge. For the reasons, see the LRB link. The CDS markets are very liquid at certain tenors but not at all at others.
Solving 2) would be rather more of a challenge.
But as you said at 74, it's not obvious how that worked, or if it did. If n traders (where n is greater than half a dozen) were all trying to manipulate the rate for their short term personal advantage, the actual effect may have been negligible, as they would cancel each other out, or is that too simplistic? Not saying it doesn't need to be addressed, but for the outside world perhaps not as worrying as to the people actually in the business.
Yves Smith herself, at Naked Capitalism
Title:...The Real Action Was i the Derivatives
"Readers have told me this sort of manipulation dates from at least 2001; the Economist quotes an insider saying it goes back 15 years."
Second, the derivative traders weren't working just with the submitters. The report indicates that on at least on occasion, they got the cash desk to cooperate with the manipulation. And again, if the derivative traders sometimes worked with traders in other banks, they might have gotten those cash desks to play along with their scheme.Third, their objectives for rate moving were to achieve single or a few basis points. Some examples:
In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America's Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions.
Then get back to me with ajay's "just a couple rogue bad apples on just a couple occasions, and nobody was really hurt"
79: that is slightly too simplistic, yes. One day it might be an RBS trader wanting to put Libor up a point to make money on some deals that are coming up to a payment. The next day, someone at Barclays wanting it to go down a point to make his portfolio look good. Most days, most of them would not care where it goes very much - banks are making or losing money overall depending on where Libor goes every day, but individual traders aren't. Which is probably why, as Diamond Bob said, "on the majority of days, no requests [to lowball Libor] were made at all".
So are you arguing that Barclays, recently at least, was lowballing Libor not as anybody's strategy but as the effect of a number of ad hoc bent calls by traders who weren't thinking any further than their personal advantage over the next 24 hours?
They weren't just lowballing, unlike the peak crisis reputation management manipulation. They were manipulating in whatever direction benefitted them on that day. See, eg: "High 1m and high 3m if poss please. Have v. large 3m coming up for the next 10 days or so"." Or "Pls set 3m libor as high as possible today".
Also, Bob Diamond might not know at any given time if a lowballed or highballed Libor would help Barclays, but the derivatives trading desk heads certainly would.
But they have to have a rate to do business, even if nobody trusts it, which is an interesting situation. Is there any chance they'll dump the current method and agree to a more robust formula, even a function of some number out of the CDS markets?
There's a significant chance. The current favourite for a replacement is the repo rate, as that's the market where trades are actually being done. Someone has to keep posting Libor though, however it gets calculated, because of all the contracts that reference it.
Most days, most of them would not care where it goes very much - banks are making or losing money overall depending on where Libor goes every day, but individual traders aren't. Which is probably why, as Diamond Bob said, "on the majority of days, no requests [to lowball Libor] were made at all".
There's also the fact that a a large proportion of requests were tied to IMM rolls.
82.1 is a good point. But (82.2) would a derivatives desk head really know Barclays' overall group Libor exposure, rather than just his desk's or Barcap's?
82.3: Indeed. Or Eonia/Sonia? Or even OIS?
The CDS markets are very liquid at certain tenors but not at all at others.
What does the word "tenor" mean in this context, ajay?
82: Ginger Yellow, what is the "repo rate"?
Inconvenient Truths About Libor
Stephanie Flanders at BBC News (not video)
You might wonder why that is worth an official "undertaking" in a legal settlement with the US regulator. After all, isn't that what the Libor rate is supposed to reflect - the rate at which banks are able to borrow and lend from each other?The answer to that question is yes, that is what it is supposed to be. The trouble is that it does not - cannot - mean that in an environment in which banks are finding it very difficult to get unsecured loans from anyone for any length of time.
As we keep hearing, that was the situation for large parts of 2007, 2008 and 2009, when some of the "fixing" and attempted manipulation of Libor at Barclays was taking place. But, as Robert Peston often reminds us, it is also true of many banks right now - especially across the Channel.
I am absolutely not buying at all "the lowballing during the crisis (2007-2008) to make themselves look better" If everybody was lowballing, and interbank loans were not being made, exactly how the fuck did Libor go through the roof and bring the sky down on us all?
Cui bono? The GFC has not exactly driven banksters and traders to the poorhouse or jail, has it? Some have called 2007-2009 a "global coup"
I know someone who went to some sort of financial industry workshop about derivatives, and the advice there was to switch to OIS as a risk-free rate.
83: I was wondering if it was tied to the option market. Banks will be on both sides of swaps, but are probably systematically on the short side of options.
87: Glad I'm not the only one who had never heard of that before.
