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Lies, Damn Lies and LIBOR

londonbanker.blogspot.co.uk

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Re: Lies, Damn Lies and LIBOR

#51

Post by leot »

simonh wrote: post #42
olalonde wrote: post #38

Earlier quoted context omitted.

Seems like the "vote with your money" mechanism should solve that: don't buy those securities. Do you claim that this mechanism doesn't work? If so, why is that?

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 security. Then you find out that you didn't get a good deal on the security. So you go to another bank, and the same things happens again in a completely different way.

Libertarian free-market types love talking about the power of incentives. However, the incentives in the banking industry do not line up with the creation of an efficient market. This much by now should be painfully obvious.

Re: Lies, Damn Lies and LIBOR

#52

Post by olalonde »

simonh wrote: post #42
olalonde wrote: post #38

Earlier quoted context omitted.

Seems like the "vote with your money" mechanism should solve that: don't buy those securities. Do you claim that this mechanism doesn't work? If so, why is that?

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 !

My point is that you can sue a dealership which sells you a car with manipulated mileage. In addition, a dealership that does this systematically will go out of business relatively quickly (no one will buy cars from them). Why don't those things happen to banks?

Re: Lies, Damn Lies and LIBOR

#53

Post by intended »

hxa7241 wrote: post #17

There should be another entry in the YC RFS http://ycombinator.com/rfs.html : 10. Kill Wall Street (etc.) We now have the technology to completely remake the financial system -- not just make 'banking' or whatever easier online, but a thorough and innovative re-imagining of what the whole thing should even be about. Information structure is the essence of all cooperative systems, and that means the economics of tomor…

Do note that given the depth, breadth and complexiy of wall street, this is like asking someone to come up with ways to kill the tech industry. And I suspect that the financial sector is the more complex of the two.

Not saying that it shouldn't be attempted - but that instead of targeting wall street, target a specific function they provide and disrupting that.

Re: Lies, Damn Lies and LIBOR

#54

Post by leot »

olalonde wrote: post #49
leot wrote: post #44

Earlier quoted context omitted.

Yes, it seems that way, doesn't it. And yet. [Edit: imagine two bookies, both of them placing odds on different horses. how, exactly, are you going to figure out which bookie to bet with in order to get the fairest odds?]

> [Edit: imagine two bookies, both of them placing odds on different horses. how, exactly, are you going to figure out which bookie to bet with in order to get the fairest odds?] Isn't that type of problem solved through arbitrage? Frankly, I'm really not sure I get your point.

Arbitrage generally requires with equivalent commodities traded on different exchanges. It doesn't work when everything is different from everything else.

In other words, arbitrage would only work if the bookies showed odds for the equivalent horses. But in this scenario they don't. (also see my most recently posted comment)

Re: Lies, Damn Lies and LIBOR

#55

Post by olalonde »

leot wrote: post #54
olalonde wrote: post #49

Earlier quoted context omitted.

> [Edit: imagine two bookies, both of them placing odds on different horses. how, exactly, are you going to figure out which bookie to bet with in order to get the fairest odds?] Isn't that type of problem solved through arbitrage? Frankly, I'm really not sure I get your point.

Arbitrage generally requires with equivalent commodities traded on different exchanges. It doesn't work when everything is different from everything else. In other words, arbitrage would only work if the bookies showed odds for the equivalent horses. But in this scenario they don't. (also see my most recently posted comment)

Well to answer your question, I won't bet because I don't like gambling. No one is forced to buy securities from shady banks.

Re: Lies, Damn Lies and LIBOR

#56

Post by intended »

retube wrote: post #37
JackFr wrote: post #16

Earlier quoted context omitted.

But the the manipulation was as likely in your favor as it was against you. Edit: I take it back. Looking at the data, Barclays was definitely cheating against you.

Rates were low-balled by the majority of banks. Barclays was high in comparison because for much of the time they were posting accurate rates. This was the reason for calls from the Bank of England (why are you guys so high?). The fact is anyone with a libor-linked mortgage will have benefitted from this.

