[HN Gopher] Libor, long the most important number in finance, di...
___________________________________________________________________
Libor, long the most important number in finance, dies at 52
Author : prostoalex
Score : 178 points
Date : 2022-01-19 02:07 UTC (1 days ago)
(HTM) web link (www.nytimes.com)
(TXT) w3m dump (www.nytimes.com)
| ddlatham wrote:
| There's a great Planet Money episode explaining the story
|
| https://www.npr.org/transcripts/1044598674
| [deleted]
| Retric wrote:
| TLDR;
|
| "Libor was the interest rate that banks themselves had to pay, so
| it offered a convenient base line for the rates they charged
| customers who wanted to borrow cash to buy a home or issue a
| security to finance a business expansion."
|
| "Because Libor relied on self-reported estimates, it was possible
| for a bank to submit a rate that was artificially high or low,
| thus making certain financial holdings more profitable."
|
| "Libor could no longer be used to calculate new deals as of Dec.
| 31 -- more than six years after a former UBS trader was jailed
| for his efforts to manipulate it and others were fired, charged
| or acquitted."
| phaer wrote:
| https://archive.is/ujVCY
| ptr2voidStar wrote:
| r00fus wrote:
| The salient info buried at the end:
|
| "Libor is survived by several successors, each making a claim to
| its crown. The Secured Overnight Financing Rate, or SOFR -- a
| rate produced by the Federal Reserve Bank of New York that is
| based on transaction data, not estimates -- has already been
| embraced by many banks in the United States and has the
| endorsement of the Fed. Others, like the American Interbank
| Offered Rate, or Ameribor, and the Bloomberg Short-Term Bank
| Yield Index, or BSBY, have their adherents. In Britain, the
| Sterling Overnight Index Average, or SONIA, seeks to inherit
| Libor's place as the do-it-all benchmark."
|
| My only remaining question is, since we used to have a single
| reference rate, and now we have multiple reference rates - how
| does this impact existing contracts?
| mathattack wrote:
| The article references that existing contracts will stay on
| LIBOR. It's only dead for new deals.
| cyanydeez wrote:
| after swindling millions for decades
| NoboruWataya wrote:
| Transitioning from LIBOR has been a huge project in the finance
| industry. I would say most banks' in-house legal departments have
| been living and breathing this stuff for the last two years. Most
| contracts drafted after the scandals broke (when it became clear
| that LIBOR's days were numbered) were drafted with fallback
| language language built in, so that upon the cessation of LIBOR
| the contract would automatically switch to a successor rate. But
| there were a lot of longer-dated contracts that required manual
| intervention.
|
| For derivatives, it wasn't so bad because ISDA (the industry
| association for derivatives users) published an IBOR fallback
| protocol which counterparties could adhere to. All contracts
| between two adherents to that protocol were deemed amended so as
| to include market-standard fallback language.
|
| There was no such neat solution for bonds and loans, so banks had
| to look at them pretty much one-by-one. The economic and legal
| terms of the amendments required to replace LIBOR were mostly
| standardised across the market, so they typically didn't involve
| any tough negotiation - the issue was more the operational burden
| of amending many thousands of contracts.
|
| In a simple bilateral loan the process is straightforward: bank
| reaches out to borrower, borrower and bank sign amendment
| agreement, done. But bonds which are widely held through clearing
| systems posed a much bigger problem, because material amendments
| typically need the consent of at least half (or sometimes two
| thirds or three quarters) of bondholders.
|
| A single bond issuance can be held by thousands of (ultimate)
| investors, and ownership can be heavily intermediated: an
| investor might hold her bonds in an account with her broker, that
| broker might hold the bonds in an account with a custodian, that
| custodian holds them in an account with a securities depositary,
| etc. The issuer does not know who the ultimate holders are; it
| can only send out a consent solicitation through the clearing
| systems. Even if that solicitation manages to work its way
| through the ownership chain to the end investors, most of them
| will probably just ignore it.
|
| So a lot of consent solicitations fail even for routine,
| unobjectionable amendments. When this happens (or is likely to
| happen), issuers need to look at other ways to push the
| amendments through, like asking the security agent (who basically
| represents the bondholders as a class) to consent to the
| amendment without first receiving the consent of the underlying
| bondholders. Most deal documents allow security agents to do this
| where the proposed amendments are not materially prejudicial to
| bondholders, but security agents are very reluctant to make that
| determination.
| epa wrote:
| Unfortunately the replacement of SOFR is a collateralized rate
| where as LIBOR is non-collateralized. Adoption of SOFR has been
| slow because its not 1:1. Plus, LIBOR is not dead yet, still a
| lot of contracts that need to go through maturity before the rate
| truly dies.
|
| Interesting history on LIBOR, was created related to an Iran loan
| in the 1960s. Doesnt seem that long ago but that is pushing 50
| years now. Imagine apple told you that mouse will no longer be
| supported on OSX, please everyone switch to touch screen -- the
| adoption would be slow at best.
| gadders wrote:
| The other difference is that LIBOR is a forward-looking rate,
| whereas SOFR (unless you have Term SOFR) is a backward looking
| rate (i.e. that is for LIBOR you know at the start of the month
| what rate you will pay for the following month, whereas with
| SOFR you don't know the rate until the end of the interest
| period [or 5 days before in the case of lookback])
| JackFr wrote:
| And the SOFR is _only_ an overnight rate. There is no
| official Term SOFR. The CME has forward SOFR contracts for 1,
| 3, 6 and 12 months -- which are not really the same thing,
| but if you squint hard you can treat them kind of like
| forward looking term rates.
| divbzero wrote:
| Past HN discussions on the LIBOR scandal --
|
| [2012]: https://news.ycombinator.com/item?id=4224873 "Lies, Damn
| Lies and LIBOR"
|
| [2015]: https://news.ycombinator.com/item?id=9426247 "Deutsche
| Bank to Pay Record $2.5B to Resolve Libor"
|
| [2017]: https://news.ycombinator.com/item?id=13497578 "Libor: the
| bankers who fixed the world's most important number"
|
| [2017]: https://news.ycombinator.com/item?id=14075230 "Libor:
| Bank of England implicated in secret recording"
|
| [2017]: https://news.ycombinator.com/item?id=14994122 "Is LIBOR,
| Benchmark for Trillions of Dollars in Transactions, a Lie?"
|
| [2018]: https://news.ycombinator.com/item?id=16418629 "The
| brazenness of the LIBOR scam"
| yob22 wrote:
| tomc1985 wrote:
| Man I'm glad I don't work for a fintech right now, there's a lot
| of very complicated code with LIBOR as an input
| gadders wrote:
| Or an actual real bank...
| NoboruWataya wrote:
| Most banks are relatively okay _now_ , as by now they have
| already spent thousands of man-hours to migrate their trades.
| The transition has been a major talking point for the last
| two years.
| NovemberWhiskey wrote:
| The smart money already moved away from LIBOR discounting
| for pricing and risk models straight after 2008, and has
| been on Fed Fund OIS discounting for a long time; so SOFR
| OIS is actually going to be the second move.
| tomc1985 wrote:
| Hey now, fintech is a real banc!
| marginalia_nu wrote:
| Having worked in fintech, I assume everyone ignored all signs
| toward this coming, assumed it would be postponed forever, and
| then collectively burst into a choir of "LIBOR gone?
| Inconceivable!"
| twic wrote:
| How did you get access to my commit logs?!
| tomc1985 wrote:
| Yup! I remember hearing murmurs of LIBOR's unsuitability but
| didn't see much of a reaction. Wonder how things are now
| wsc981 wrote:
| Think about all the job security. You'll be set for many years!
| toomuchtodo wrote:
| Chaos is a ladder. Run towards it to prosper.
| queuebert wrote:
| They should start a club with the COBOL maintainers.
| pessimizer wrote:
| They've had years.
| unixhero wrote:
| The vestiges of the Bretton Woods system.
| jayflux wrote:
| https://www.theguardian.com/business/2017/jan/18/libor-scand...
| is a good read about what went on about it.
| fanzhang wrote:
| When I first heard about LIBOR in 2002, I was surprised that the
| number is just based on a survey of bankers. Surely there would
| be accuracy issues with that?
|
| But at that time I was young and had no finance experience, so
| though that the adults in the room knew best. Turns out not!
|
| I don't think the base problem is that people shaded their
| numbers one way or another, it's that the system is designed
| wrong.
| kaesar14 wrote:
| This was also my impression learning about it as I was starting
| to learn about global finance in high school. Even them it
| seemed ridiculous. I wonder how many more systems currently in
| place are based on such foolish promises and easily exploited
| foundations of trust.
| boringg wrote:
| Fiat currency is based on trust - so was the gold standard to
| a degree. Trust is an important part of society. We rip trust
| away in our societal institutions and we are left in a
| terrible existence.
|
| If you boil everything down - trust a critical function. Your
| day is filled with trust of functioning. Without it you would
| live in pure chaos. I find these arguments facile.
| cardiffspaceman wrote:
| Pre-SoundScan record sales numbers?
| NoboruWataya wrote:
| Trust is central to the financial system, for better or
| worse. The whole thing is based on trust - whether it's trust
| in the person on the other end of the phone, trust in the
| big-name bank that person works for, or trust in that bank's
| regulator.
|
| This seems stupid to some tech people, who try to disrupt it
| by creating trustless systems such as distributed ledgers.
| But trust keeps on creeping back into the system. There are
| crypto custodians, crypto brokers, crypto exchanges, all of
| whom you have to trust to some extent. There is crypto
| lending. I wouldn't be surprised if we eventually have the
| Bitcoin Interexchange Offered Rate decided by a handful of
| the biggest exchanges.
| SkyMarshal wrote:
| The more I've learned of the banking system, the more examples
| of this I see. It seems that much of the banking system was
| designed by bottom-line-oriented, non-systems-thinkers, who
| just wanted an immediate, good-enough solution to a problem.