From the MacKenzie article linked above:
At least two such indices already exist. Eonia (Euro Overnight Index Average), calculated by the European Central Bank, is a weighted average of the rates of overnight interbank loans denominated in euros. Sonia, its sterling equivalent, is a similar average of overnight loans transacted via London's main money brokers.
TED Spread ...Wiki, with graphs back to 1999
Initially, the TED spread was the difference between the interest rates for three-month U.S. Treasuries contracts and the three-month Eurodollars contract as represented by the London Interbank Offered Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped T-bill futures[when?], the TED spread is now calculated as the difference between the three-month LIBOR and the three-month T-bill interest rate.
82: It's the rate that banks can lend to each other with collateral. A repo works exactly like going to a pawn shop: I lend you money and you give me collateral. I give it back to you when you pay me back (on an assigned date). If you don't pay me back, I keep the collateral.
...exactly like going to a pawn shop
When the new flat TVs came out, banks couldn't get anything by hocking the old ones so the financial crisis happened.
What does the word "tenor" mean in this context, ajay?
The duration of a product such as a loan or a swap or something. I think I meant to say "term" anyway. Tenor is for bonds.
Eonia and Sonia have the advantage that they're based on "what rate are you actually borrowing at for this duration" rather than "if you were to borrow at this duration, what do you think you would be borrowing at?" which is what Libor is based on. But as MacKenzie points out, the Eonia market is pretty thin at the long end.
92: yes. The difference is that Libor is based on the unsecured rate and repo isn't.
The Groan has just flagged up that the SFO is getting involved in this, which probably means there's a good chance of a member of the ruling class going to prison, or they wouldn't bother.
Banks will be on both sides of swaps, but are probably systematically on the short side of options.
I'm not sure I see why.
Historically, the Serious Farce Office getting involved has meant that there's virtually no chance of anyone going to prison at all.
No, they wouldn't, but the vast bulk of a bank like Barclays's directional Libor exposure is going to be in the derivatives book.
78
There are ways to improve it: stopping publication of bank submissions would solve problem 1) in my list. ...
It's not clear to me how serious problem 1 is. Would people with rates tied to Libor really prefer that these rates jump wildly in a crisis?
I'm talking out of my ass here, but I would imagine that most of the time banks are just intermediaries for the two sides of the swap, while for options they are actively writing options which they then have to hedge.
I meant I'm talking out of my Kobe, which is much more authoritative.
99: There are a great many ways to get something that doesn't jump in a crisis that don't involve fraud.
99: Why should Libor be more volatile if submissions were private?
98 to 84.
If everybody was lowballing, and interbank loans were not being made, exactly how the fuck did Libor go through the roof and bring the sky down on us all?
Everyone was lowballing precisely because Libor was going through the roof and interbank loans were not being made. That's what Libor going through the roof means (or was supposed to mean) - that banks were charging each other much more money to borrow even short term. In an environment where Libor was supposed to reflect where you as a bank could borrow at that day, and investors are wondering which bank is going to face a run next, if you are high, that suggests you are weaker. So they lowballed.
||
I just spotted the ultimate Slate sidebar. They should close down the website, and go out on a high note.
It's "This Beloved Feminist Novel is Just a Little Irritating", by Katie Roiphe.
|>
Kobe has a point, but I'd have thought that they'd hedge that away. In terms of net rather than gross exposure, it's by no means clear to me that most of Barclays' Libor exposure would be in its derivatives operation.
Things I read for work these days: "ALJ issues decision on National Steel Erection"
103
Why should Libor be more volatile if submissions were private?
Quoting you in 74:
1) During the crisis, was Barclays lowballing in order to appear stronger than it actually was?
...
1): yes. So, it is pretty clear, were lots of other banks.
So if submissions were private banks would be more willing to report high numbers making Libor spike more than it actually did in the crisis.
106: It would be a case where the self-interest of the banks all run in the same way, so you would see systematic misreporting.
102
There are a great many ways to get something that doesn't jump in a crisis that don't involve fraud.
Sure but if this sort of misrepresentation isn't hurting people who base contracts on the Libor index they don't have a lot of incentive to move to a different index because of it.
108: that would imply higher Libor rates, but not more volatile ones. Which may have been what you meant - in which case sorry for the misreading.
But if you're arguing that we should be encouraging banks to lie systematically about borrowing rates because a side-effect would be a brief period of slightly lower mortgage rates in the event of a massive financial crisis, then I think you are going about it the wrong way.
110: As long as fraud is investigated and prosecuted, I don't care what index rate people use.
But I still didn't understand either how Milo could buy eggs in Malta for seven cents apiece and sell them at a profit in Pianosa for five cents
Chocolate covered derivatives for everyone!
Everyone has a tranche, so everyone makes a profit.
112. ajay's understandable cynicism notwithstanding, it looks like that will happen.
