10 ms·

Libor: the bankers who fixed the world’s most important number

191 points by ghosh 10y ago

rissicay 10y ago
this is why bitcoin is important...
- neximo64 10y ago
  How would bitcoin change anything? The market pricing mechanism for bitcoin is outside the scope of the blockchain - in other words traders set that. Likewise interest rates on bitcoin would be exactly the same.
  - nfbush 10y ago
    I agree to an extent however bitcoin marketplaces have a substantially lower bar to entry and slightly more (apparent) transparency to trade volume and holding which can give better ideas as to stability and the market consensus. I admit this is conjecture however it is undeniable that the closed doors of financial institutions make price fixing more convenient.
    - JumpCrisscross 10y ago
      > Bitcoin marketplaces have...more (apparent) transparency to trade volume and holding Libor is the rate at which banks lend to each other. It wouldn't matter if the contracts were dollar or Bitcoin or seashell denominated. They are private contracts to which the public is not privy. A simpler solution is requiring banks to post their interbank borrowings, nightly, to a clearinghouse.
      - nfbush 10y ago
        I just realised i'm mixing up trading and lending, i shouldn't post when this tired lol. Maybe if we lived in a dissociated socialist crypto cybertopia it would be possible, i can dream.
  - jakeogh 10y ago
    It's competition with standard banking and payment at least.
    - digi_owl 10y ago
      Yeah, like always playing in gold is...
      - jakeogh 10y ago
        That's what I was thinking. Bitcoin is significantly easier to trade in.
    - UweSchmidt 10y ago
      You really think politics/central banks will sit back and shrug "oh we can't regulate money supply any more, a small number of anonymous people who invested in Bitcoin early are in charge of the world economy? Bummer."
      - jakeogh 10y ago
        Nope. But they are not omnipotent.
- raverbashing 10y ago
  The bitcoin circle of self-pleasing is funny. They don't know the basis of economical science and are stuck in a self-limiting (hence deflationary) monetary base. Not to mention some of the fundamentalism that runs around Good luck with that
kevin_thibedeau 10y ago
Who was saving the text messages?
- illektr1k 10y ago
  I use SMS Backup + [1] which saves all my text messages to my Google account allowing me to easily search and archive. It's followed me through android phones for many years, automagically installing as I sign-in for the first time on each 'new' device. [1] https://play.google.com/store/apps/details?id=com.zegoggles.smssync&hl=en https://play.google.com/store/apps/details?id=com.zegoggles....
- bboreham 10y ago
  They are likely to be either Bloomberg messages or on banks' internal chat systems, similar to IRC but recorded. For example Mindalign is a chat system that was spun out of UBS and bought by Microsoft.
TwoBit 10y ago
His prison sentence (11 years) and fine (800K pounds) should have been much worse. People go to prison in the US for 11 years for smoking weed.
- djsumdog 10y ago
  I'm amazed he got any jail time at all. Look back at the 2008 financial crisis. The crisis was riddled with fraud, and yet the executives from many of those banks that caused the crisis left with multi-million dollar bonuses and zero jail time.
  - digi_owl 10y ago
    Not high enough on the totempole most likely. Thus he was thrown under the bus to deflect attention.
    - forgetsusername 10y ago
      >Thus he was thrown under the bus to deflect attention Why is it so hard to imagine someone doing this without direct order? Why do we assume the "executive" is evil, but the lowly worker is "good"?
      - ashark 10y ago
        Being generally scummy and not getting caught (or not getting caught by anyone who matters) gives you a big advantage in business. Those who rise to the top through many rounds of competition are therefore either generally scummy or are just so damn good that they can be saints and still outcompete the (possibly colluding and therefore even harder to beat!) assholes. Source: all history of business since forever, and/or an evening of drinks and discussion with any mid-ladder-climb MBA. The lowly worker, meanwhile, has failed to rise in the ranks and is therefore less likely to be evil than the population average since some of the evil people (but proportionately fewer not-evil people) have moved out of his or her cohort (to higher-paying positions). QED.
  - 10y ago
arca_vorago 10y ago
I don't get how someone can write about Libor and not get into more details about the structure. I consider it one of the most important and yet most under-reported key stories of the 08 crash. My primary issue isn't with LIBOR persay, because, as the name implies, it's a London bank rate. My primary issue is with the fact that the Fed board of governors so quickly and easily chose it as the rate, in effect ceding a huge part of their power (interest rate setting) to fucking London bankers! They had all the power to choose an American rate or create one of their own, but chose not to. To me, this is a perfect example of the danger of the Fed and it's unsupervised, unchecked power of agency, and it leads credence to the anti-fed sentiment and documentation I have read. That the Wall Street bankers truly are subservient to The City (London) is more of a threat to US national security than ISIS.
- smallnamespace 10y ago
  > My primary issue is with the fact that the Fed board of governors so quickly and easily chose it as the rate What are you talking about? LIBOR was a de facto standard because the market overwhelmingly chose to use it as the short rate by writing it into private counterparty contracts. The market could have easily settled into something else (right now it's moving towards Fed Funds and OIS rates). If you look at how the LIBOR rate is actually set, it's a trimmed average, meaning you poll something like 18 banks, then you discard the highest 4 and lowest 4. This is actually a good fraud-resistant design. The Fed had little directly to do with what index banks and other private counterparties chose to use with one another at the time.
- JumpCrisscross 10y ago
