There is a line forming to the left for people to beat up on Libor-manipulating banks, and it’s a long line so your beating time is limited and you have to make the most of it if you want anyone to care. Today’s the day for U.S. municipal borrowers. How’d they do?

The municipalities are important because they are the unusual case of a large class of politically sympathetic customers who would have been systematically disadvantaged by low Libor rates, as opposed to you and that mortgage that you won’t shut up about, on which Liborgate probably saved you money. Stephen Gandel nicely sums up the situation here: the problem was that, in astonishing droves, U.S. cities and counties borrowed at variable rates, paying their own idiosyncratic floating SIFMA rate, but they then swapped to fixed, receiving a floating rate based on Libor. This led to badness, as muni credit blew up and SIFMA spiked, while bank credit blew up and Libor mysteriously didn’t, because of the manipulating. So cities who had expected to pay a fixed 5% or whatever a year ended up paying 5% plus the suddenly widening gap between SIFMA and Libor.

Here is a graph I made you, comparing the SIFMA rate that munis paid to their bondholders versus a proxy for the Libor-based rate that they received from their banks*:

So that sort of looks okay outside of 2008, which looks sort of … not okay. Here is perhaps a more suggestive thing:

  • From 1997-2004, the Libor-based rate averaged 6 basis points higher than the SIFMA rate
  • From 2005-2009, the Libor-based rate averaged 7 basis points lower than the SIFMA rate
  • From 2010-2012, the Libor-based rate averaged 4 basis points higher than the SIFMA rate

If you date your Libor manipulations to 2005-2009, and you are a municipality, you have I guess a plausible case for saying “those swaps cost us 11-13 basis points a year.” The municipalities themselves calculate 20 basis points but that is because they are muppets.**

I am not a fan of most municipal carping about interest rate swaps because that carping is in the first instance of the form “rates went down and now we are paying a high fixed rate and receiving a low floating rate” and y’know what THAT HAPPENS and you wouldn’t be complaining if rates had gone up and you should live in a world of expectations bro. That said you can’t take that argument too far, because you do kind of get the sense that the munis were at least bulldozed a bit, no?

Like, maybe there’s a good reason for decomposing a trade (borrow 30 years fixed) into a public component (borrow 30 years floating) and a derivative component (swap to fixed)? Obviously corporate issuers do related but opposite decompositions all the time (issue 10-year fixed, swap to floating) for market-receptivity reasons (taxable investors want fixed-rate bonds more than they want floating-rate bonds); I assume without knowledge that there’s a plausible market-receptivity argument the other way in the municipal space. Certainly I wouldn’t want to lend the City of Baltimore money at a 30-year fixed rate. Still it’s always suspect when banks are earning most of their money not on disclosed underwriting fees but on swap P&L that, just guessing here, the City of Baltimore is not well equipped to calculate or second-guess.

More worryingly, it is hard to wrap your head around paying a floating rate that’s based on your own credit while receiving a floating rate that isn’t. Variable rate muni bonds seem to float based either on the SIFMA rate or on their own weekly auctions; in either case, you pay up when muni credit worsens, which is exactly when you don’t want to, since presumably your credit is worsening for the time-honored reason of you don’t have any more money. On the other hand, the floating payments that come in don’t go up just because you’re running out of money: they only go up because [actual risk-free rates are rising and/or] banks are running out of money, and banks have ways to avoid running out of money, or failing that to pretend that they still have money, that municipalities lack.

If banks manipulated Libor they were stealing from these municipalities, which is bad, but it’s always worth keeping in mind that the total gross amount of Libor exposure dwarfs any bank’s (or all the banks’ together) net exposure: they have lots of Libor coming in, and lots going out, and they just clip a wee bit of it in the middle. So they were distributing the proceeds of that theft pretty widely. One fun way to think about Liborgate is to imagine the financial system, in theory a machine to intelligently use price mechanisms to intermediate the movement of money from savers to productive uses, as actually a machine to haphazardly use an imaginary-price mechanism to intermediate the movement of money from arbitrary Libor losers to arbitrary Libor winners. Barclays seems to have engineered the world so that Nassau County*** sales taxes were used to subsidize adjustable-rate mortgage borrowers in California. Was that a good idea? Beats me. Was it a conscious and defensible decision about the allocation of resources? I’m guessing no. That, and not “ooh bankers lie a lot,” may be the real problem with Libor manipulation.

Wall Street’s latest sucker: Your hometown [Term Sheet]
Rate Scandal Stirs Scramble for Damages [DealBook]

* SIFMA swap rate data from SIFMA. 3-month LIBOR from Bloomberg (USD0003M Index). Muni swaps tend to be based on 0.67 x Libor, rather than 1 x Libor, because taxes blah blah blah. 3mL versus 1-week SIFMA because I’m lazy but look how nice they line up no?

** Nah, there’s lots of econometrics in the complaint, whatever. Twenty, or even 11, bps seems like a lot of manipulation to me – the Barclays bros were talking about half basis points and as John Carney points out they sometimes couldn’t even get that – but maybe?

*** The county of my childhood, it goes almost without saying.

23 comments (hidden to protect delicate sensibilities)
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Comments (23)

  1. Posted by Amazed Guest | July 11, 2012 at 6:47 PM

    Huh, never would have guessed Matt was from Nassau County, will wonders never cease?