But I still didn't understand either how Milo could buy eggs in Malta for seven cents apiece and sell them at a profit in Pianosa for five cents
He takes the mess fund, leverages it up, takes a massive directional position on Maltese egg derivatives through an offshore company run by Hungry Joe and Chief White Halfoat, then moves the (relatively thin) underlying Maltese egg market by buying a lot of eggs at seven cents apiece, settles out his derivatives for cash for a profit, and then flies the eggs to Pianosa, sells them to the mess for five cents apiece and still comes out ahead.
Or else it's a forex arbitrage play between Malta and Pianosa and he's just transferring the money in egg form to get round AMG currency controls.
The actual answer is of course rather simpler.
Milo chortled proudly. "I don't buy eggs in Malta," he confessed, with an air of slight and clandestine amusement that was the only departure from industrious sobriety Yossarian had even seen him make. "I buy them in Sicily for one cent apiece and transfer them to Malta secretly at four and a half cents apiece in order to get the price of eggs up to seven cents apiece when people come to Malta looking for them."
"Why do people come to Malta for eggs when they're so expensive there?"
"Because they've always done it that way."
"Why don't they look for eggs in Sicily?"
"Because they've never done it that way."
112
As long as fraud is investigated and prosecuted, I don't care what index rate people use.
I am in favor of prosecuting fraud but I am not sure why this is the top priority. I think what the rating agencies did was much worse and they appear to have gotten a complete pass.
As massively stupid as the ratings agencies were, they apparently didn't send emails detailing criminal conspiracies.
I rated a mortgage backed security in Reno just to watch it default.
Speaking of mortgages, apparently local house prices are up 12% over lay last year. If true, it means the best investment I ever made was buying a house shortly before the housing crash and holding it for years. I'm some kind of real estate genius and really shitty at choosing stocks.
In another four to six years, I'll be able to sell my small, older house and get a big, new house in San Francisco plus a cabin cruiser and an RV.
115: There are no atheists in tranches.
123
As massively stupid as the ratings agencies were, they apparently didn't send emails detailing criminal conspiracies.
Actually I expect there are lots of similar emails to be found in the rating agencies if anyone was interested in looking.
Out of all the ways people pissed away other people's money, the only ones that bothers you are the ones that involved a government regulation. The government requires ratings for certain classes of investments and therefore the ratings agencies are your issue as opposed to the massively more profitable i-banking. I get that. I love the predictability.
132
Out of all the ways people pissed away other people's money, the only ones that bothers you are the ones that involved a government regulation. The government requires ratings for certain classes of investments and therefore the ratings agencies are your issue as opposed to the massively more profitable i-banking. I get that. I love the predictability.
This is silly, the entire financial sector is full of government regulations so this predicts nothing. The rating agencies aren't the only malefactors that bother me but in my view they did the most damage and hence should be a high priority for criminal investigation and prosecution.
There are regulations, but the ratings agencies aren't really "capital" and I don't find it coincidental that is where focus your ire. They are mere servants of capital and can thus be thrown to the wolves.
134
... but the ratings agencies aren't really "capital" ...
I have no idea what this means. Warren Buffet owned a big piece of Moody's during the period in question and if he doesn't represent "capital" I don't know who does.
He owns stuff, but Moody's business is providing knowledge to investors, not investing.
136
... but Moody's business is providing knowledge to investors, not investing.
What's the point of this distinction? They had a job to do, they didn't do it properly for corrupt reasons and an incredible amount of damage resulted.
The people selling those mortgage back securities were much more powerful and sophisticated than the ratings agencies. The issuers and packagers of these bonds were hiring the agencies. You are foisting the most blame for corruption on the weaker party who was corrupted as opposed to those who were writing the checks and making the bigger profits.
138
The people selling those mortgage back securities were much more powerful and sophisticated than the ratings agencies. The issuers and packagers of these bonds were hiring the agencies. You are foisting the most blame for corruption on the weaker party who was corrupted as opposed to those who were writing the checks and making the bigger profits.
If the rating agencies can't be expected to resist that sort of pressure then they are useless, have no reason to exist and should be eliminated.
That's reasonable. And different from saying they are worse than the banks. Evil trumps worthless.
140
That's reasonable. And different from saying they are worse than the banks. Evil trumps worthless.
Let me phrase it like this. In my view what the rating agencies did was much more systemically damaging than Barclay's Libor manipulation (as revealed to date).
Skimmers gonna skim.
The question is why people put up with them eating so much of the economy.
I wish I could be disgraced like that.
Actually I expect there are lots of similar emails to be found in the rating agencies if anyone was interested in looking.
They were and there are. The CRA equivalent of the Bollinger email is:
"Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it."
http://www.cnbc.com/id/27321998/S_P_Officials_We_d_Do_a_Deal_Structured_by_Cows