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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: No

by 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.
- chimeracoder 10y ago
  > What is not legal is if even two or more has station owners make a secret pact to keep prices the same. This isn't analogous, because the gas stations aren't repeatedly buying gas and selling it back to other gas stations within very short intervals. They're buying it from suppliers and selling it to consumers who use it. Banks are buying and selling liquid assets (money) to/from each other overnight. The same banks alternate back and forth between being buyers and sellers (and some may even act as both buyers and sellers within the same trading period). So "price fixing" doesn't have the same effect as it does in other markets, because it's essentially a closed system. It's weird to talk about Libor as collusion because, again, the entire point is to save banks the trouble of having to run around and find out all of the possible rates that each bank would charge each other. Instead, they can use Libor as a estimate of the "going rate", and with the caveat that everyone knows it's not always accurate, they can figure out their own pricing accordingly.
  - mcguire 10y ago
    "So "price fixing" doesn't have the same effect as it does in other markets, because it's essentially a closed system." Except that it's not a closed system. That would be the point.
    - chimeracoder 10y ago
      > Except that it's not a closed system. That would be the point. Overnight interbank loans are a closed system, by definition. The part that isn't a closed system is when people use Libor as a metric for other purposes. Which isn't a reasonable complaint, because that's explicitly not what the Libor was created for, and it was never intended to mean anything else.
      - AnimalMuppet 10y ago
        That's like saying that the Internet was created to connect military computers, and therefore it's not reasonable for civilians to complain when governments spy on their internet activity. That is: Things grow beyond "what they were created for". To say that any such use is fair game for abuse is both unreasonable and unwise.
lmm 10y ago
> 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. Many of those large investors are mutual funds and pension funds. Some of which do fund widows and orphans. E.g. I think CALPERS was involved in one of the lawsuits? Stealing a penny each from a million people surely must be just as evil bad and wrong as stealing a million pennies from one person (any sensible way of relating money and harm comes up with that result). I think the reason it seems less bad is that our monkey brains aren't good at comprehending the concept of millions of people, so when we say "a million people" our moral intuition just interpreters that as "lots of people", i.e. "a couple of hundred people".
- Lazare 10y ago
  True, it was also pension funds. Okay, so...at a big picture level, a million people borrow money to buy houses, and save for their retirement via a pension fund that invests in mortgages, and then nefarious activities at the bank causes mortgage rate to shift 0.05% down for a month, causing them in aggregate to gain thousands of dollars as homeowners, but lose thousands of dollars as savers, for a net change too small to really measure? It's not really the crime of the century, is it? > Stealing a penny each from a million people surely must be just as evil bad and wrong as stealing a million pennies from one person Arguable. Declining marginal value of money says that I'd be much more upset about losing the millionth penny than the first, so in some ways stealing a million pennies from one person is worse. (This is the moral justification for progressive taxation.) But okay, let's accept that for now. In which case... ...Libor manipulation still doesn't seem that bad? As you point out, there was a lot of overlap in the beneficiaries and the losers. Because even if stealing a penny each from a million people is the same as stealing a million pennies from one person, giving the pennies back again is still pretty different. :)
  - ska 10y ago
    Libor manipulation still doesn't seem that bad? Actually, it does seem pretty bad. It was collusion by people who should be transparently honest, in/near the core of a system that is fundamentally based on trust. If that trust is weakened to much really, really bad things happen. This isn't about the measurable effects of the dishonesty, it's about the integrity of the system.
beezle 10y ago
They could have used eurodollars but as you note it all began long ago and nobody could be bothered to change. And these fixings were not even far from whatever rate was believed to be their true rate ((for how much and from who? Always left out). Why anybody would use it in swaps was crazy. And the fx fix outlived its usefulness in the early 80s yet some clients still insisted on using it. The flip side of libor is the rage against spoofing. As long as the price is available to be dealt on for some minimum time, who cares? You think its wrong then go deal on it. In the days when fx and money/bond markets were not totally automated trading was all about psychology- which side would cave first. Pushing prices and then calling off the weak side was just good market making.
retube 10y ago
Yes exactly. Market participants all knew what Libor was and how it was computed. I mean some tenors never even traded - they were always made up!
JohnJamesRambo 10y ago
"(note: Not the rate they WERE borrowing money at)" Why didn't people and banks just use this number?
- cm2187 10y ago
  They do now, but the problem is that a bank does not necessarily raise 11 months money in every major currency every business day. So you would end up with patchy submissions. Not sure what approach they now use for that. I presume they must do some form of interpolation. The other thing is that Libor is an ancient instrument, created before capital markets had the size and liquidity they have today. The market must have been even patchier then.
JackFr 10y ago
> 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). .. >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. To be clear, it was never intended to be a measure of credit quality for banks. It was supposed to be a measure of supply and demand in the money market, a substitute for the Fed Funds rate, only for the non-US domiciled dollar market.
kafkaesq 10y ago
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." The amount of money involved was hardly insignificant. Per WP: "Early estimates are that the rate manipulation scandal cost US states, counties, and local governments at least $6 billion in fraudulent interest payments, above $4 billion that state and local governments have already had to spend to unwind their positions exposed to rate manipulation.[53] ... Timothy Lee, a capital markets expert at the Federal Housing Finance Agency Office of Inspector General, said in a 3 November memo that Fannie Mae and Freddie Mac may have lost more than $3 billion because of the manipulation.[57]" And I hate to break this to you, but the people who benefit from these schemes weren't "giving [their gains] to home owners." There's no way you can say the magnitude of the crime justified it, especially given the small scale and vague legal situation. As to the crime, it's called "market manipulation", and there's nothing at all legally vague about it. These people knew what they were doing, and by and large, were perfectly aware that it was agains the law. The just didn't think they'd get caught.

