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Libor, long the most important number in finance, dies at 52

nytimes.com

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Re: Libor, long the most important number in finance, dies at 52

#41

Post by MR4D »

nerdponx wrote: post #10

> In 1986, at age 17, it hit the big time: Libor was taken in by the British Bankers Association, a trade group described later by The New York Times as a “club of gentlemen bankers.” What are the chances that this "club of gentlemen bankers" always intended to manipulate Libor to some extent? I know finance and banking is very complicated; maybe someone will come along who happens to have been a banker in London in…

> Otherwise I find it hard to limit my cynicism when enormous amounts of money are involved.

You should always be cynical when large amounts of money are involved. It helps you avoid large losses.

Side note - one of the best questions to ask in any deal is “how are you making money on this”. If the other party doesn’t tell you, then they probably know something that they don’t want you to know. If you doesn’t get a straight answer, walk away [0].

[0] - I work in finance and never do business with someone who is not transparent about this. Been doing it a long time and it serves me well. I learned it from an old hand, and cringes the first few times he asked it. Then, I got the nerve to ask why he asked such a cringeworthy question. Glad I did!

Re: Libor, long the most important number in finance, dies at 52

#42

Post by ChrisLomont »

fennecfoxen wrote: post #34
tomc1985 wrote: post #20

Earlier quoted context omitted.

LIBOR is often part of the formula for calculating loan interest rates. Last time I saw such code it looked something like: LIBOR + bank's minimum interest rate + a rate based on creditworthiness = your offered interest rate Planet Money recently had a really good episode on how some banks are deciding on a replacement rate: https://www.npr.org/2021/10/08/1044598674/libor-pains

That's not what it's measuring, that's how it's used.

That's also what it measures, as measured by the people doing the estimation of creditworthiness, who are the experts in understand how to measure that value.

If anyone else was more accurate at this measurement, then they had arbitrage against those using the measure, giving those doing the initial measurement incentive to get it as right as is humanly possible, since they usually worked at places that use LIBOR to price things.

Since LIBOR underlied hundreds of trillions in assets, there are ample papers on all aspects of LIBOR, including those trying to see how well it was computed versus post outcomes.

It holds up well. https://scholar.google.com/scholar?hl=en&as_sdt=0%2C14&q=LIB...

Re: Libor, long the most important number in finance, dies at 52

#44

Post by queuebert »

erwincoumans wrote: post #27

From the title it seems like Mr. or Dr. Libor died. For a paragraph, it is cute to have Libor personified. Doing it until the end of the story feels a bit artificial to me.

The NYT has a very high opinion of their obituaries.

Re: Libor, long the most important number in finance, dies at 52

#45

Post by fanzhang »

When I first heard about LIBOR in 2002, I was surprised that the number is just based on a survey of bankers. Surely there would be accuracy issues with that?

But at that time I was young and had no finance experience, so though that the adults in the room knew best. Turns out not!

I don't think the base problem is that people shaded their numbers one way or another, it's that the system is designed wrong.

Re: Libor, long the most important number in finance, dies at 52

#46

Post by skrebbel »

citizenpaul wrote: post #33
decafninja wrote: post #23

I was working at an investment bank (as a developer) when this scandal hit. My entire department was laid off as a result. Not because we were involved or complicit in the scandal, but because the scandal indirectly caused a big financial hit to the bank and we were part of the cost cutting measures. It was a traumatic and tragic moment for me at the time. But in hindsight it was the event that lead to my eyes being…

>part of the cost cutting measures. Not sure why you would believe this. It is much harder for regulators to interview employees about their activities when they are no longer centrally located for convenient discussions. Its the same tactic they use in bury investigators with paperwork but for people.

Don't assume, you know nothing about the parent's situation.

Re: Libor, long the most important number in finance, dies at 52

#47

Post by queuebert »

wsc981 wrote: post #19
tomc1985 wrote: post #18

Man I'm glad I don't work for a fintech right now, there's a lot of very complicated code with LIBOR as an input

Think about all the job security. You'll be set for many years!

They should start a club with the COBOL maintainers.

Re: Libor, long the most important number in finance, dies at 52

#49

Post by JackFr »

nerdponx wrote: post #10

> In 1986, at age 17, it hit the big time: Libor was taken in by the British Bankers Association, a trade group described later by The New York Times as a “club of gentlemen bankers.” What are the chances that this "club of gentlemen bankers" always intended to manipulate Libor to some extent? I know finance and banking is very complicated; maybe someone will come along who happens to have been a banker in London in…

LIBOR grew out of the same ecosystem that created Eurodollars. Originally a Eurodollar was simply a dollar held in a non-US domiciled bank, in particular a bank outside of the Federal Reserve System. The story, at least partly true, is that the Soviet Union was making a ton of money selling oil. Thanks to OPEC, the market for oil is denominated in dollars. Soviet oil companies didn't mind the dollars, but they didn't want money in US banks, and so the Eurodollar was created. In the USD money market (the interbank lending market for terms Well, then it grew. US banks got involved in EuroDollars and foreign banks got US subsidiaries and everything kind of ballooned.

But the big change was the invention of interest rate swaps. Interest rate swaps create a linkage between the Money Market (terms 12 months). There are a bunch of economic explanations as to why interest rate swaps exist and some of them have to be true, but they're irrelevant to the LIBOR story. A vanilla fixed-floating swap needs a floating rate, and that's LIBOR. A couple of trillion dollars (notional) worth of derivatives later, instead of simply being a pragmatic way to quote rates in the money market, it then drove P&L of derivatives desks.

I think everyone knew the potential for manipulation was always possible, but for a long time I think, until the tail started wagging the dog, it worked. But there's no going back now.

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