Libor Probably Not Worth The Fixing

Should we just consign this thing to the scrapheap of corporate history?

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Updated:: Jan 14, 2019
Original:: Jul 9, 2015

Not having a great day.

Remember when the new people in charge of Libor—you know, the ones doing such a good job of running their flagship exchange yesterday—said that no one wanted to help set it but there was really nothing to worry about because all of their hard work, combined with a new oversight committee, was “encouraging new participation and confidence” in the benchmark? Yeah, not so much.

A top U.K. regulator says efforts to overhaul the London interbank offered rate, or Libor, haven't gone nearly far enough. The U.S. Federal Reserve says Libor is no longer fit to serve as the market’s main benchmark….ICE has committed to publishing new proposals for Libor reform this summer. Martin Wheatley, chief executive of the U.K. Financial Conduct Authority, said the benchmark needs a full overhaul, that “changes the definition” of Libor.

Or it could just not bother and scrap the whole thing.

Changes to regulation in the aftermath of the financial crisis have reduced the amount of lending between banks and “weakened the foundation of Libor,” said Jerome Powell, a governor of the Federal Reserve, in a speech last fall. Banks are now more likely to borrow cheaply by offering assets such as government bonds as security to investors in return for short-term loans.
“Is it wise to rely on a critical benchmark that is built on a market in decline?” asked Mr. Powell. “Clearly not. The risks to market functioning are simply too great.”

No Fix for Libor: Benchmark Still Broken, Regulators Say [WSJ]

Pretty much the definition of a situation.

Given...y'know.

One thing that most people probably agree on is that having their instant messages, e-mails, and phone calls end up court would be cause for at least a little embarrassment. Everyone's thrown in an emoticon they aren't proud of, some of us have used company time to chat with significant others about undergarments, and the vast majority of workers have spent a not insignificant amount of the workday talking shit about their superiors. Of course, the humiliation gets ratcheted up a notch in the case of people who 'haha' (and in extreme circumstances "hahahah') their own jokes* which, just for example, involve habitual Libor manipulation. Tan Chi Min knows what we're talking about: “Nice Libor,” Tan said in an April 2, 2008, instant message with traders including Neil Danziger, who also was fired by RBS, and David Pieri. “Our six-month fixing moved the entire fixing, hahahah.” And while having such an exchange become public would be tremendously awkward for most, you know what's really 'hahaha' about this whole thing is that 1) Tan was the one who wanted people to read the above, which was submitted as part of a 231-page affidavit earlier this month and 2) He's trying to use it as evidence that he didn't deserve to be fired. The conversations among traders at RBS and firms including Deutsche Bank AG illustrate how the risk of abuse was embedded in the process for setting Libor, the benchmark for more than $300 trillion of securities worldwide......Tan, the bank’s former Singapore-based head of delta trading for Asia, [is] suing Britain’s third-biggest lender by assets for wrongful dismissal after being fired last year for allegedly trying to manipulate the London interbank offered rate, or Libor. Tan, who 'allegedly' tried to manipulate the London interbank offered rate, also included this conversations as part of his defense: “What’s the call on Libor,” Jezri Mohideen, then the bank’s head of yen products in Singapore, asked Danziger in an Aug. 21, 2007, chat. “Where would you like it, Libor that is,” Danziger asked, according to a transcript included in Tan’s filings. “Mixed feelings, but mostly I’d like it all lower so the world starts to make a little sense,” another trader responded. “The whole HF world will be kissing you instead of calling me if Libor move lower,” Tan said, referring to hedge funds. “OK, I will move the curve down 1 basis point, maybe more if I can,” Danziger replied. And this: In another conversation on March 27, 2008, Tan called for RBS to raise its Libor submission, saying an earlier lower figure the bank submitted may have cost his team 200,000 pounds. “We need to bump it way up high, highest among all if possible,” Tan said. Tan also asked for a high submission in an Aug. 20, 2007, instant message to Scott Nygaard, global head of RBS’s treasury markets in London. “We want high fix in 3s,” Tan said in the message. “Neil is the one setting the yen Libor in London now and for this week and next.” Also this: “It’s just amazing how Libor fixing can make you that much money or lose if opposite,” Tan said on an Aug. 19, 2007, conversation with traders at other banks, including Deutsche Bank’s Mark Wong. “It’s a cartel now in London.” And this philosophical one, for good measure: “This whole process would make banks pull out of Libor fixing,” Tan said in a May 16, 2011, chat with money markets trader Andrew Smoler. “Question is what is illegal? If making money if bank fix it to suits its own books are illegal... then no point fixing it right? Cuz there will be days when we will def make money fixing it.” The defense rests. RBS Instant Messages Show Libor Rates Skewed for Traders [Bloomberg] *Although actually people who do this probably don't even have the good sense to be ashamed of themselves.