  > LIBOR...[is] a London bank rate In 2014 "a private corporation called ICE Benchmark Administration (IBA) took over the daily production and administration of [LIBOR] subject to the regulation and supervision of" the UK's Financial Conduct Authority [1]. ICE is an American company that trades on the NYSE. > the Fed [ceded]...power...to...London Of the 18 LIBOR member banks, 3 are American and all have a presence in New York City [2]. That's how the Fed is able to regulate them. Also, I don't think the Fed pushes LIBOR. Lenders baked it into their private contracts much as the Wall Street Journal prime rate is baked into some mortgages. > Wall Street bankers...are subservient to The City Other way around. If Washington cut London's dollar clearing privileges the City would implode. [1] https://www.federalreserve.gov/newsevents/speech/powell20140904a.htm https://www.federalreserve.gov/newsevents/speech/powell20140... [2] https://en.wikipedia.org/wiki/Libor https://en.wikipedia.org/wiki/Libor
lordnacho 10y ago
I actually traded with these guys. Not personally but definitely through agents. It's interesting to note that whenever there was a fixing of any kind in a visible market like fx or equities, people who held dependent instruments such as options would always comment on how it seemed fixed. You'd stare at the graph during the fixing and wonder why on earth it was moving so strangely. They'd typically be rumours of someone having a large interest via barriers and such but of course your broker would not actually tell you who. I'm not surprised libor was also rigged, it actually seems to suit the culture. Add to that the fact a lot of these guys (these types of traders and brokers, not necessarily these exact guys) knew each other from childhood, or at least had a very strong common culture.
- JumpCrisscross 10y ago
  > your broker would not actually tell you who Former algorithmic options market maker. Brokers don't tell because they don't know. (We did, along with the one broker whose client placed the order did.)
  - daneyh 10y ago
    Former broker. We know, but it is important function of a broker not to tell.
  - lordnacho 10y ago
    I used to trade voice before I went full algo. They know, and they go for drinks with them after work. They're supposed to not tell you because the whole point of them is to be the go-between, so that it's not too obvious what they want to do. That sort of broking is a lot smaller now, and there is something to be said for the screen model of market making.
    - JumpCrisscross 10y ago
      Each broker goes for drinks with their clients, and knows what their client trades. But they can rarely connect the dots without the help of a market maker. Hence why I got drinks :)
smcl 10y ago
Reading back the messages on libor fixing is why I have a "how would this look being read out in court" mental check before communicating with colleagues on internal IM or email. There's nothing illegal that I do (or even that I can do, really) but I've no idea what anyone else is up to, and it would be extremely embarrassing for a silly in-joke or throwaway comment to be taken completely out of context. What these folks were up to was pretty bad but the pally, casual way they talked about it probably didn't help them one bit.
- kasey_junk 10y ago
  Its one thing I try to keep in mind when reading news articles that pull quotes from court transcripts. If you pulled random quotes from many of my chat transcripts, even in professional settings, they might seem insanely terrible without context. Just yesterday I said in chat that I needed to "put a bullet in his head". The "his" in that quote was an old daemon that was performing badly and needed to be shut down.
- m-i-l 10y ago
  What I'm curious about is when he said things like "I'll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?", was it just hot air, or did he actually follow through with these people? And if so, how (bank transfer, super-cars as gifts, cash in briefcases, etc.), and why weren't these picked up by things like Anti Money Laundering, Gifts & Entertainment policies etc.?
- cm2187 10y ago
  If you are not completely paranoid already, the Fabrice Tourre scandal should push you over the edge. The SEC and congress edited sentences and took them out of context in a pretty shameless way. Two examples I noted: First the SEC quotes Tourre "More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!" [1] Where the actual sentence was (translating the bits in French): You should take a look at this article... Very insightful... More and more leverage in the system, the whole building is about to collapse anytime. Only potential survivor, the fabulous fab (as Mitch would kindly call me, even though there is nothing fabulous about me, just kindness, altruism and deep love for some gorgeous and super-smart French girl in London), standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of these monstruosities!!! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, etc [2] I wouldn't write that in an email, but still, the sentence has a very different meaning with the bits edited out by the SEC back in. Second example, one of Tourre's managers was quoted writing "boy that timeberwof was one shitty deal". This was repeated over and over by congress as if it was a reference to the quality of the collateral of the transaction, i.e. Goldman Sachs sells some product to a client that they call internally a shitty product. But if you look at the actual email trail [3], they are not discussing about the quality of the collateral in that CDO, but of the fact that they are left with a $300m unsold position, which understandably is undesirable as a market maker. So my advice to everyone. No personal stuff in professional emails. No humor, no joke, no second degree, no sarcasm. None of that is safe. The sentence you add at the end to provide context in case a third party reads it will not help you, it will be edited out. [1] https://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf https://www.sec.gov/litigation/complaints/2010/comp-pr2010-5... page 7 [2] http://i.telegraph.co.uk/multimedia/archive/01623/Fabrice_Tourre_ema_1623617a.pdf http://i.telegraph.co.uk/multimedia/archive/01623/Fabrice_To... [3] http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/FN1623-2406.pdf?attempt=2 http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/... page 224
cm2187 10y ago
I think it's worth clarifying a couple of things. This is my personal understanding of what happened. There were two separate scandals in the libor fixing scandal. Scandal one is the one covered in this article. Before the crisis, swap traders getting the libor submitters to skew their submissions in one way or another to fit their positions. One thing to know about that is that the amount by which the libor fixings were moved was very marginal, typically 5-10 basis points (0.05-0.1%), which would then get averaged out, and probably well within the range of uncertainty for the cost of funding of a bank. The impact would be nothing more than a rounding error to pretty much any borrower with a loan indexed on Libor. It would matter to a swap trader as he would be sitting on a massive libor future position, and would be running the basis risk between that position and the derivatives this position is hedging. But it is kind of like stealing 1 cent from 10 millions bank accounts. It is still stealing, it doesn't excuse it, but people who pretend that the economy has been impacted are insincere. The other scandal was of a whole different nature and scale. During the peak of the crisis, as banks were going bust one after the others, the management of these banks were asking libor submitters to lower their contribution significantly, typically by several percents, because these contributions were public, and they did not want to give the sentiment that the bank was struggling to fund itself, and may go bust soon too. This had a much larger impact on everyday loans, though at the benefit of the borrowers, as rates were lower than they should. People who pretend that struggling borrowers were cheated got their math wrong. Investors were cheated. Although one could argue that when people were choosing libor for their contract, they meant it as a good indicator of the general level of interest rates, but didn't mean to index their own borrowing cost to the credit risk of a bank, which has very little to do with interest rates, and is what caused libor to spike, as interest rates were otherwise going down. That second scandal though, was not something that happened, hidden, between a handful of traders. Regulators were informed either by whistle blowers, or even potentially by the management of banks. They decided not to act as they percieved the threat of major banks going bust as a much greater problem than where interest rates were. Now I am not saying I condone manipulating rate submissions. But people who are outraged on HN should ask themselves whether they would have preffered the alternative, a much more violent financial crisis than 2008, which was already off the chart.
- gd1 10y ago
Lazare 10y ago
Eh. Libor was "fixed" by design. Literally, the concept behind Libor was to ask some guys to make up a rate they thought they could borrow money at (note: Not the rate they WERE borrowing money at). Totally subjective. For the purposes it was originally intended for, that was fine. Later it began to be used for other purposes, but it seems like a lot of people forgot that it was, at base, asking some bankers to make up a number. Which...they did. And then people got upset, because they didn't want a made up number, they wanted some objective benchmark. Well, maybe you shouldn't have been using Libor? Okay, sure, the number was being made up for selfish reasons and did not represent a good faith effort to try and make up a number that accurately reflected the rate that the people being asked believed they could borrow hypothetical money, if they tried. If you squint a bit, that's...I dunno, I guess it's bad? It wasn't obviously against the law, and I'm hard pressed to articulate a clear moral argument about how bankers should make up hypothetical numbers, but okay, let's just say it was bad and wrong. But... At any given point some banks were trying to drive the numbers up; others down. Net movement was often nil but generally downwards. Since mortgages are often linked to Libor (in some countries) that means all this probably means a bunch of people saved a few pennies (literally) on their mortgage payments a few years back, mostly at the expense of large investors. Yeah, I know, that doesn't mean it's either moral or legal but...stealing an almost immeasurably small amount of money from a hedge fund and giving it to a home owner is not exactly "robbing widows and orphans" territory. In short, I'm decidedly underwhelmed by the entire "scandal". And I think the sentence was wildly disproportionate; there's no way you can say the magnitude of the crime justified it, especially given the small scale and vague legal situation.
- koliber 10y ago
  I think the issue was the collusion in making up this number, and not the fact that the number was made up. You're right about every single thing you said. However, the conclusion is slightly off. Think about prices at a gas station. Each gas station owner is free to price their gas at a price at which he thinks people will buy it from him. This is normal and most definitely legal. What is not legal is if even two or more has station owners make a secret pact to keep prices the same. This is called price fixing. It does not matter if the price is a bit higher than normal (to maximize profits) or lower than normal (to keep a third gas station from opening up). What matters is that the prices are being fixed. If you slice and dice price fixing, you can come up with the same conclusion as you have. And yet price fixing is considered illegal and bad. https://en.wikipedia.org/wiki/Price_fixing https://en.wikipedia.org/wiki/Price_fixing In the case of LIBOR, it is a situation very similar to price fixing, but at an imaginably large scale. That is why it was a huge scandal and that is why people and institutions got punished for it.
djhworld 10y ago
What I don't understand is how this guy thought he would get away with it? I mean, he's a millionaire, millions of pounds in bonuses and salary, getting a job like his isn't easy - why throw all that away?
known 10y ago
https://en.wikipedia.org/wiki/Information_asymmetry https://en.wikipedia.org/wiki/Information_asymmetry is a behemoth

191 points by ghosh 10y ago

rissicay 10y ago

this is why bitcoin is important...

neximo64 10y ago
How would bitcoin change anything? The market pricing mechanism for bitcoin is outside the scope of the blockchain - in other words traders set that. Likewise interest rates on bitcoin would be exactly the same.
- nfbush 10y ago
  I agree to an extent however bitcoin marketplaces have a substantially lower bar to entry and slightly more (apparent) transparency to trade volume and holding which can give better ideas as to stability and the market consensus. I admit this is conjecture however it is undeniable that the closed doors of financial institutions make price fixing more convenient.
  - JumpCrisscross 10y ago
    > Bitcoin marketplaces have...more (apparent) transparency to trade volume and holding Libor is the rate at which banks lend to each other. It wouldn't matter if the contracts were dollar or Bitcoin or seashell denominated. They are private contracts to which the public is not privy. A simpler solution is requiring banks to post their interbank borrowings, nightly, to a clearinghouse.
    - nfbush 10y ago
      I just realised i'm mixing up trading and lending, i shouldn't post when this tired lol. Maybe if we lived in a dissociated socialist crypto cybertopia it would be possible, i can dream.
- jakeogh 10y ago
  It's competition with standard banking and payment at least.
  - digi_owl 10y ago
    Yeah, like always playing in gold is...
    - jakeogh 10y ago
      That's what I was thinking. Bitcoin is significantly easier to trade in.
  - UweSchmidt 10y ago
    You really think politics/central banks will sit back and shrug "oh we can't regulate money supply any more, a small number of anonymous people who invested in Bitcoin early are in charge of the world economy? Bummer."
    - jakeogh 10y ago
      Nope. But they are not omnipotent.
raverbashing 10y ago
The bitcoin circle of self-pleasing is funny. They don't know the basis of economical science and are stuck in a self-limiting (hence deflationary) monetary base. Not to mention some of the fundamentalism that runs around Good luck with that

kevin_thibedeau 10y ago

Who was saving the text messages?

illektr1k 10y ago
I use SMS Backup + [1] which saves all my text messages to my Google account allowing me to easily search and archive. It's followed me through android phones for many years, automagically installing as I sign-in for the first time on each 'new' device. [1] https://play.google.com/store/apps/details?id=com.zegoggles.smssync&hl=en https://play.google.com/store/apps/details?id=com.zegoggles....
bboreham 10y ago
They are likely to be either Bloomberg messages or on banks' internal chat systems, similar to IRC but recorded. For example Mindalign is a chat system that was spun out of UBS and bought by Microsoft.

