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Lies, Damn Lies and LIBOR

londonbanker.blogspot.co.uk

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Re: Lies, Damn Lies and LIBOR

#91

Post by praptak »

SkyMarshal wrote: post #86
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?

Loyalty Points but it doesn't really matter as long as it is something freely interchangeable for other goods.

Re: Lies, Damn Lies and LIBOR

#92

Post by weego »

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.

The purpose of a business is to do whatever the hell you want to do.

The purpose of a publicly traded business is to make money and thus profit for it's shareholders. Everything else becomes secondary.

There is a huge difference in responsibility between the two.

Re: Lies, Damn Lies and LIBOR

#93

Post by SkyMarshal »

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…

There's little to no comparison b/t the Silicon Valley model and current banking system model. In the banking system, risk is systemic, in the Silicon Valley model, risk is localized. The two models are the inverse of each other.

In SV, many relatively small investments are spread over lots of startups, with the expectation that something like ~90% will fail, ~9% will just break even, 0.99% will do well, and 0.01% will become the next Microsoft, Google, or Facebook.

The small number of successes more than compensate for the huge number of failures, and the failures are not systemic and pose no risk to the greater economy. There is no apparent way for systemic risk or systemic fraud to undermine the system and put the entire global economy at risk.

The banking system on the other hand is the definition of systemic risk. Every company in every industry depends on it, for short-term cash needs to long-term investment loans. If the banking system fails for some unrelated reason (say, too much bad mortgage debt used as collateral for too much prop-trading leverage, the financial crisis in a nutshell), then every company in every other industry is at risk of failure as well.

Look at the history of banking and you see the same bubble-crisis-collapse played out over and over, to varying degrees of severity. From 1800 to 1929 there's a banking crisis literally almost every 10 years, with a few 15-20yr gaps. Read up on the history of banking crises [1] [2] and you can see it's endemic to the system.

But that is clearly not the case with the startup ecosystem, because the risk model is the inverse of the banking system risk model.

If those two mechanisms are failing us, as some people claim, I'd be genuinely curious to know why it fails specifically for banks while it works wonders in other industries such as tech.

The banking system of late is really creating and concentrating debt, not wealth. They create assets like mortgage-backed instruments of various sorts, get them AAA-rated, then use them as ostensibly high-quality collateral on which to borrow even more.

But when the cash flows on that collateral began to collapse in 2007/2008, it became apparent it wasn't AAA after all, and that it could not support so much leverage, and suddenly the entire system was at risk of insolvency and needed a government bailout, massive central bank support, and economic stimulus to prevent total collapse and all the collateral damage to other industries that entailed.

Conversely, Silicon Valley concentrates equity and cash-flow-generating businesses, rather than debt, and high failure rates are expected and built into the financing model. Risk is limited to the risk-takers, and not the broader economy or government.

1. http://en.wikipedia.org/wiki/Banking_crisis

2. http://www.economics.harvard.edu/files/faculty/51_This_Time_...

Re: Lies, Damn Lies and LIBOR

#94

Post by ajtulloch »

SwellJoe wrote: post #73
Variance wrote: post #62

Earlier quoted context omitted.

Sounds like you're arguing for the elimination of the Federal Reserve and bailouts--which is what moving from $ to Bitcoins would essentially do. The money supply of currencies like that is fixed.

I'm not strongly arguing for or against any particular solution. I'm an amateur on monetary policy and alternative currencies and the Federal Reserve system. I merely know what fraud looks like, and I'm confident it's happened in the past, and continues to happen to this day because no one has been held accountable for past fraud, on a massive scale. So, I don't know what the optimal solution looks like, exactly, but…

You're wrong about a few things, but for now I'll just pick on one.

You do realise that the 'IB' in LIBOR stands for 'inter-bank'? The LIBOR rate has no bearing on the cost of a sovereign government's cost of funds - e.g. in US, treasury bills. The spread between them can be quite volatile (http://en.wikipedia.org/wiki/TED_spread). In short - governments don't lend or borrow at LIBOR - that's the point of having LIBOR in the first place.

Re: Lies, Damn Lies and LIBOR

#95

Post by lifeisstillgood » 

  We have allowed markets to evolve in ways that make supervision of markets almost impossible.
This reminds me of the big monolithic app vs small services debate. A some point an app becomes harder and harder to break out Into testable pieces, becomes Interdependant and complex

Re: Lies, Damn Lies and LIBOR

#96

Post by intended »

Tycho wrote: post #71
intended wrote: post #66

Earlier quoted context omitted.

Considering that libor affects mortgage rates, I'd say that's a lot of people affected. that's like saying the only people affected by oil speculation are the counter parties.

I've not been able to find any analyses about mortgage borrowers being adversely affected. Regardless, they are not the targets of the fraud, so the idea about libor rate fixers robbing the public is disingenuous.

What should probably get your goat though, is that this method completely destroys price discovery and was a clear case of the market not working because of collusion.

The other things that should strike you is the scale of the fiasco and the collateral damage -

Lets see... I would likely be using LIBOr for financial models, at the very least those focused on bond pricing and hence any shorts/longs made on that - all of those are off.

LIBOR does get used to set variable rate mortgages, Switzerland uses it for national projections for a few other things.