| Accuracy, reproducibility, scalability, systemic integrity, and
| similar concerns often weren't a factor.
| tlb wrote:
| It evolved from a small system where the people all knew each
| other and went to the same few public schools where
| everything also ran on the honor system. It wasn't a bad
| design for its original scale & context.
|
| Those dumb bankers. We computer scientists would never design
| something that failed to scale through 5 decades.
| rr808 wrote:
| > good-enough solution to a problem
|
| That's pretty much everyone everywhere in every industry.
| LIBOR really was good enough which is why it lasted.
| rr808 wrote:
| > When I first heard about LIBOR in 2002, I was surprised that
| the number is just based on a survey of bankers. Surely there
| would be accuracy issues with that?
|
| Traditionally the banking community of London was super close
| and built on reputation. People do huge deals based on people's
| word and people were expected to be honorable. That might sound
| naieve in the 21st century when global trade is much bigger but
| it worked for hundreds of years.
|
| Secondly LIBOR really was pretty accurate, people talk a lot
| about how it could have been manipulated but the evidence is
| isn't so solid. Yes in aggregate a few bps adds up to a lot of
| money but for individual parties it doesn't really make a
| difference.
| cromulent wrote:
| The Corruption Index is similar - it's based on how corrupt
| people think a nation is. Nothing to do with how much actual
| corruption exists.
| sokoloff wrote:
| It seems overwhelmingly likely that "how corrupt people think
| a nation is" does have "[something] to do with how much
| actual corruption exists".
| CraigJPerry wrote:
| >> I was surprised that the number is just based on a survey of
| bankers
|
| The numbers that LIBOR is measuring ultimately represent a
| human's opinion. Well, it's the opinions of several humans then
| the highest and lowest opinions get discarded and the rest
| averaged.
|
| It's not measuring a value derived deterministically from some
| inputs, so how else could you capture it?
| hardtke wrote:
| I have an adjustable rate mortgage based on LIBOR and the lender
| still has not said what they plan to do. The presumed replacement
| rate (SOFR) seems to be pegged near 0% which would be good.
| javajosh wrote:
| Why is this purely up to the lender? And if it is, _of course_
| they 'll add something. You can't have _individuals_ borrowing
| money interest free now, can we? (Institutions...that 's more
| than fine, its expected.)
| stanleydrew wrote:
| It's not "purely up to the lender." It's agreed upon in a
| mortgage contract, which the borrower signed. Both parties
| decided that it was a good idea, otherwise there wouldn't
| have been an agreement.
| postalrat wrote:
| How do you know all mortgage contracts have a clause for if
| libor isn't available?
| EugeneG wrote:
| Yeah there will be a spread, won't go from LIBOR+0 to SOFR+0,
| but to SOFR+0.20% for example
| yufeng66 wrote:
| legally the new definition of 3 month Libor is sofr + 26.161bps
| codebolt wrote:
| I know they will use a fallback spread to convert 3 month
| Libor to SOFR. But is the spread really a constant?
| swedishturnip wrote:
| Absolutely not true, don't know where you got that idea.
| xtracto wrote:
| Completely tangentially related: I love basis points. Up
| until I started working in the FinTech I could not grasp the
| need for it... but after much repeating "x% plus 3%" and then
| having to clarify that is 300 basis points and not x*1.03, it
| got my eyes opened.
| catothedev wrote:
| It's also useful for negotiating rates. Saying you want a
| rate to be .2% lower is awkward and wordy. Saying 'can we
| take it down 20 bips?' sounds much more pro ;).
| WanderPanda wrote:
| Your expressions are not equivalent
| hardtke wrote:
| I'm tied to the 1 year LIBOR -- do you know what that will
| be?
| twic wrote:
| 0.71513%
|
| https://assets.bbhub.io/professional/sites/10/IBOR-
| Fallbacks...
| stanleydrew wrote:
| If you read your mortgage contract I'm pretty sure you'll find
| a clause related to what your rate is based on if LIBOR is no
| longer available.
| gadders wrote:
| If you're in the US and the mortgage is dollar-based I would
| expect you to be transitioned to a SOFR-based loan, possibly
| with a credit adjustment spread.
| codebolt wrote:
| What about SONIA, isn't that the dollar based equivalent?
| NoboruWataya wrote:
| SONIA is the Sterling Overnight Index Average, an overnight
| rate for pound sterling.
| rwmj wrote:
| In my previous job we sold LIBOR (and Euribor) mortgages, so I
| have been wondering what the lender would do about those, since
| as I understand it the LIBOR element was written into the 25+
| year mortgage contracts. I guess I found out - nothing!
| codebolt wrote:
| Note that when SOFR starts to fluctuate, you wont know your
| actual interest payment before the end of each payment period,
| since these rates are applied on a daily basis, in arrears.
| sneak wrote:
| > _It turned out that bankers had been coordinating with one
| another to manipulate the rate, pronounced "LIE-bore," by skewing
| the number higher or lower for their banks' gain._
|
| It's rare to see shade thrown so overtly in the Times, because
| it's so rare it can be done this deniably, and always makes me
| chuckle when it does.