A really important point to add is that at this juncture, LIBOR was also no longer the rate at which Barclays wa being loaned money.

Banks would be giving them cash at rates higher than libor.

Search for "LIBOR has become dislocated from itself " a beautifully finance speak way of saying "it's bullshit/it's being manipulated and it doesn't matter"

Edit: found it! http://www.telegraph.co.uk/finance/newsbysector/banksandfina...

Every time I read one of these I think that the reporting/commenting/story is over the top, and then something else blows by in a few months which makes it look like child's play.

Re: Lies, Damn Lies and LIBOR

#57

Post by rwmj »

He had me up until he said "How [can] profits in the financial sector to be consistently higher than profits from [...] agriculture, transport, health care or utilities?"

Those are four very poorly chosen examples which suffer from Baumol's Disease [1]

[1] https://en.wikipedia.org/wiki/Baumol%27s_cost_disease

Now whether or not it is true that banks can really be efficient, it's better to compare banks to technology and industrial production that don't suffer from Baumol's disease.

Re: Lies, Damn Lies and LIBOR

#58

Post by ktizo »

rwmj wrote: post #57

He had me up until he said "How [can] profits in the financial sector to be consistently higher than profits from [...] agriculture, transport, health care or utilities?" Those are four very poorly chosen examples which suffer from Baumol's Disease [1] [1] https://en.wikipedia.org/wiki/Baumol%27s_cost_disease Now whether or not it is true that banks can really be efficient, it's better to compare banks to technology…

Don't think that one is true of agriculture, at least not since the invention of the tractor, or possibly even the horse drawn plough. As for the others, you may have a point in some areas of medicine in the US, but in transport and utilities I don't think it is a rise in wage costs that are the problem. Also, aren't the rising wage costs in this case largely driven by keeping up professional standing when socialising with people in industries that are behaving unfairly, like some areas of the legal and financial world, who are for fairly obvious reasons able to renumerate their staff to a level far in excess of the work they are actually doing.

Re: Lies, Damn Lies and LIBOR

#59

Post by Variance »

rwmj wrote: post #57

He had me up until he said "How [can] profits in the financial sector to be consistently higher than profits from [...] agriculture, transport, health care or utilities?" Those are four very poorly chosen examples which suffer from Baumol's Disease [1] [1] https://en.wikipedia.org/wiki/Baumol%27s_cost_disease Now whether or not it is true that banks can really be efficient, it's better to compare banks to technology…

Agreed on the poor choices of examples, though that Wikipedia article is terrible. There's absolutely nothing contrary to classical economics in "cost disease", and Baumol's stuff was more an analysis of the economics of a situation than a sudden discovery of some unforeseen phenomenon.

Articles like the OP link are little more than populist sensationalism. Valid and extremely strong arguments can be made for reform in the banking system, but they aren't made by expressing that banks should be "in service of the people, not the profit." Those are political talking points, and the most offensive is that he compared financial markets to casinos, which is where authors lose all credibility to anyone who understands economics.

Also:

>Price discovery is not a sexy function of markets

Hell yeah price discovery is sexy. If it isn't, what is? The entire stock market exists literally only to set prices as quickly and accurately as possible.

Re: Lies, Damn Lies and LIBOR

#60

Post by ktizo »

olalonde wrote: post #52
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 !

My point is that you can sue a dealership which sells you a car with manipulated mileage. In addition, a dealership that does this systematically will go out of business relatively quickly (no one will buy cars from them). Why don't those things happen to banks?

They do. It is called a run. Then anything left is bought for next to nothing by a larger bank, and there is then even more opportunity for collusion as there are now less players at the table. It's been going on for a while now and in history seems to be the general trend apart from during those brief times when it is reversed for a while by the invention of new markets and financial technologies.

Albeit, this is only my probably wildly inaccurate and hastily sketched opinion.

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