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Suddenly, once some sunshine is beamed in their general direction, a host of banks clear their throats and look down at their shoes before reporting LIBOR closer to the "shadow interbank money rate market." The revelation was so dramatic that it apparently caused a 5.4 magnitude earthquake in Illinois this morning.
This spurs many questions, one of which is not "Gee, I wonder if they were artificially depressing LIBOR," since the answer to that is actually painfully obvious. More interesting is who runs the membership committee for the various "shadow markets" I have increasingly heard about and why haven't I gotten an invitation to apply?
There's this shadow interbank money rate market, there's the "shadow economy," "shadow government statistics," and "shadow prices." I feel like there is this whole hidden shadowy world to discover. Very depressing. I never got to go to the "no girls allowed" treehouse club either.
And, frankly, it's kind of a bummer. Now that it has been exposed, the Shadow LIBOR market will vanish.
LIBOR Surges After Scrutiny Does Too [WSJ]


Banks Were Asked If They Would Prefer To Make More Money Or Less Money, Chose More Money

One kind of obvious thing about financial markets is that you can't just call everyone into a room and tell them, "look, guys, just be honest about the price that you would pay / receive for Thing X." This is because financial industry traders are degenerate lying scumbags. No, wait, that's not right. This is because if everyone just told each other their reserve prices then it would be really hard for them to make any money trading and so we, like, wouldn't have a financial system. So you have things like anonymous execution on stock exchanges and dark pools and, um, lying scumbag traders. And that allows you to have profitable trading. Of course you have to put some limits on the lying scumbaggery: you can't tell people you're investing their money while really blowing it on hookers, and I guess now you can't sell someone synthetic CDOs without telling them who was on the other side. But a little fudging around the edges about the price you're willing to pay or receive - or the price you could pay or receive elsewhere - is kind of at the heart of what trading is. So in a sense the amazing thing about the Libor scandal is that people are amazed by it. A quick recap: