5 ms·

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. How

by 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.
      - chimeracoder 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. No, it's not at all. It's more like when people complain that memcache doesn't make a good tool for session handling, or that it's not fault-tolerant and has zero replication. Of course not - it was never meant to be used that way, and the documentation explicitly says it shouldn't be used that way[0]. If you still want to, fine, but don't complain that memcache is a bad system when you're simply using it against its intended design. [0] https://github.com/memcached/memcached/wiki/ProgrammingFAQ#how-do-you-handle-replication https://github.com/memcached/memcached/wiki/ProgrammingFAQ#h...
        AnimalMuppet 10y ago
SilasX 10y ago
That's a good point, but I don't think it fully addresses what that parent was saying, which is that Libor isn't a price, but a subjective assessment. So it would be more like if two gas stations agreed to use the same marketing language to promote their stores [1] -- yes, it's collusion, but over a signal they never represented as an objective benchmark, even though people started using it as one. [1] "we'll both say we have 'fresh produce', and one month out of the year we'll both say it's 'very fresh produce'"
- AnimalMuppet 10y ago
  Libor is in fact a price - the price of renting money. There are actual loans and/or bonds made at Libor (often plus an offset).
  - SilasX 10y ago
    The point is that there is a subtlety -- the difference between a price, and a signal that other people use to set prices. Libor is the latter. Colluding on a signal is not the same as colluding on the prices themselves, the argument goes.
    - hermitdev 10y ago
      A lot of large loans are set to Libor plus an offset. You might think it is a signal, but is, in a very real sense, also a price.
      - AnimalMuppet 10y ago
        Well... SilasX has at least half a point. If the Libor rate is being messed with (and if the messing nets to a Libor that is a consistent, say, 0.05% too low), people making contracts could adjust the offset up by 0.05%. But I still think that SilasX's view isn't the right way to look at this. Why were people messing with Libor? It wasn't because they were going to make more money off of interbank loans. It's because they were going to make more money off of other things that were keyed to Libor. So, yes, they were using Libor to manipulate the price of things. And if I understand correctly, it works like this: The contract says Libor + X%. The X is fixed at the time the contract is negotiated, not at the time it closes. Then, later, the contract closes, and uses the Libor at the date of closing. This means that the Libor-setters move last, after the offset is determined. This makes it impossible in practice to use the offset to fix the Libor machinations.

by koliber 10y ago

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.
    - chimeracoder 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. No, it's not at all. It's more like when people complain that memcache doesn't make a good tool for session handling, or that it's not fault-tolerant and has zero replication. Of course not - it was never meant to be used that way, and the documentation explicitly says it shouldn't be used that way[0]. If you still want to, fine, but don't complain that memcache is a bad system when you're simply using it against its intended design. [0] https://github.com/memcached/memcached/wiki/ProgrammingFAQ#how-do-you-handle-replication https://github.com/memcached/memcached/wiki/ProgrammingFAQ#h...
      - AnimalMuppet 10y ago

SilasX 10y ago

That's a good point, but I don't think it fully addresses what that parent was saying, which is that Libor isn't a price, but a subjective assessment. So it would be more like if two gas stations agreed to use the same marketing language to promote their stores [1] -- yes, it's collusion, but over a signal they never represented as an objective benchmark, even though people started using it as one. [1] "we'll both say we have 'fresh produce', and one month out of the year we'll both say it's 'very fresh produce'"

AnimalMuppet 10y ago
Libor is in fact a price - the price of renting money. There are actual loans and/or bonds made at Libor (often plus an offset).
- SilasX 10y ago
  The point is that there is a subtlety -- the difference between a price, and a signal that other people use to set prices. Libor is the latter. Colluding on a signal is not the same as colluding on the prices themselves, the argument goes.
  - hermitdev 10y ago
    A lot of large loans are set to Libor plus an offset. You might think it is a signal, but is, in a very real sense, also a price.
    - AnimalMuppet 10y ago
      Well... SilasX has at least half a point. If the Libor rate is being messed with (and if the messing nets to a Libor that is a consistent, say, 0.05% too low), people making contracts could adjust the offset up by 0.05%. But I still think that SilasX's view isn't the right way to look at this. Why were people messing with Libor? It wasn't because they were going to make more money off of interbank loans. It's because they were going to make more money off of other things that were keyed to Libor. So, yes, they were using Libor to manipulate the price of things. And if I understand correctly, it works like this: The contract says Libor + X%. The X is fixed at the time the contract is negotiated, not at the time it closes. Then, later, the contract closes, and uses the Libor at the date of closing. This means that the Libor-setters move last, after the offset is determined. This makes it impossible in practice to use the offset to fix the Libor machinations.