LIBOR rigging: Difference between revisions

LIBOR rigging (view source)

Revision as of 15:35, 6 April 2024

536 bytes added , 6 April

no edit summary

Amwelladmin

Bureaucrats, Interface administrators, Administrators

82,903

edits

@@ Line 13: / Line 13: @@
 Since banks ''borrow'' in floating and ''lend'' in fixed, they have “''structural'' interest rate risk”. It is a natural function of how banks work. They want floating rates to be low, and to move lower.  If they don’t manage this risk, things can get funky, fast. Just ask [[Silicon Valley Bank]].
-So knowing what that floating rate is, and managing it, is an important risk management function for the bank. A risk well managed is called a “return”. The floating rate is different from the central bank’s base rate, and moves daily in response to market conditions:
+So knowing what that floating rate is, and managing it, is an important risk management function for the bank. A risk well managed is called a “return”. The floating rate is different from the central bank’s base rate, and moves daily in response to market conditions.
-So, a foundational question: Where does this “floating rate” come from?
+Where does this “floating rate” come from, then?
-In the good old days, each bank worked out its own floating rates, based on its own models, funding costs and market positioning. This process was opaque and unstandardised. Rates could vary significantly between similar banks.
+In the good old days, each bank worked out its own floating rates, based on its own models, funding costs and market positioning. This process was neither transparent nor standardised. Rates could vary significantly between similar banks. As long as interest rates were not a tradable instrument, this did not much matter to banks. They just told customers what the floating rate was, and that was that.
+In the early nineteen eighties, some [[First Men|bright sparks]] at [[Salomon Brothers]] figured out how to make interest rates into a tradable instrument. To standardise that instrunent, the banks realised there would need to be a common “benchmark” describing how variable interest rates change through time.
 ==== Chess club and the cool kids ====
-{{Drop|E|nter, in the}} nineteen eighties, the [[British Bankers’ Association]]. This was just the sleepy, city-grandees-in-a-smoke-filled-gentlemen’s-club-in-Threadneedle-Street of your imagination. Inasmuch as it ever did anything useful, the BBA compiled the “London Interbank Offered Rate” — “[[LIBOR]]” — sleepily, by inviting 18 major banks to, literally, ''phone in'' the rate at which they believed they could borrow in various currencies and maturities in the market each day.
+{{Drop|E|nter, in the}} the [[British Bankers’ Association]]. This was just the sleepy, city-grandees-in-a-smoke-filled-gentlemen’s-club-in-Threadneedle-Street of your imagination. It began to compile what it called the “London Interbank Offered Rate” — “[[LIBOR]]”. This was to be an objective distillation of all the major banks’ borrowing rates. The method the BBA chose to compile it was simple: it invited 18 major banks to
+literally, ''phone in'' what they believed they could borrow in various currencies and maturities in the market each day.
 The BBA would compile the submissions, “trim” off the top and bottom four, average the rest and publish the result as a set of daily LIBOR rates for each currency and maturity, before toddling off for a liquid lunch at the Garrick and a regular three o’clock tee time.
@@ Line 26: / Line 29: @@
 You get the picture.
-With LIBOR published, the banks could then set its rates for call deposits, calculate suitable fixed rates for new term loans, and trade interest rate swaps by reference to this standardised “benchmark”. Happy, unadventurous stuff, carried out by happy, unadventurous people. Look: we don’t want to run the interest rate-setting crowd down, but before 2007, the LIBOR rate setting process was the after-school chess club: all the cool kids were out shagging, smoking weed and shorting structured credit. No-one cared much about LIBOR.
+With LIBOR published, the banks could then set their rates for call deposits, calculate suitable fixed rates for new term loans, and more importantly trade standardised interest rate instruments  by reference to the new LIBOR “benchmark”.
+Happy, unadventurous stuff, carried out by happy, unadventurous people. Look: we don’t want to run the interest rate-setting crowd down, but before 2007, the LIBOR rate setting process was like the after-school chess club: snoresville. All the cool kids were out shagging, smoking weed and shorting structured credit. None of the hepcats paid much attention to LIBOR.
-Now. It is one of JC’s [[Financial disasters roll of honour|axioms of financial scandal]] that [[Air crashes v financial crashes|''calumny happens where you least expect it'']]. This is because success in financial services is in large part about “[[edge]]”, and you find the most [[edge]] where no-one else is looking. In the lead up to the global financial crisis, no-one was looking very hard at LIBOR.
+Now. It is one of JC’s [[Financial disasters roll of honour|axioms of financial scandal]] that [[Air crashes v financial crashes|''calumny happens where you least expect it'']]. This is because success in financial services is in large part about “[[edge]]”, and you generally only find a. [[edge]] where no-one else is looking for it.
 Tom Hayes was a cool kid (''metaphorically'': he wasn’t ''literally'' very cool at all). But he hung out in the chess club. He, and a bunch of other groovers, found some [[edge]] there, where no one was looking for it. No one bothered them and they didn’t do any harm — at least, not that anyone has been since able to point to. But they sent each other lots of [[embarrassing emails]].