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Lies, Damn Lies and LIBOR

londonbanker.blogspot.co.uk

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Re: Lies, Damn Lies and LIBOR

#81

Post by batgaijin »

praptak wrote: post #18

Real life dwarfs gaming. Remember the recent EVE exploit? Someone discovered that it was possible to pump prices of low liquidity goods, pack ships with said goods, destroy the ships and score an unusually high LP, due to the artificialy inflated "value" of those goods. The underlying mechanism is the same - someone ties some kind of payout to a market price. Then someone other discovers that th price is not somethin…

I' still surprised the SEC doesn't actively try to game the system. I mean we all know that we aren't dealing with the worlds best people, why not try to play the psycopath game ourselves?

Re: Lies, Damn Lies and LIBOR

#82

Post by rayiner »

olalonde wrote: post #50
rayiner wrote: post #48

Earlier quoted context omitted.

Why is the presumption that "vote with your money" will solve that? Why don't you prove that "vote with your money" will solve that problem?

That is pretty much the equivalent of asking me why capitalism works which is another debate entirely.

"Capitalism works" is a general justification for structuring you economy as capitalist versus say having central planning via a Politburo. It is not a valid general justification for fine grained questions like whether a specific type of financial activity should be regulated or not. That's just hand-waving.

Re: Lies, Damn Lies and LIBOR

#83

Post by rayiner »

Tycho wrote: post #70
intended wrote: post #67

Earlier quoted context omitted.

We have the net outcome in front of us? Did you mean to say something other than wealth concentration to financiers, the meltdown of the world economy, the euro crisis... Sorry, are you saying what the net benefit would be once you remove the calamities it has caused?

The major problem facing the world economy is excessive sovereign debt, and you cant blame the banks for that. Nor for the many other structural problems in the economy, or for shortage of natural resources, or AIDS, or wars, etc. What people do is focus on one visible failing of the financial system, then assume everything would be rosy if not for that problem, ergo the banks are a drag on society. And then just dev…

The debt/GDP ratios of nearly every sovereign country exploded when the financial crisis happened, as countries spent to keep the economy moving along. You can't cordon off the sovereign debt issue and call it a problem by itself, it's inextricably tied to the operation of the financial sector.

Re: Lies, Damn Lies and LIBOR

#84

Post by [deleted] »

rayiner wrote: post #82
olalonde wrote: post #50

Earlier quoted context omitted.

That is pretty much the equivalent of asking me why capitalism works which is another debate entirely.

"Capitalism works" is a general justification for structuring you economy as capitalist versus say having central planning via a Politburo. It is not a valid general justification for fine grained questions like whether a specific type of financial activity should be regulated or not. That's just hand-waving.

[deleted]

Re: Lies, Damn Lies and LIBOR

#85

Post by peteretep »

dreamdu5t wrote: post #39

Why do we tolerate price-fixing and interest rate manipulation of the whole economy through the Bank of England's control of the pound sterling dealing rate? The central bank of the UK is setting interest rates for the entire economy yet people only care about Libor rates being manipulated. It's a hypocrisy.

Oooh, oooh, I know this one! Next up:

- Why are the army the only people allowed guns?! - Why are doctors the only ones who can prescribe medicine?! - Why do we let the police have sirens on their cars, but I can't get one on mine?!

Re: Lies, Damn Lies and LIBOR

#86

Post by SkyMarshal »

praptak wrote: post #18

Real life dwarfs gaming. Remember the recent EVE exploit? Someone discovered that it was possible to pump prices of low liquidity goods, pack ships with said goods, destroy the ships and score an unusually high LP, due to the artificialy inflated "value" of those goods. The underlying mechanism is the same - someone ties some kind of payout to a market price. Then someone other discovers that th price is not somethin…

For those of us who don't know EVE jargon, what's LP?

Re: Lies, Damn Lies and LIBOR

#87

Post by svdad »

intended wrote: post #46
olalonde wrote: post #26

> We need to rethink as a society what banks are for, what exchanges are for, and what clearing houses are for. If they are for the profit of the few at the expense of the many now, that is because it is the business model we have permitted. Is that really true compared to Silicon Valley? Do banks concentrate wealth a lot more than a Google or a Facebook? If not, how would you feel about some random dude commenting o…

This is one of those questions where a rebuttal and an explanation would be extremely long, and would also have to work against your biases/beliefs. I hope someone more eloquent than me comes along. In short it's a complicated matter, with tough constraints. For one, yes banks do concentrate wealth a lot more than Facebook and google. HFT/prop desks/Cdo desks and the firms PE and IB arms are extremely well paid. They…

Full disclosure: I worked on a Magnetar trade; not the one that was in the press, but another deal basically identical. And I bought, sold and analyzed Abacus.

