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Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

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Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#21

Post by cm2187 »

smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

Also most banks got badly burned with fines after the Libor scandal and introduced a pretty strict process to ensure that doesn't happen again.

The "fantasy" the article is referring to is the fact that large banks have to submit a number for every currency and every tenor every day, even if they didn't fund in that currency and that tenor that day. They will usually interpolate based on other tenors.

However this is only a problem for the lesser used tenors (like 2m, 8m), the most referenced tenors in private contracts (1m, 3m, 6m) tend to trade very frequently.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#22

Post by throw2016 »

c3534l wrote: post #18
JumpCrisscross wrote: post #10

Earlier quoted context omitted.

> there is no market that LIBOR measures Except that's not true. Interbank lending is still a $70 billion market in the United States alone [1]. Small compared to banks' balance sheets and less than the $500 billion from as recently as February 2008, but material nonetheless. Good rule of thumb in finance is to ignore Matt Taibbi. [1] https://fred.stlouisfed.org/series/IBLACBM027NBOG

Yeah, the article flips between somewhat sensationalist black-and-white statements that imply to the less savvy reader that LIBOR is an arbitrary number decided by a secret cabal of bankers to more reasonable statements like interbank lending is falling and LIBOR is an increasingly poor choice to measure interest rates.

Except it doesn't. Libor IS an arbitrary number decided by a cabal of bankers. This process has zero transparency and accountability which lead to the fixing and abuse in the first place.

Its not Matt Taibbi but the regulators who concluded there is no basis for LIBOR as reported in the article so perhaps you meant to accuse the regulator of sensationalism.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#23

Post by chinathrow »

smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

> There are checks built into LIBOR to discourage fraud

https://en.wikipedia.org/wiki/Libor_scandal

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#24

Post by JumpCrisscross »

zzalpha wrote: post #16
JumpCrisscross wrote: post #10

Earlier quoted context omitted.

> there is no market that LIBOR measures Except that's not true. Interbank lending is still a $70 billion market in the United States alone [1]. Small compared to banks' balance sheets and less than the $500 billion from as recently as February 2008, but material nonetheless. Good rule of thumb in finance is to ignore Matt Taibbi. [1] https://fred.stlouisfed.org/series/IBLACBM027NBOG

And Matt Levine, who said the exact same thing in an article posted in this comment thread? But a second problem is that the banks might not even know. Libor surveys asked banks each day what they would have to pay to borrow money unsecured from other big banks, but over time the banks sort of stopped doing that, particularly in some of the more obscure combinations of tenors and currencies that nonetheless reported…

> We're well into ad hominem

I'm not saying it is wrong because Taibbi wrote it. It's wrong because he got basic facts about interbank lending wrong, i.e. that it exists. I'm then passing along my observation that, whenever I've fact checked Taibbi, his facts have tended to be wrong.

> Matt Levine...said the exact same thing

Taibbi said there is no interbank lending. Libor is totally made up. Levine said that there is less interbank lending and so some of the numbers had to be made up some of the time. He concludes the paragraph you quote with this sentence:

"[Libor] was all more or less good enough as a casual system for resetting the rates on a few billion dollars worth of syndicated loans, but it was not accurate down to the hundredth of a basis point as a foundation for the financial system, or as the source for pricing hundreds of trillions of dollars of derivatives."

That's important context. Libor was a good enough number for a market where precision didn't matter (syndicated loans). It proceeded to be used, and abused, improperly. It's not a totally made up number like Taibbi makes it out to be. It's a totally inappropriately-used number.

TL; DR You'll walk away better informed about almost any financial topic reading Levine over Taibbi.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#25

Post by cm2187 »

lordnacho wrote: post #2

Pretty much everything that has derivatives tied to it is manipulated. Option expiries, FX fixes as well. Or it was when I was looking at it. The thing is there are derivatives that are sometimes non-linear, things with triggers and barriers. When some large enough fish has one of these (eg by taking the other side vs a customer) they have an incentive to move the rate in whatever way they can. Whether it's getting s…

There were two kinds of libor manipulations. Those instructed by the management of the banks to reduce the perception of the bank struggling to fund during the crisis, and the manipulations requested by the swap traders before the crisis.