| neil_s wrote:
| OMG, I was wondering why they waited so far down in the article
| to describe the pronunciation. Only after seeing your comment
| did it click!
| akmarinov wrote:
| Paywalled
| decafninja wrote:
| I was working at an investment bank (as a developer) when this
| scandal hit. My entire department was laid off as a result. Not
| because we were involved or complicit in the scandal, but because
| the scandal indirectly caused a big financial hit to the bank and
| we were part of the cost cutting measures.
|
| It was a traumatic and tragic moment for me at the time. But in
| hindsight it was the event that lead to my eyes being opened to
| the world of Silicon Valley tech companies. Until then, I had
| naively thought that working as a developer in the IT departments
| of Wall Street investment banks and hedge funds* was the pinnacle
| of a SWE career.
|
| * Not referring to places like Citadel or Jane Street or Two
| Sigma, etc.
| throwmeaway666 wrote:
| >we were part of the cost cutting measures. >the event that
| lead to my eyes being opened to the world of Silicon Valley
| tech companies
|
| I found that being aware of whether you will be part of the
| cost center or profit center in a company is very useful when
| deciding where you should work.
| decafninja wrote:
| Agree with this 100%. I now make it a point to avoid any
| companies where tech is an unrespected cost center, which
| unfortunately does rule out the overwhelming majority of
| companies out there.
|
| That said, even companies where SWEs and tech are the profit
| center are certainly capable of laying you off, so profit vs
| cost center isn't really any insurance to avoid that sort of
| fate. Even at the banks I've worked at the traders (profit
| center) would face the axe before us lowly peasants in the
| tech departments.
|
| Rather, it's more an issue of respect...and relative
| compensation.
| willcipriano wrote:
| I have one primary question that I'm trying to figure out
| during job interviews. "Will my boss understand what I
| produce and the difficulty involved in producing it?" if
| the answer is no, the job is going to suck.
| decafninja wrote:
| It's not just one level though. You can ask the same
| about whether your boss's boss will understand, and so on
| and so forth up the food chain.
|
| The problem with many tech-as-a-cost-center companies is
| that you will quickly run into a person on that hierarchy
| who doesn't (often at or near the intersection between
| tech departments and the profit center business
| departments).
| grahamm wrote:
| And if your company wants to "flatten the structure"
| running into that person is more likely and you will run
| in to them.
|
| I also have a problem with ex-developers who work their
| way up the structure with time. Generally they drift away
| from the tech and what tech takes and end up serving
| their higher masters. So you end up with someone who
| thinks they know what it takes but hasn't actually done
| it for many years. Literally had this again the other day
| when I gave an estimate for a piece of work one of the
| devs had done a decent bit of investigation on. Bluntly
| told that was too much time from someone who had really
| no much more info than the subject line of the bug
| report. Of course who had the weight to get their
| estimate across.....(not me)
| willcipriano wrote:
| I like the rule whoever estimates lowest gets to do it.
| If you aren't in the running to do it, your estimate
| doesn't count. It's easy to armchair quarterback if
| someone else is on the line.
| santoshalper wrote:
| This one really hit me personally. When I was young, my
| father advised me that in my career I should stay "close to
| the money". It made a lot of sense, and I tried, but I ended
| up moving increasingly into financial services technology.
|
| Now, 25+ years later, I am the head of technology (C-Level)
| for a large financial services firm (Fortune 200). I report
| to the CEO, I lead thousands, I am handsomely compensated,
| but I am professionally lonely.
|
| Over the years, I have become very, very good at explaining
| technology concepts to non-tech peers (I think it was an
| intrinsic skill that got me here), but honestly, I am
| exhausted. I don't think I have it in me to explain technical
| debt, or the importance of investing in our platform, or how
| to run a build/buy process or why having an engineering
| culture is so important. I long to work at a company where my
| work is intrinsically respected. My peers are polite, but
| treat the work my team does like magic. It felt deferential
| at first, but now it feels condescending. I think I've done a
| great job of creating a real technology culture, but in the
| last year I realized I am never going to turn us into a
| technology company, no matter how hard I try.
|
| The lesson is - if you want to work at a technology company
| (revenue is directly generated through licensing or SaaS
| fees), then don't compromise. You won't be able to change the
| nature of your employer no matter how high up the ladder you
| climb.
|
| My litmus test is this: If you couldn't imagine a company
| installing a former engineer as their CEO, don't consider it
| a tech company no matter what the leadership claims.
| [deleted]
| DwnVoteHoneyPot wrote:
| > my father advised me that in my career I should stay
| "close to the money"
|
| I got the same advice from my father, but it meant
| something different. I was told if I went into computer
| science or any engineering, I'd always be a servant to
| management and my job would be outsourced to India. I would
| be easily replaceable. Best to be "close to the money"
| instead... that was management. Also, to make "real money",
| I'd have to move up from engineering to management and
| wouldn't be programming anyway.
