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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-repo

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
- arca_vorago 10y ago
  > 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. In 2014, a full 6 years after a crash, that doesn't negate the issue of allowing a non-American set interest rate to be the basis for American financial institutions in the first place. Literally billions of dollars in city, firefighter, and police pensions, not to mention other investments, in the US were negatively affected by the manipulation of LIBOR. Even though they sacrificed a scapegoat, and LIBOR was indeed being abused, the structure of LIBOR itself is part of the problem here. > Of the 18 LIBOR member banks, 3 are American... Not really reassuring me with those kinds of numbers. > all have a presence in New York City [2]. That's how the Fed is able to regulate them. They can regulate their American side, but not their London side, correct? Still doesn't change the original issue. Also, the Fed regulating the banks is sorta the fox guarding the hen house isn't it? I mean, as far as I know, the true ownership (who owns stocks in the Fed) is private still is it not? Isn't it a sort of inherent conflict of interest? Don't get me started on how the SEC has their balls cut off on this subject. > Other way around. If Washington cut London's dollar clearing privileges the City would implode. I understand the power of the defense/petro-dollar, but I'm talking about culture wise, where I have repeatedly seen the Fed and major heads of banks bend over for bankers in the City. It's much more ancedotal and on this point I haven't read any good academic papers or books, so if you have some reading on the relationship between the City and Wallstreet I would love to hear about it.
  - JumpCrisscross 10y ago
    > allowing a non-American set interest rate to be the basis for American financial institutions in the first place American banks don't borrow based on LIBOR. Their overnight borrowing and lending is done at the Federal funds rate [1], an arguably much better-designed system than LIBOR. The only reason LIBOR shows up in the U.S. is people write it into contracts. > Of the 18 LIBOR member banks, 3 are American >> Not really reassuring me with those kinds of numbers The U.S. overruled British regulators in 2008 regarding Lehman Brothers and Barclays, and did so again in reforming LIBOR. The four British banks who are LIBOR members depend more on the U.S. than any American bank depends on London. > the true ownership (who owns stocks in the Fed) is private No, the Fed was created by Congress [2]. Its Board is appointed by the President and confirmed by the Senate. It remits its profits to the U.S. Treasury. Commercial banks own "stock" in the regional reserve banks, but it's more of a reserve accounting mechanism than actual stock. The "stock" is not transferable and confers no management rights; "the Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the Federal Reserve System" [2]. > I understand the power of the defense/petro-dollar The size of the American economy, particularly its consumption, underwrites dollar hegemony. That size means lots of people, within the country and without, must hold U.S. dollars. That, in turn, makes it ideal for lending and borrowing in, which in turn makes it ideal for trading commodities. > I have repeatedly seen the Fed and major heads of banks bend over for bankers in the City Since World War II and the implementation of the Bretton-Woods pact the City has served at the pleasure of Washington. For a hint at this, search the British financial press for mentions of American regulators and then do the same of the American financial press for British regulators. [1] https://en.wikipedia.org/wiki/Federal_funds_rate https://en.wikipedia.org/wiki/Federal_funds_rate [2] https://www.federalreserve.gov/faqs/about_14986.htm https://www.federalreserve.gov/faqs/about_14986.htm
erikb 10y ago
Despite other reasons it's probably also political. Sometimes in a high position it's actually better to not know stuff. Set up an employment contract that forces others to do illegal things in your favor but never ask what they do. When sh*t hits the fan you can exit fast, since you know you set up your guy to do bad things, and since you can access all the information that is and therefore can make smart decisions for yourself. But when the scheme gets caught on by the public your employer goes to jail, not you. Nobody ever asks for who set up the system in a way that traders feeled compelled to act dishonest. So yes, they handed off the power to do their jobs right, but their goal was not to do their jobs right. Their goal was to make money as long as it's good and not go to jail when it's bad. And the power to do that they didn't hand of to anyone.

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

arca_vorago 10y ago
> 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. In 2014, a full 6 years after a crash, that doesn't negate the issue of allowing a non-American set interest rate to be the basis for American financial institutions in the first place. Literally billions of dollars in city, firefighter, and police pensions, not to mention other investments, in the US were negatively affected by the manipulation of LIBOR. Even though they sacrificed a scapegoat, and LIBOR was indeed being abused, the structure of LIBOR itself is part of the problem here. > Of the 18 LIBOR member banks, 3 are American... Not really reassuring me with those kinds of numbers. > all have a presence in New York City [2]. That's how the Fed is able to regulate them. They can regulate their American side, but not their London side, correct? Still doesn't change the original issue. Also, the Fed regulating the banks is sorta the fox guarding the hen house isn't it? I mean, as far as I know, the true ownership (who owns stocks in the Fed) is private still is it not? Isn't it a sort of inherent conflict of interest? Don't get me started on how the SEC has their balls cut off on this subject. > Other way around. If Washington cut London's dollar clearing privileges the City would implode. I understand the power of the defense/petro-dollar, but I'm talking about culture wise, where I have repeatedly seen the Fed and major heads of banks bend over for bankers in the City. It's much more ancedotal and on this point I haven't read any good academic papers or books, so if you have some reading on the relationship between the City and Wallstreet I would love to hear about it.
- JumpCrisscross 10y ago
  > allowing a non-American set interest rate to be the basis for American financial institutions in the first place American banks don't borrow based on LIBOR. Their overnight borrowing and lending is done at the Federal funds rate [1], an arguably much better-designed system than LIBOR. The only reason LIBOR shows up in the U.S. is people write it into contracts. > Of the 18 LIBOR member banks, 3 are American >> Not really reassuring me with those kinds of numbers The U.S. overruled British regulators in 2008 regarding Lehman Brothers and Barclays, and did so again in reforming LIBOR. The four British banks who are LIBOR members depend more on the U.S. than any American bank depends on London. > the true ownership (who owns stocks in the Fed) is private No, the Fed was created by Congress [2]. Its Board is appointed by the President and confirmed by the Senate. It remits its profits to the U.S. Treasury. Commercial banks own "stock" in the regional reserve banks, but it's more of a reserve accounting mechanism than actual stock. The "stock" is not transferable and confers no management rights; "the Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the Federal Reserve System" [2]. > I understand the power of the defense/petro-dollar The size of the American economy, particularly its consumption, underwrites dollar hegemony. That size means lots of people, within the country and without, must hold U.S. dollars. That, in turn, makes it ideal for lending and borrowing in, which in turn makes it ideal for trading commodities. > I have repeatedly seen the Fed and major heads of banks bend over for bankers in the City Since World War II and the implementation of the Bretton-Woods pact the City has served at the pleasure of Washington. For a hint at this, search the British financial press for mentions of American regulators and then do the same of the American financial press for British regulators. [1] https://en.wikipedia.org/wiki/Federal_funds_rate https://en.wikipedia.org/wiki/Federal_funds_rate [2] https://www.federalreserve.gov/faqs/about_14986.htm https://www.federalreserve.gov/faqs/about_14986.htm

erikb 10y ago

Despite other reasons it's probably also political. Sometimes in a high position it's actually better to not know stuff. Set up an employment contract that forces others to do illegal things in your favor but never ask what they do. When sh*t hits the fan you can exit fast, since you know you set up your guy to do bad things, and since you can access all the information that is and therefore can make smart decisions for yourself. But when the scheme gets caught on by the public your employer goes to jail, not you. Nobody ever asks for who set up the system in a way that traders feeled compelled to act dishonest. So yes, they handed off the power to do their jobs right, but their goal was not to do their jobs right. Their goal was to make money as long as it's good and not go to jail when it's bad. And the power to do that they didn't hand of to anyone.