I suspect the swap traders were mostly targeting future delivery dates (4 fixings a year). That's the only way the fraction of basis points they were asking the submitters to move the fixing by would have any material P&L impact. So it's kind of like other markets with strandardised contracts.

The former manipulation would have affected every days fixings.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#26

Post by JumpCrisscross »

throw2016 wrote: post #22
c3534l wrote: post #18

Earlier quoted context omitted.

Yeah, the article flips between somewhat sensationalist black-and-white statements that imply to the less savvy reader that LIBOR is an arbitrary number decided by a secret cabal of bankers to more reasonable statements like interbank lending is falling and LIBOR is an increasingly poor choice to measure interest rates.

Except it doesn't. Libor IS an arbitrary number decided by a cabal of bankers. This process has zero transparency and accountability which lead to the fixing and abuse in the first place. Its not Matt Taibbi but the regulators who concluded there is no basis for LIBOR as reported in the article so perhaps you meant to accuse the regulator of sensationalism.

> regulators...concluded there is no basis for LIBOR

Regulators did not conclude this. They concluded (a) better metrics for banks' costs of capital exist (e.g. the Fed funds rate [1]), (b) the market Libor is based on (wholesale unsecured interbank term lending) is too small and inactive to provide the sort of precision Libor implies and (c) transitioning from Libor will be messy [2].

[1] https://fred.stlouisfed.org/series/FEDFUNDS

[2] https://www.fca.org.uk/news/speeches/the-future-of-libor

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#27

Post by throw2016 »

JumpCrisscross wrote: post #26
throw2016 wrote: post #22

Earlier quoted context omitted.

Except it doesn't. Libor IS an arbitrary number decided by a cabal of bankers. This process has zero transparency and accountability which lead to the fixing and abuse in the first place. Its not Matt Taibbi but the regulators who concluded there is no basis for LIBOR as reported in the article so perhaps you meant to accuse the regulator of sensationalism.

> regulators...concluded there is no basis for LIBOR Regulators did not conclude this. They concluded (a) better metrics for banks' costs of capital exist ( e.g. the Fed funds rate [1]), (b) the market Libor is based on (wholesale unsecured interbank term lending) is too small and inactive to provide the sort of precision Libor implies and (c) transitioning from Libor will be messy [2]. [1] https://fred.stlouisfed.or…

In other words there is no basis for libor.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#28

Post by cm2187 »

xefer wrote: post #5

There are so many bilateral derivative contracts tied to LIBOR what would it even mean for this benchmark to go away?

I don't think it will completely go away. It will be replaced by some other benchmark calculated differently. Derivatives won't be a problem as the ISDA association can make a decision that would automatically convert all contracts. Bonds and private contracts will be more of a problem as they don't necessarily have a language for what happens if the index stops being published.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#29

Post by jkaptur »

JumpCrisscross wrote: post #10
zzalpha wrote: post #3

For folks who feel like they knew about this story already: read the article. LIBOR fixing is one thing. But the realization that there is no market that LIBOR measures is truly astonishing! 2021 will be an interesting year...

> there is no market that LIBOR measures Except that's not true. Interbank lending is still a $70 billion market in the United States alone [1]. Small compared to banks' balance sheets and less than the $500 billion from as recently as February 2008, but material nonetheless. Good rule of thumb in finance is to ignore Matt Taibbi. [1] https://fred.stlouisfed.org/series/IBLACBM027NBOG

I'm not a domain expert, but both could be right - isn't the point that some currencies and tenors are very illiquid, not that the entire market doesn't exist?

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#30

Post by c3534l »

throw2016 wrote: post #27
JumpCrisscross wrote: post #26

Earlier quoted context omitted.

> regulators...concluded there is no basis for LIBOR Regulators did not conclude this. They concluded (a) better metrics for banks' costs of capital exist ( e.g. the Fed funds rate [1]), (b) the market Libor is based on (wholesale unsecured interbank term lending) is too small and inactive to provide the sort of precision Libor implies and (c) transitioning from Libor will be messy [2]. [1] https://fred.stlouisfed.or…

In other words there is no basis for libor.

What do you mean by "no basis"? I suspect to you it means something like "too abstract" or "not good enough"?
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