|
| So I went to business school. Might as well optimize and
| skip the engineering step and go straight into managment.
| And to be _even closer_ to the money: finance degree.
|
| 15+ years later, while finance has been fine, I just really
| like programming. I have a real aptitude for it. Had to
| teach myself to code, started side hustle online business
| (finance is still day job). I might get the same salary as
| a FAANG software engineer (without the skyrocketing stock),
| but I always wonder what if I did comp sci instead.
|
| Then, on HN I see comments like yours. Many here hate
| management, or in your case, moved up to the top of IT
| management and still seem unsatisfied.
|
| Now, I figure grass is greener on there side... Management
| says they are treated like a cost center and engineering is
| "closer to the money" as in profit center. Engineers, even
| in the profit center, gripe at those MBAs who are "closer
| to the money" as in directing the business plan, budget and
| timelines.
|
| In my next life, I'll just do what I enjoy and am good at.
| toss1 wrote:
| THIS^^ So much this.
|
| If the executives from the CEO on down fail to understand
| technology as the source of a serious competitive
| advantage, then you will be seen merely as a glorified
| janitor, or maybe plumber. They do absolutely essential
| work, but nobody respects them.
|
| And one guarantee, if your company (or one you are
| considering) looks at technology as a cost center, then I
| can guarantee that they do NOT and WILL NOT see technology
| as the source of any competitive advantage. You'll be
| nothing more than a plumber on a team of plumbers who will
| be ignored, until a pipe breaks, then you'll be blamed for
| it happening even if they congratulate you for fixing it to
| your face. Good luck with that.
| [deleted]
| rr808 wrote:
| > I found that being aware of whether you will be part of the
| cost center or profit center in a company is very useful when
| deciding where you should work.
|
| The problem with most tech companies these days is they dont
| make profits.
| vsuaoqmdn wrote:
| Let me guess. Now you think that the pinnacle of a SWE career
| is working at Google it Facebook, right?
| [deleted]
| citizenpaul wrote:
| >part of the cost cutting measures.
|
| Not sure why you would believe this. It is much harder for
| regulators to interview employees about their activities when
| they are no longer centrally located for convenient
| discussions.
|
| Its the same tactic they use in bury investigators with
| paperwork but for people.
| skrebbel wrote:
| Don't assume, you know nothing about the parent's situation.
| citizenpaul wrote:
| I'm not assuming anything. Lying is part of business. The
| reason he was told was almost certainly not the actual
| reason.
| decafninja wrote:
| My department was very far removed from the issues in the
| scandal. I doubt investigators would have had much interest
| in us or found anything of use from interviewing any of us.
| citizenpaul wrote:
| I believe that it was separated and 100% not involved. Do
| you think your company is above laying off an entire
| department to keep investigators off the trail of the real
| problem department?
| colordrops wrote:
| > I had naively thought that working as a developer in the IT
| departments of Wall Street investment banks and hedge funds*
| was the pinnacle of a SWE career.
|
| What was the reasoning behind this thinking? While finance
| often does have some pretty advanced tech behind it, you can
| find more cutting edge and complex work at purely technical
| companies. Or are you speaking of compensation?
| Jenk wrote:
| I'm not GP but in the 90s I was taught that bigger = better,
| and to some degree that was true, if you were into old (ergo,
| very expensive) tech.
|
| In the days before the internet, technology was niche (as was
| the knowledge to develop and operate it) and super expensive,
| so only mega corps had decent tech to work with.
|
| This reputation persisted for sometime into the new
| millennium until we started to see more of these scruffy
| younguns starting to make noise in the business, and techno,
| spheres.
| madaxe_again wrote:
| I had a similar nudge into going starting my own thing - I'd
| been at Refco (a now defunct brokerage) in '05 when everything
| went pop, because they'd been hiding half a billion of bad debt
| - I saw which way the wind was blowing and scurried away like a
| rat from a sinking ship.
| jacquesm wrote:
| Fair chance that they exaggerated the financial impact and just
| used it as an excuse to push through a lay-off they were
| planning anyway. 'Never let a good crisis go to waste'.
| pessimizer wrote:
| Quote from earlier linked article explaining why it took so long
| after the scandal to do this:
|
| > The transition to a post-Libor world would not be painless.
| Remember those $190 trillion of Libor-linked derivatives? Hardly
| any of those instruments -- essentially contracts between two
| parties -- provide a workable option for what to do if Libor were
| to vanish.
|
| > In a worst-case scenario, banks and their customers would
| effectively have to negotiate how to end Libor-based contracts
| over the phone, said Darrell Duffie, a Stanford University
| finance professor. For a sense of what is at stake, Lehman
| Brothers was a party to more than 900,000 derivatives contracts
| when it went bankrupt in 2008, according to research published by
| the Federal Reserve Bank of New York.
|
| > "It'll be really nasty in terms of costly, difficult workouts,"
| he said.
|
| https://archive.fo/LKI4J
|
| _The Most Important Number in Finance Is Going Away. Wall St.