TwoBit 10y ago

His prison sentence (11 years) and fine (800K pounds) should have been much worse. People go to prison in the US for 11 years for smoking weed.

djsumdog 10y ago
I'm amazed he got any jail time at all. Look back at the 2008 financial crisis. The crisis was riddled with fraud, and yet the executives from many of those banks that caused the crisis left with multi-million dollar bonuses and zero jail time.
- digi_owl 10y ago
  Not high enough on the totempole most likely. Thus he was thrown under the bus to deflect attention.
  - forgetsusername 10y ago
    >Thus he was thrown under the bus to deflect attention Why is it so hard to imagine someone doing this without direct order? Why do we assume the "executive" is evil, but the lowly worker is "good"?
    - ashark 10y ago
      Being generally scummy and not getting caught (or not getting caught by anyone who matters) gives you a big advantage in business. Those who rise to the top through many rounds of competition are therefore either generally scummy or are just so damn good that they can be saints and still outcompete the (possibly colluding and therefore even harder to beat!) assholes. Source: all history of business since forever, and/or an evening of drinks and discussion with any mid-ladder-climb MBA. The lowly worker, meanwhile, has failed to rise in the ranks and is therefore less likely to be evil than the population average since some of the evil people (but proportionately fewer not-evil people) have moved out of his or her cohort (to higher-paying positions). QED.
- 10y ago

arca_vorago 10y ago

I don't get how someone can write about Libor and not get into more details about the structure. I consider it one of the most important and yet most under-reported key stories of the 08 crash. My primary issue isn't with LIBOR persay, because, as the name implies, it's a London bank rate. My primary issue is with the fact that the Fed board of governors so quickly and easily chose it as the rate, in effect ceding a huge part of their power (interest rate setting) to fucking London bankers! They had all the power to choose an American rate or create one of their own, but chose not to. To me, this is a perfect example of the danger of the Fed and it's unsupervised, unchecked power of agency, and it leads credence to the anti-fed sentiment and documentation I have read. That the Wall Street bankers truly are subservient to The City (London) is more of a threat to US national security than ISIS.

smallnamespace 10y ago
> My primary issue is with the fact that the Fed board of governors so quickly and easily chose it as the rate What are you talking about? LIBOR was a de facto standard because the market overwhelmingly chose to use it as the short rate by writing it into private counterparty contracts. The market could have easily settled into something else (right now it's moving towards Fed Funds and OIS rates). If you look at how the LIBOR rate is actually set, it's a trimmed average, meaning you poll something like 18 banks, then you discard the highest 4 and lowest 4. This is actually a good fraud-resistant design. The Fed had little directly to do with what index banks and other private counterparties chose to use with one another at the time.
JumpCrisscross 10y ago
> LIBOR...[is] a London bank rate In 2014 "a private corporation called ICE Benchmark Administration (IBA) took over the daily production and administration of [LIBOR] subject to the regulation and supervision of" the UK's Financial Conduct Authority [1]. ICE is an American company that trades on the NYSE. > the Fed [ceded]...power...to...London Of the 18 LIBOR member banks, 3 are American and all have a presence in New York City [2]. That's how the Fed is able to regulate them. Also, I don't think the Fed pushes LIBOR. Lenders baked it into their private contracts much as the Wall Street Journal prime rate is baked into some mortgages. > Wall Street bankers...are subservient to The City Other way around. If Washington cut London's dollar clearing privileges the City would implode. [1] https://www.federalreserve.gov/newsevents/speech/powell20140904a.htm https://www.federalreserve.gov/newsevents/speech/powell20140... [2] https://en.wikipedia.org/wiki/Libor https://en.wikipedia.org/wiki/Libor

lordnacho 10y ago

I actually traded with these guys. Not personally but definitely through agents. It's interesting to note that whenever there was a fixing of any kind in a visible market like fx or equities, people who held dependent instruments such as options would always comment on how it seemed fixed. You'd stare at the graph during the fixing and wonder why on earth it was moving so strangely. They'd typically be rumours of someone having a large interest via barriers and such but of course your broker would not actually tell you who. I'm not surprised libor was also rigged, it actually seems to suit the culture. Add to that the fact a lot of these guys (these types of traders and brokers, not necessarily these exact guys) knew each other from childhood, or at least had a very strong common culture.