All of these transactions are explicitly caveat emptor. My grandma couldn't go out and buy a piece of ABACUS 2007-ACA; sales are restricted to "qualified investors".

Of course we all know that's basically meaningless, at least the assumption that "qualified investors" always understand what they're doing. I know from experience that "qualified investors" in this kind of deal mostly don't do any serious due diligence. [On Abacus, it was practically impossible anyway. There were O(1,000,000) loans underlying the deal and there is no way you'd have been able to get the loan details for even a significant fraction.]

But I wonder whether we're expecting more from GS/MS/etc. than we expect from our local car dealer, and whether the remedy should be any different. That is, everyone is told to be suspicious of used car dealers, so you poke around, kick the tires, look for leaks, get a mechanic to look it over, read the repair records, etc. before you buy. If it still turns out to be a lemon, and you discover the dealer told you something explicitly false about the car, you have a legal remedy; otherwise (IANAL) I don't think you do. But you have a social/market remedy, i.e. don't buy from that dealer again and tell your friends not to buy from that dealer again. Likewise, if you find a dealer who always tells it straight and prices it fair, you go back to that dealer the next time and tell your friends about him.

Why isn't that the right remedy for these CDO deals as well? Sure, if GS said something provably false about the deal, there's a fraud case. But if (as I suspect is more accurate) they just sold it for what it was (namely an extraordinarly complex and impossible-to-price derivative financial instrument, offering an attractively high risk-weighted rate of return), and the buyers didn't bother (or have the computational resources, as almost none of them did) to do their own pricing analysis, is that the fault of GS? If you buy a CDO and lose your shirt, well, don't buy CDOs again and maybe don't buy from GS if you didn't like how they sold it.

Re: Lies, Damn Lies and LIBOR

#88

Post by tsotha »

scarmig wrote: post #61
olalonde wrote: post #26

> We need to rethink as a society what banks are for, what exchanges are for, and what clearing houses are for. If they are for the profit of the few at the expense of the many now, that is because it is the business model we have permitted. Is that really true compared to Silicon Valley? Do banks concentrate wealth a lot more than a Google or a Facebook? If not, how would you feel about some random dude commenting o…

"the ultimate purpose of a business is to make money" No. The proximate purpose of a business is to make money. It's a means to the end: the ultimate purpose of businesses are to improve human well being.

No, actually, the purpose of a business is to make money. That's why it's created, after all. Now, businesses do bring benefits to society, on the whole, but that's not why they exist.

Re: Lies, Damn Lies and LIBOR

#89

Post by tsotha »

kitsune_ wrote: post #14
danboarder wrote: post #7

Earlier quoted context omitted.

One reason is that the London Interbank Offered Rates (LIBOR) are just not as relevant as they used to be: "...the scandal has shed light on an inconvenient truth about these interbank rates which are used to determine the price of so many hundreds of trillions of dollars worth of global financial contracts. That inconvenient truth is that even when London Interbank Offered Rates are not "fixed", they may still not b…

There are hundreds of trillions of dollars of derivates tied to the LIBOR. If the LIBOR moves 0.01% it translates to shifts in billions of dollars around the globe. Fixing the LIBOR is one of the (if not the) biggest thefts in history. Free-market capitalism is a joke. Deregulation and corporate socialism has led to a dysfunctional society ruled by a kleptocratic elite.

What deregulation? The financial industry is the most heavily regulated industry save medicine. The problem is there are too many regulations - banking regulations are so complex only the bankers understand them, which is the basis of the revolving door between banks and government regulating agencies.

Too much regulation gives companies as much freedom as too little.

Re: Lies, Damn Lies and LIBOR

#90

Post by svdad »

leot wrote: post #51
simonh wrote: post #42

Earlier quoted context omitted.

The point is you are being lied to about the nature and. Alice of those instruments, the value of which is manipulated up before you buy and down afterwards. Efficient markets only work when participants have reliable information on which to make buy and sell decisions. It's like telling someone who bought a car that's had its mileage manipulated that they shouldn't have bought the car. Well duh !

It's not really a lie. It's just that you're getting a bad deal. And it's not in any of the banks' interests to make it easy for you to get a good deal. You see one side of one trade for one security offered by one bank. Your analysis says it's a pretty good deal, but that's based in part on information the banks themselves have provided, and in general is impoverished next to the information the bank has. So you buy…

The incentives also don't line up on the buy side. As a buy-side fixed income investor, you can buy a 10-yr US Treasury (AAA) yielding X%, or you can buy a slice of the 10-yr AAA tranche of the Abacus CDO yielding X+0.50% (made-up but representative numbers). You're suspicious of the long-term performance of Abacus (it's 2007 and you're already hearing rumblings about problems in the housing market) but your bonus is based on the quarterly performance of your portfolio. It's pretty clear what most institutional investors did in this scenario.
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