| Isn't Prepared._
| JaggerFoo wrote:
| Mainly was LIBOR used in the EuroDollar market?
|
| Anyways, it seems like there is a need for a system that is
| transparent, immutable, and accessible to everyone... Crypto?
| Matt Damon is calling.
|
| Cheers
| Hjfrf wrote:
| I worked at a European bank ten years ago, and libor was at
| least one leg of effectively every product offered.
|
| Interest rate swaps, credit, loans, fixed income, exotic
| derivatives, CDO, whatever.
|
| You have to hedge the interest rate risk somewhere or get stuck
| with huge collateral requirements/XVA.
|
| Cryptocurrencies don't solve the problem since they're largely
| traded on opaque exchanges and other l2 solutions even less
| trustworthy than the libor cartel.
| csdvrx wrote:
| I think the parent poster meant that the actual going prices
| on multiple exchanges could be used for data inference.
|
| While there are rumors of wash tradings on some exchanges,
| the price at which such trades would be going will be
| constrained by the larger network, and the risk of triangular
| trade will limit the possible divergences to a larger spread
| (instead of going one direction only)
|
| Add enough data, and you may get something that would be
| almost impossible to trick, simply due to the sheer number of
| exchanges, and bots that would gladly take the money of those
| who would try to rig the game.
| erosenbe0 wrote:
| Ummm the whole point is that it is a measure of relatively
| unregulated dollar for dollar transactions not subject to
| any clearinghouse, exchange, or blockchain regulation or
| visibility. LIBOR is supposed to be the benchmark of
| dollars anywhere, so to speak. So you're talking about
| apples and oranges
| csdvrx wrote:
| Well, you do with what you have (and the prices of apples
| may be correlated enough with the price of oranges to act
| as a proxy if you can't get the price of oranges), and
| the pros of "resilient to rigging" might be worth more
| than the cons.
| siliconlotus wrote:
| When I worked in investment banking, all our debt models were
| pegged to LIBOR. Rest In Peace! God bless the IB analysts
| scrambling to plug their models with replacement rates and weird
| hardcodes!
| HarryHirsch wrote:
| So - considering that LIBOR was not an observed number, but a
| made-up number that was nonetheless useful, what did the LIBOR
| actually measure?
| dmurray wrote:
| Bankers' consensus of what the overnight interest rate should
| be for a well-capitalized, creditworthy bank.
| [deleted]
| tomc1985 wrote:
| LIBOR is often part of the formula for calculating loan
| interest rates. Last time I saw such code it looked something
| like:
|
| LIBOR + bank's minimum interest rate + a rate based on
| creditworthiness = your offered interest rate
|
| Planet Money recently had a really good episode on how some
| banks are deciding on a replacement rate:
| https://www.npr.org/2021/10/08/1044598674/libor-pains
| fennecfoxen wrote:
| That's not what it's measuring, that's how it's used.
| ChrisLomont wrote:
| That's also what it measures, as measured by the people
| doing the estimation of creditworthiness, who are the
| experts in understand how to measure that value.
|
| If anyone else was more accurate at this measurement,
| then they had arbitrage against those using the measure,
| giving those doing the initial measurement incentive to
| get it as right as is humanly possible, since they
| usually worked at places that use LIBOR to price things.
|
| Since LIBOR underlied hundreds of trillions in assets,
| there are ample papers on all aspects of LIBOR, including
| those trying to see how well it was computed versus post
| outcomes.
|
| It holds up well. https://scholar.google.com/scholar?hl=e
| n&as_sdt=0%2C14&q=LIB...
| tomc1985 wrote:
| It measures the backroom sensitivities of the cabal of
| bankers that set it, judging by recent news releases
| JackFr wrote:
| It measures the answer to the hypothetical question "If a
| another bank with good credit came to you right now to borrow
| (overnight/1W/1M/3M) in (USD/EUR/GBP/CHF/JPY) what rate would
| you offer them?" Which is a proxy for the banks' willingless
| to lend. (It had a less quoted counterpart, LIBID the London
| Interbank Bid Rate, where would you borrow at.)
| tula wrote:
| No, LIBOR is your borrowing cost, the rate at which you'd
| be _able_ to borrow (ie the rate that others would offer to
| you to lend you money).
|
| LIBID is the rate at which you'd be _willing_ to borrow. So
| the difference between the two is like bid vs ask.
| erichocean wrote:
| ELI5 Why not simply measure the actual trading activity for
| exactly those activities the previous day?
| twic wrote:
| Good question. I suspect this was because when the rate
| was defined in the 1980s, collecting that data would have
| been difficult.
|
| After the LIBOR scandal, the EU brought the benchmarks
| regulation (BMR) which says that interest rate indexes
| have to be based on actual transactions, just as you say.
| Euribor, the equivalent of LIBOR for lending in euros,
| was reformed to be based on transactions:
|
| https://www.emmi-
| benchmarks.eu/benchmarks/euribor/reforms/
|
| The administrator of LIBOR proposed doing the same:
|
| https://www.clarusft.com/rfrs-libor-is-changing/
|
| But in the end, US and UK regulators decided just to
| abolish it, in favour of overnight indexes based on real
| transactions (SONIA for pounds, which already existed,
| and SOFR for dollars, which was created for this
| purpose).