    – Former Countrywide Demographics Quant

  2. Posted by Jimmy the Geek | July 11, 2012 at 6:50 PM

    I had Suffolk at +250

  3. Posted by UBS Name Analyst | July 11, 2012 at 6:52 PM

    I had Darien or Greenwich for sure.

  4. Posted by Guest | July 11, 2012 at 9:14 PM

    Looks as if Matt had too many margs and free handed the chart

  5. Posted by Guest | July 11, 2012 at 9:27 PM

    Read the Dealbook/NY Times article on this lawsuit that Matt links – it does not explain how the (alleged) LIBOR manipulation hurt the municipality by causing SIFMA and LIBOR to diverge – the term SIFMA is not even used at Dealbook – in yet another demonstration of why Paul Krugman shouldn't be throwing rocks at CNBC from his own glass house of shitty reporting.

    Matt Levine > CNBC > NY Times

  6. Posted by FT Alphaville | July 11, 2012 at 10:01 PM

    If you imagine our accents as you read we sound far better, you should really try it sometime.

  7. Posted by guest | July 11, 2012 at 10:28 PM

    Wait, what? While I totally agree that Matt is better than any MSM (or not MSM) journalist, and that NYT's business coverage is pretty bad, CNBC should at all times be called out for how insanely idiotic it is. It it truly one of the worst if not the worst financial "news" outlets around.

  8. Posted by SellingLow | July 11, 2012 at 10:40 PM

    Hey!

    -CNN

  9. Posted by Matt's Mom | July 11, 2012 at 10:48 PM

    I always knew he was destined for such great things! Someone's getting an extra gold star put next to their picture on the refrigerator tonight.

    -Proud in Nassau County

  10. Posted by Bandersnatch | July 12, 2012 at 7:07 AM

    It seems like Bess has finally found her wingman. Keith Hahn, Zach Kouwe and many others tried and failed but the footnore king has succeeded.

  11. Posted by Guest | July 12, 2012 at 11:33 AM

    I like to imagine that Bess pays Matt back by taking him out after work for frozen margs and trying to set him up with her friends, and Matt ends up embarrassing Bess when his game consists of showing charts that make the case why a young lady should go home with him tonight.

  12. Posted by Matt's conscience | July 12, 2012 at 11:45 AM

    Or maybe the real problem with LIBOR manipulation is "hey, you're not supposed to do that!", not "well, who benefited and who lost?" or "did the manipulator give a lot of thought to who (other than themselves, in aggregate) would benefit or loes?"

  13. Posted by Matt's conscience | July 12, 2012 at 11:46 AM

    That's right, I said loes. I went there.

  14. Posted by Kermit | July 12, 2012 at 11:48 AM

    Hey!

  15. Posted by guest | July 12, 2012 at 12:58 PM

    Just make sure you hang the picture on the leeward side of the fridge so the wheel spray from the big trucks zipping through the overpass doesn't ruin it.

    – UBS Long Island Prime Real Estate quant.

  16. Posted by Guest | July 12, 2012 at 5:16 PM

    Who the hell enters into a swap where the floating rate received differs from the floating rate paid on the bonds and doesn't hedge the difference with any more than wishful thinking?

    Municipalities deserved to lose money on that trade – what kind of world do we live in where clients bitch and complain about their loss making decisions and then sue the brokers / intermediaries / whoever?

  17. Posted by Guest | July 16, 2012 at 12:13 PM

    Gee, do ya think there was any pressure from the executive branch to NOT allow libor mortages to blow up? I hope you all realize you would be eating NY rats right now if LIBOR had spiked. It would be over for the USA. And that includes the municipalities and their fat golden benefits that hardly suit a servant.

  18. Posted by Red Sox citizen | July 18, 2012 at 8:18 PM

    Mat has joined the cracker heads. Everyone that's a bank customer got screwed from the libor scam….mortgages weren't somehow subsidized by the libor scam's impact on muni bond rates (yeilds).

    I could whip up some charts showing that libor benefited the over night lending rates at the cost of the military debt.

    The banks that were in the libor scam and benefited from it..like Barclays…are NOT monolithic organizations. Heck, the Treasury function isn't even in the same sub as the mortage lending group….MUTUALLY EXCLUSIVE OPERATIONS.

    I smell another hired gun to twist a story….and deflect critisim from the out-of-control banks by blaming state and citry government. Sorry….I'm not Gulliver.

  19. Posted by rayashton618 | November 5, 2012 at 3:47 PM

    It's all in all startling to be relying on their numbers to mortgage company ma but then again, that would be the way they do their business for the longest time now. The just affirmation one can get out of this is if there are any efforts to establish safety tied up to some credit bundles that they accord.

  20. Posted by العاب اطفال | September 13, 2013 at 10:44 AM

    You're right – I already do that for both the FT and the Economist!

  21. Posted by Pay Date Auction | September 16, 2013 at 7:03 AM

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  22. Posted by al3ab | December 4, 2013 at 9:22 AM

    Who the hell enters into a swap where the floating rate received differs from the floating rate paid on the bonds and doesn't hedge the difference with any more than wishful thinking?

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