by Lazare 10y ago

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.

chimeracoder 10y ago
> What is not legal is if even two or more has station owners make a secret pact to keep prices the same. This isn't analogous, because the gas stations aren't repeatedly buying gas and selling it back to other gas stations within very short intervals. They're buying it from suppliers and selling it to consumers who use it. Banks are buying and selling liquid assets (money) to/from each other overnight. The same banks alternate back and forth between being buyers and sellers (and some may even act as both buyers and sellers within the same trading period). So "price fixing" doesn't have the same effect as it does in other markets, because it's essentially a closed system. It's weird to talk about Libor as collusion because, again, the entire point is to save banks the trouble of having to run around and find out all of the possible rates that each bank would charge each other. Instead, they can use Libor as a estimate of the "going rate", and with the caveat that everyone knows it's not always accurate, they can figure out their own pricing accordingly.
- mcguire 10y ago
  "So "price fixing" doesn't have the same effect as it does in other markets, because it's essentially a closed system." Except that it's not a closed system. That would be the point.
  - chimeracoder 10y ago
    > Except that it's not a closed system. That would be the point. Overnight interbank loans are a closed system, by definition. The part that isn't a closed system is when people use Libor as a metric for other purposes. Which isn't a reasonable complaint, because that's explicitly not what the Libor was created for, and it was never intended to mean anything else.
    - AnimalMuppet 10y ago
      That's like saying that the Internet was created to connect military computers, and therefore it's not reasonable for civilians to complain when governments spy on their internet activity. That is: Things grow beyond "what they were created for". To say that any such use is fair game for abuse is both unreasonable and unwise.

lmm 10y ago

> 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. Many of those large investors are mutual funds and pension funds. Some of which do fund widows and orphans. E.g. I think CALPERS was involved in one of the lawsuits? Stealing a penny each from a million people surely must be just as evil bad and wrong as stealing a million pennies from one person (any sensible way of relating money and harm comes up with that result). I think the reason it seems less bad is that our monkey brains aren't good at comprehending the concept of millions of people, so when we say "a million people" our moral intuition just interpreters that as "lots of people", i.e. "a couple of hundred people".

Lazare 10y ago
True, it was also pension funds. Okay, so...at a big picture level, a million people borrow money to buy houses, and save for their retirement via a pension fund that invests in mortgages, and then nefarious activities at the bank causes mortgage rate to shift 0.05% down for a month, causing them in aggregate to gain thousands of dollars as homeowners, but lose thousands of dollars as savers, for a net change too small to really measure? It's not really the crime of the century, is it? > Stealing a penny each from a million people surely must be just as evil bad and wrong as stealing a million pennies from one person Arguable. Declining marginal value of money says that I'd be much more upset about losing the millionth penny than the first, so in some ways stealing a million pennies from one person is worse. (This is the moral justification for progressive taxation.) But okay, let's accept that for now. In which case... ...Libor manipulation still doesn't seem that bad? As you point out, there was a lot of overlap in the beneficiaries and the losers. Because even if stealing a penny each from a million people is the same as stealing a million pennies from one person, giving the pennies back again is still pretty different. :)
- ska 10y ago
  Libor manipulation still doesn't seem that bad? Actually, it does seem pretty bad. It was collusion by people who should be transparently honest, in/near the core of a system that is fundamentally based on trust. If that trust is weakened to much really, really bad things happen. This isn't about the measurable effects of the dishonesty, it's about the integrity of the system.

beezle 10y ago

They could have used eurodollars but as you note it all began long ago and nobody could be bothered to change. And these fixings were not even far from whatever rate was believed to be their true rate ((for how much and from who? Always left out). Why anybody would use it in swaps was crazy. And the fx fix outlived its usefulness in the early 80s yet some clients still insisted on using it. The flip side of libor is the rage against spoofing. As long as the price is available to be dealt on for some minimum time, who cares? You think its wrong then go deal on it. In the days when fx and money/bond markets were not totally automated trading was all about psychology- which side would cave first. Pushing prices and then calling off the weak side was just good market making.

retube 10y ago

Yes exactly. Market participants all knew what Libor was and how it was computed. I mean some tenors never even traded - they were always made up!

JohnJamesRambo 10y ago

"(note: Not the rate they WERE borrowing money at)" Why didn't people and banks just use this number?

cm2187 10y ago
They do now, but the problem is that a bank does not necessarily raise 11 months money in every major currency every business day. So you would end up with patchy submissions. Not sure what approach they now use for that. I presume they must do some form of interpolation. The other thing is that Libor is an ancient instrument, created before capital markets had the size and liquidity they have today. The market must have been even patchier then.

JackFr 10y ago

> 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). .. >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. To be clear, it was never intended to be a measure of credit quality for banks. It was supposed to be a measure of supply and demand in the money market, a substitute for the Fed Funds rate, only for the non-US domiciled dollar market.

kafkaesq 10y ago

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." The amount of money involved was hardly insignificant. Per WP: "Early estimates are that the rate manipulation scandal cost US states, counties, and local governments at least $6 billion in fraudulent interest payments, above $4 billion that state and local governments have already had to spend to unwind their positions exposed to rate manipulation.[53] ... Timothy Lee, a capital markets expert at the Federal Housing Finance Agency Office of Inspector General, said in a 3 November memo that Fannie Mae and Freddie Mac may have lost more than $3 billion because of the manipulation.[57]" And I hate to break this to you, but the people who benefit from these schemes weren't "giving [their gains] to home owners." There's no way you can say the magnitude of the crime justified it, especially given the small scale and vague legal situation. As to the crime, it's called "market manipulation", and there's nothing at all legally vague about it. These people knew what they were doing, and by and large, were perfectly aware that it was agains the law. The just didn't think they'd get caught.