|
| I believe this divergence happened because of differences
| in the lending markets. In the euro area, there is still
| a lot of unsecured term lending, which is what Euribor
| measures. But in the UK and US, this kind of lending has
| largely dried up, but there is a lot of overnight
| lending, so they chose rates which measure that. I don't
| know why the euro area is different to the US and UK
| here. It's possible that the euro market will evolve to
| be more like the US and UK, in which case Euribor will
| stop being credible, and the euro will also move over to
| its overnight rate, ESTR.
|
| Another fun quirk is that SONIA and ESTR measure
| unsecured overnight lending, whereas SOFR measures
| "repo", which is essentially lending secured with
| government bonds as collateral. There is a sterling
| overnight repo rate, RONIA, but i don't think it's used
| much. I think repo volumes are higher than unsecured
| lending volumes; if that difference gets stark enough,
| perhaps sterling and euro regulators will force another
| switch, to the repo indexes.
| JackFr wrote:
| 1) easier said than done - in general these are often OTC
| markets without clearing houses - that being said not
| insurmountable difficulties but not zero-cost either. 2)
| the previous days trades are backward looking, not
| forward looking. What's the big deal you say, it's just a
| day? We'll think about driving by using your rear view
| mirror -- you do fine until to hit a turn then things get
| a little sketchy, and a sharp turn can kill you.
| pjc50 wrote:
| That's a day old. And the market may not be very active.
| Besides, I don't think they are centrally cleared? (Or
| perhaps in the early days they weren't, it was certainly
| pre-digitization)
|
| The market - interbank rates - is quite small in terms of
| participants. I think the problem is the number was
| incredibly _useful_ even if it wasn 't accurate.
| neom wrote:
| What Is Libor And Why Is It Being Abandoned? -
| https://www.forbes.com/advisor/investing/what-is-libor/
| jcuenod wrote:
| If you're a neophyte like me, take a look at the Odd Lots
| podcast:
| https://www.listennotes.com/search/?ocid=c1a7b213882c4e32964...
|
| There's a ton of good info in there on what Libor is, why it
| needed to live, why it needed to die, and some attempts to
| replace it.
| throwthere wrote:
| 52 years-- it's amazing how easy it was to cook Libor and how
| long it lasted.
|
| And it was mostly fine before the world started drowning in
| derivatives and derivatives of derivatives.
| nerdponx wrote:
| > In 1986, at age 17, it hit the big time: Libor was taken in by
| the British Bankers Association, a trade group described later by
| The New York Times as a "club of gentlemen bankers."
|
| What are the chances that this "club of gentlemen bankers"
| _always_ intended to manipulate Libor to some extent?
|
| I know finance and banking is very complicated; maybe someone
| will come along who happens to have been a banker in London in
| 1986 and will set me straight. Otherwise I find it hard to limit
| my cynicism when enormous amounts of money are involved.
| MR4D wrote:
| > Otherwise I find it hard to limit my cynicism when enormous
| amounts of money are involved.
|
| You should _always_ be cynical when large amounts of money are
| involved. It helps you avoid large losses.
|
| Side note - one of the best questions to ask in any deal is
| "how are you making money on this". If the other party doesn't
| tell you, then they probably know something that they don't
| want you to know. If you doesn't get a straight answer, walk
| away [0].
|
| [0] - I work in finance and never do business with someone who
| is not transparent about this. Been doing it a long time and it
| serves me well. I learned it from an old hand, and cringes the
| first few times he asked it. Then, I got the nerve to ask why
| he asked such a cringeworthy question. Glad I did!
| JackFr wrote:
| LIBOR grew out of the same ecosystem that created Eurodollars.
| Originally a Eurodollar was simply a dollar held in a non-US
| domiciled bank, in particular a bank outside of the Federal
| Reserve System. The story, at least partly true, is that the
| Soviet Union was making a ton of money selling oil. Thanks to
| OPEC, the market for oil is denominated in dollars. Soviet oil
| companies didn't mind the dollars, but they didn't want money
| in US banks, and so the Eurodollar was created. In the USD
| money market (the interbank lending market for terms < 12
| months) the most riskfree rate is the Fed Funds rate -- that is
| the rate which banks lend to ach other within the Fed system.
| In the money market for USD, everything was quoted in terms of
| Fed Funds, e.g. Fed Funds + 50 etc. Banks with EuroDollar
| deposits couldn't partake in the Fed system, but they needed
| something similar, and so LIBOR was created.
|
| Well, then it grew. US banks got involved in EuroDollars and
| foreign banks got US subsidiaries and everything kind of
| ballooned.
|
| But the big change was the invention of interest rate swaps.
| Interest rate swaps create a linkage between the Money Market
| (terms < 12 months) and the Capital Market (terms > 12 months).