JumpCrisscross 10y ago
> your broker would not actually tell you who Former algorithmic options market maker. Brokers don't tell because they don't know. (We did, along with the one broker whose client placed the order did.)
- daneyh 10y ago
  Former broker. We know, but it is important function of a broker not to tell.
- lordnacho 10y ago
  I used to trade voice before I went full algo. They know, and they go for drinks with them after work. They're supposed to not tell you because the whole point of them is to be the go-between, so that it's not too obvious what they want to do. That sort of broking is a lot smaller now, and there is something to be said for the screen model of market making.
  - JumpCrisscross 10y ago
    Each broker goes for drinks with their clients, and knows what their client trades. But they can rarely connect the dots without the help of a market maker. Hence why I got drinks :)

smcl 10y ago

Reading back the messages on libor fixing is why I have a "how would this look being read out in court" mental check before communicating with colleagues on internal IM or email. There's nothing illegal that I do (or even that I can do, really) but I've no idea what anyone else is up to, and it would be extremely embarrassing for a silly in-joke or throwaway comment to be taken completely out of context. What these folks were up to was pretty bad but the pally, casual way they talked about it probably didn't help them one bit.

kasey_junk 10y ago
Its one thing I try to keep in mind when reading news articles that pull quotes from court transcripts. If you pulled random quotes from many of my chat transcripts, even in professional settings, they might seem insanely terrible without context. Just yesterday I said in chat that I needed to "put a bullet in his head". The "his" in that quote was an old daemon that was performing badly and needed to be shut down.
m-i-l 10y ago
What I'm curious about is when he said things like "I'll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?", was it just hot air, or did he actually follow through with these people? And if so, how (bank transfer, super-cars as gifts, cash in briefcases, etc.), and why weren't these picked up by things like Anti Money Laundering, Gifts & Entertainment policies etc.?
cm2187 10y ago
If you are not completely paranoid already, the Fabrice Tourre scandal should push you over the edge. The SEC and congress edited sentences and took them out of context in a pretty shameless way. Two examples I noted: First the SEC quotes Tourre "More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!" [1] Where the actual sentence was (translating the bits in French): You should take a look at this article... Very insightful... More and more leverage in the system, the whole building is about to collapse anytime. Only potential survivor, the fabulous fab (as Mitch would kindly call me, even though there is nothing fabulous about me, just kindness, altruism and deep love for some gorgeous and super-smart French girl in London), standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of these monstruosities!!! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, etc [2] I wouldn't write that in an email, but still, the sentence has a very different meaning with the bits edited out by the SEC back in. Second example, one of Tourre's managers was quoted writing "boy that timeberwof was one shitty deal". This was repeated over and over by congress as if it was a reference to the quality of the collateral of the transaction, i.e. Goldman Sachs sells some product to a client that they call internally a shitty product. But if you look at the actual email trail [3], they are not discussing about the quality of the collateral in that CDO, but of the fact that they are left with a $300m unsold position, which understandably is undesirable as a market maker. So my advice to everyone. No personal stuff in professional emails. No humor, no joke, no second degree, no sarcasm. None of that is safe. The sentence you add at the end to provide context in case a third party reads it will not help you, it will be edited out. [1] https://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf https://www.sec.gov/litigation/complaints/2010/comp-pr2010-5... page 7 [2] http://i.telegraph.co.uk/multimedia/archive/01623/Fabrice_Tourre_ema_1623617a.pdf http://i.telegraph.co.uk/multimedia/archive/01623/Fabrice_To... [3] http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/FN1623-2406.pdf?attempt=2 http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/... page 224