In essence those few terms I've mentioned are already fast approaching nearly a trillion dollars in affected securities and financial instruments.

> they are not the targets of the fraud...

Not being the target means little if you are still collateral damage. Heck the collateral damage was higher, since all the financiers were away the game was rigged by 2006. "LIBOR has become dislocated from itself".

Losers who weren't direct targets would be someone making a deposit - they were getting lower interest rates than they should have.

Re: Lies, Damn Lies and LIBOR

#97

Post by kitsune_ »

crusso wrote: post #45
kitsune_ wrote: post #14

Earlier quoted context omitted.

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.

> Free-market capitalism is a joke. To paraphrase Churchill: It has been said that free-market capitalism is the worst economic model except all the others that have been tried. You use the word "deregulation", yet thousands of pages of new regulations are churned out each year by the Federal government... when 1 or 2 pages are repealed, we hear "They're deregulating!". Any look at the regulations being emitted from…

With deregulation I don't mean the lack of regulatory laws. It's not about the quantity here, it's about the QUALITY of the regulatory framework.

What good are thousands of pages of "regulatory" law when they are filled with loop holes? In fact these monstrous laws are perfect for the big corporations, their lobbyists and lawyers. These people live for this. Heck, they even often write the laws themselves!

Have a look at the deregulation of California's energy system. These are not small laws. However, this is an example of clear deregulation, and was not a regulatory effort.

In fact Enron was able to pull off completely immoral, but often at many times legal, shenanigans. I mean they shut down half of the power plants because their energy traders could make a profit from the rising prices. Holy shit. In the mean time they cried wolf and said that regulation was killing them. BULL SHIT. It was the exact opposite.

People actually died from these power outages. Again, holy shit.

With big so-called regulatory and "deregulatory" frameworks filled with loop holes, small business owners are basically shut out of the market because they don't have the resources necessary to even begin to understand the matter.

In the mean time, big corporations can fully exploit these custom-made laws, profit from them and then later, call for "more deregulation".

I hope you do realize that this is a vicious cycle.

Re: Lies, Damn Lies and LIBOR

#98

Post by ajtulloch »

svdad wrote: post #87
intended wrote: post #46

Earlier quoted context omitted.

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 in…

Well said. I'm an ex-quant, and one thing that is supremely irritating about discussions of Abacus is the inability of people to distinguish between acting as a fiduciary and acting as a market maker.

When a counterparty calls GS up for a quote on the JPY/USD cross, they don't care one iota what GS's internal positioning is, or where GS thinks the JPY/USD will be in 3mths time, or any other number of things. These are sophisticated counterparties (as you pointed out) who

1) know that GS doesn't owe them a fiduciary duty, and 2) don't expect it to.

It seems like theres a whole population of people out there who think that GS is playing some sort of trusted financial advisor role in OTC derivative trades, when in fact it's in a bidding war between 4 other banks to get you the lowest rate.

That's the case in Abacus as well, AFAICT. If you don't want to trade thinly traded opaque credit derivatives, don't trade them. No-one is forcing you to. But if you don't understand your risks, you trade, and your position moves against you, don't blame your counterparty. Blame yourself.

Re: Lies, Damn Lies and LIBOR

#99

Post by olefoo »

Tycho wrote: post #71
intended wrote: post #66

Earlier quoted context omitted.

Considering that libor affects mortgage rates, I'd say that's a lot of people affected. that's like saying the only people affected by oil speculation are the counter parties.

I've not been able to find any analyses about mortgage borrowers being adversely affected. Regardless, they are not the targets of the fraud, so the idea about libor rate fixers robbing the public is disingenuous.

Your savings account underperforming, or your adjustable rate mortgage being more expensive than it would be otherwise aren't obvious forms of theft...

And the second order effects as businesses smaller than major banks attempt to make up for their losses are even less obvious forms of theft.

And if the marks don't know they're being clipped, what's the harm, right?

Re: Lies, Damn Lies and LIBOR

#100

Post by SwellJoe »

ajtulloch wrote: post #94
SwellJoe wrote: post #73

Earlier quoted context omitted.

I'm not strongly arguing for or against any particular solution. I'm an amateur on monetary policy and alternative currencies and the Federal Reserve system. I merely know what fraud looks like, and I'm confident it's happened in the past, and continues to happen to this day because no one has been held accountable for past fraud, on a massive scale. So, I don't know what the optimal solution looks like, exactly, but…

You're wrong about a few things, but for now I'll just pick on one. You do realise that the 'IB' in LIBOR stands for 'inter-bank'? The LIBOR rate has no bearing on the cost of a sovereign government's cost of funds - e.g. in US, treasury bills. The spread between them can be quite volatile ( http://en.wikipedia.org/wiki/TED_spread ). In short - governments don't lend or borrow at LIBOR - that's the point of having LI…

I understand that (though my understanding of this particular situation is less deep than that of the US banking crisis). It's also my understanding that LIBOR is used to determine rates for municipal bonds, consumer loan rates (including loans insured by government), and other types of debt that do impact taxpayers and consumers. The LIBOR is a baseline...manipulating it manipulates the entire lending market in the UK. That's illegal and unethical and screws a bunch of people over and compromises the integrity of every bank that participates. (At least, that is my understanding of it, but I'd never heard the word LIBOR until two days ago.)
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