| There are a bunch of economic explanations as to why interest
| rate swaps exist and some of them have to be true, but they're
| irrelevant to the LIBOR story. A vanilla fixed-floating swap
| needs a floating rate, and that's LIBOR. A couple of trillion
| dollars (notional) worth of derivatives later, instead of
| simply being a pragmatic way to quote rates in the money
| market, it then drove P&L of derivatives desks.
|
| I think everyone knew the potential for manipulation was always
| possible, but for a long time I think, until the tail started
| wagging the dog, it worked. But there's no going back now.
| panoramas4good wrote:
| Would highly recommend the book, The Spider Network, which gives
| an in-depth view (perhaps slightly dramatised) of how one trader
| manipulated Libor.
| erwincoumans wrote:
| From the title it seems like Mr. or Dr. Libor died. For a
| paragraph, it is cute to have Libor personified. Doing it until
| the end of the story feels a bit artificial to me.
| svnpenn wrote:
| Yeah this just screams clickbait. "Let's create a title that
| makes no sense, followed by an entire article with a strained
| metaphor".
| mhh__ wrote:
| How is it clickbait? LIBOR is omnipresent in finance and it
| _is_ being killed. Sterling LIBOR is already dead for
| example.
| svnpenn wrote:
| Well:
|
| 1. Its LIBOR, not Libor
|
| 2. LIBOR is not a number, its a rate. Thats literally what
| the "R" stands for
|
| 3. LIBOR cant die, as its not a person
|
| Its just an awful title because it calls LIBOR a number,
| which its not, then goes on to treat it as a human, which
| its also not.
| carnitine wrote:
| LIBOR is not a rate, it's a series of rates across
| different currencies. Rates are numbers though so I'm not
| sure what distinction you are trying to draw.
| recursive wrote:
| I don't know anything about LIBOR, but I know a few
| things about rates. Every rate I've ever heard of is a
| number. How can a rate not be a number?
| danielmarkbruce wrote:
| It's a tongue in cheek article in the NY Times. NY has a
| lot of finance folks. To a lot of finance folks, libor
| has been a meaningful number for a long time and a
| million contracts are based on it.
|
| As for "treating it as a human", the financial industry
| has long used the term "mr market". Ie it's sort of an
| inside joke.
|
| To the target audience it is not an awful title, nor an
| awful article.
|
| As for the semantics of numbers v rates - the rate is
| specified in numbers. And LIBOR v Libor - the number was
| used so extensively for so long many people didn't even
| know what the acronym meant. It's like correcting someone
| for calling a tissue a kleenex.
| outside1234 wrote:
| It is a literary device to make a very boring topic interesting
| for mainstream readers.
| whatshisface wrote:
| A giant London banking scam touching on something that may
| even have been involved in the reader's mortgage contract, is
| not exactly a boring topic.
| NoboruWataya wrote:
| At a high level "there was a huge scam" sounds pretty
| interesting, but try to explain the detail and most
| people's eyes will glaze over.
| r00fus wrote:
| There's concern fatigue these days, plus LIBOR scandal was
| old news even years ago. The fact that LIBOR now dead is
| not really surprising.
| WJW wrote:
| > may even have been involved in the reader's mortgage
| contract
|
| I personally find finance pretty interesting, but mortgage
| contracts are pretty much the definition of boring for many
| people.
| WillEngler wrote:
| I enjoyed the framing but to each their own.
| queuebert wrote:
| The NYT has a very high opinion of their obituaries.
| ambrozk wrote:
| I enjoyed it, and I'm happy when writers practice their craft
| with a bit of humor.
| fourseventy wrote:
| It was confusing to me because I had no context on what/who
| Libor was.
| dang wrote:
| It did seem odd for NYT, and a bit of an annoying distraction
| in an important story. On the other hand, I'm surprised they
| let someone experiment like that.
| TameAntelope wrote:
| > It turned out that bankers had been coordinating with one
| another to manipulate the rate, pronounced "LIE-bore," by skewing
| the number higher or lower for their banks' gain.
|
| The authors must be very pleased with themselves about this
| one...
| lordnacho wrote:
| I traded LIBOR instruments that were probably manipulated, and
| there was suspicion at the time. Same with FX, there was a cartel
| manipulating that as well, and people in my firm also wondered at
| times why things were moving around at the exact wrong time.
|
| It's probably best that the LIBOR system goes in favor of
| something more transparent. But I have a friend who is involved
| in the transition at a bank, and it's incredibly complex to move
| over such a huge mass of contracts to this new thing. Definitely
| a lot of work for a lot of people.
| splittingTimes wrote:
| The Libor - interest rates scandal is only one in a long list
| of documented manipulations in the last 5-10 years
|
| ISDAfix - swaps
|
| Platts - oil prices
|
| WM/Reuters - FX
|
| High-Frequency Trading - equities
|
| Commodities - Gold, Silver Stock indices
|
| Are all rigged. With that history, how can we give that new
| system the benefit of a doubt. It will be gamed as well.
___________________________________________________________________
(page generated 2022-01-20 23:00 UTC)