cm2187 10y ago

I think it's worth clarifying a couple of things. This is my personal understanding of what happened. There were two separate scandals in the libor fixing scandal. Scandal one is the one covered in this article. Before the crisis, swap traders getting the libor submitters to skew their submissions in one way or another to fit their positions. One thing to know about that is that the amount by which the libor fixings were moved was very marginal, typically 5-10 basis points (0.05-0.1%), which would then get averaged out, and probably well within the range of uncertainty for the cost of funding of a bank. The impact would be nothing more than a rounding error to pretty much any borrower with a loan indexed on Libor. It would matter to a swap trader as he would be sitting on a massive libor future position, and would be running the basis risk between that position and the derivatives this position is hedging. But it is kind of like stealing 1 cent from 10 millions bank accounts. It is still stealing, it doesn't excuse it, but people who pretend that the economy has been impacted are insincere. The other scandal was of a whole different nature and scale. During the peak of the crisis, as banks were going bust one after the others, the management of these banks were asking libor submitters to lower their contribution significantly, typically by several percents, because these contributions were public, and they did not want to give the sentiment that the bank was struggling to fund itself, and may go bust soon too. This had a much larger impact on everyday loans, though at the benefit of the borrowers, as rates were lower than they should. People who pretend that struggling borrowers were cheated got their math wrong. Investors were cheated. Although one could argue that when people were choosing libor for their contract, they meant it as a good indicator of the general level of interest rates, but didn't mean to index their own borrowing cost to the credit risk of a bank, which has very little to do with interest rates, and is what caused libor to spike, as interest rates were otherwise going down. That second scandal though, was not something that happened, hidden, between a handful of traders. Regulators were informed either by whistle blowers, or even potentially by the management of banks. They decided not to act as they percieved the threat of major banks going bust as a much greater problem than where interest rates were. Now I am not saying I condone manipulating rate submissions. But people who are outraged on HN should ask themselves whether they would have preffered the alternative, a much more violent financial crisis than 2008, which was already off the chart.

gd1 10y ago

Lazare 10y ago

Eh. Libor was "fixed" by design. Literally, the concept behind Libor was to ask some guys to make up a rate they thought they could borrow money at (note: Not the rate they WERE borrowing money at). Totally subjective. For the purposes it was originally intended for, that was fine. Later it began to be used for other purposes, but it seems like a lot of people forgot that it was, at base, asking some bankers to make up a number. Which...they did. And then people got upset, because they didn't want a made up number, they wanted some objective benchmark. Well, maybe you shouldn't have been using Libor? Okay, sure, the number was being made up for selfish reasons and did not represent a good faith effort to try and make up a number that accurately reflected the rate that the people being asked believed they could borrow hypothetical money, if they tried. If you squint a bit, that's...I dunno, I guess it's bad? It wasn't obviously against the law, and I'm hard pressed to articulate a clear moral argument about how bankers should make up hypothetical numbers, but okay, let's just say it was bad and wrong. But... At any given point some banks were trying to drive the numbers up; others down. Net movement was often nil but generally downwards. Since mortgages are often linked to Libor (in some countries) that means all this probably means a bunch of people saved a few pennies (literally) on their mortgage payments a few years back, mostly at the expense of large investors. Yeah, I know, that doesn't mean it's either moral or legal but...stealing an almost immeasurably small amount of money from a hedge fund and giving it to a home owner is not exactly "robbing widows and orphans" territory. In short, I'm decidedly underwhelmed by the entire "scandal". And I think the sentence was wildly disproportionate; there's no way you can say the magnitude of the crime justified it, especially given the small scale and vague legal situation.

koliber 10y ago
I think the issue was the collusion in making up this number, and not the fact that the number was made up. You're right about every single thing you said. However, the conclusion is slightly off. Think about prices at a gas station. Each gas station owner is free to price their gas at a price at which he thinks people will buy it from him. This is normal and most definitely legal. What is not legal is if even two or more has station owners make a secret pact to keep prices the same. This is called price fixing. It does not matter if the price is a bit higher than normal (to maximize profits) or lower than normal (to keep a third gas station from opening up). What matters is that the prices are being fixed. If you slice and dice price fixing, you can come up with the same conclusion as you have. And yet price fixing is considered illegal and bad. https://en.wikipedia.org/wiki/Price_fixing https://en.wikipedia.org/wiki/Price_fixing In the case of LIBOR, it is a situation very similar to price fixing, but at an imaginably large scale. That is why it was a huge scandal and that is why people and institutions got punished for it.

djhworld 10y ago

What I don't understand is how this guy thought he would get away with it? I mean, he's a millionaire, millions of pounds in bonuses and salary, getting a job like his isn't easy - why throw all that away?

known 10y ago

https://en.wikipedia.org/wiki/Information_asymmetry https://en.wikipedia.org/wiki/Information_asymmetry is a behemoth