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For folks who feel like they knew about this story already: read the article. LIBOR fixing is one thing. But the realization that there is no market that LIBO

For folks who feel like they knew about this story already: read the article. LIBOR fixing is one thing. But the realization that there is no market that LIBOR measures is truly astonishing! 2021 will be an interesting year...

JumpCrisscross 9y ago
> there is no market that LIBOR measures Except that's not true. Interbank lending is still a $70 billion market in the United States alone [1]. Small compared to banks' balance sheets and less than the $500 billion from as recently as February 2008, but material nonetheless. Good rule of thumb in finance is to ignore Matt Taibbi. [1] https://fred.stlouisfed.org/series/IBLACBM027NBOG https://fred.stlouisfed.org/series/IBLACBM027NBOG
- rcarrigan87 9y ago
  I agree, his reporting is terribly one-sided.
- zzalpha 9y ago
  And Matt Levine, who said the exact same thing in an article posted in this comment thread? But a second problem is that the banks might not even know. Libor surveys asked banks each day what they would have to pay to borrow money unsecured from other big banks, but over time the banks sort of stopped doing that, particularly in some of the more obscure combinations of tenors and currencies that nonetheless reported Libor rates. So the banks' Libor submitters would guesstimate their submissions based on deposit rates and commercial-paper rates and secured-borrowing rates and other tenors and what brokers and their buddies were telling them. Last I'd checked Mr. Levine was pretty well regarded. Not that it matters... We're well into ad hominem and argument from authority territory here.
  - JumpCrisscross 9y ago
    > We're well into ad hominem I'm not saying it is wrong because Taibbi wrote it. It's wrong because he got basic facts about interbank lending wrong, i.e. that it exists. I'm then passing along my observation that, whenever I've fact checked Taibbi, his facts have tended to be wrong. > Matt Levine...said the exact same thing Taibbi said there is no interbank lending. Libor is totally made up. Levine said that there is less interbank lending and so some of the numbers had to be made up some of the time. He concludes the paragraph you quote with this sentence: "[Libor] was all more or less good enough as a casual system for resetting the rates on a few billion dollars worth of syndicated loans, but it was not accurate down to the hundredth of a basis point as a foundation for the financial system, or as the source for pricing hundreds of trillions of dollars of derivatives." That's important context. Libor was a good enough number for a market where precision didn't matter (syndicated loans). It proceeded to be used, and abused, improperly. It's not a totally made up number like Taibbi makes it out to be. It's a totally inappropriately-used number. TL; DR You'll walk away better informed about almost any financial topic reading Levine over Taibbi.
    - zzalpha 9y ago
      Honestly this is hair splitting. Ultimately the point remains: there isn't sufficient market activity to build a real value for Libor so it's basically made up from whole cloth Your nuance, while interesting if you care to dig deeply, doesn't change the conclusion. It's a distinction without a material difference.
      - JumpCrisscross 9y ago
        > there isn't sufficient market activity to build a real value for Libor so it's basically made up from whole cloth The least active currency-tenor, since deprecated, traded once a month. Most currency-tenors trade many, many, many times a day. There's plenty of market activity to build Libor-esque metrics. > It's a distinction without a material difference It's a world of material difference. The Fed Funds rate in the United States is based on the same kind of wholesale unsecured interbank lending as Libor is supposed to be. The metric, and the market it's based on, work. We can have something like Libor based on market activity. It just won't be published every day for every tenor and currency. If you just read Taibbi, the answer would seem to be to scrap any attempt at measuring the market because you cannot measure something that does not exist. If you understand the nuance, you walk away better appreciating what (a) went wrong, (b) we should do to improve future metrics and (c) one should look for when evaluating other metrics purporting to do similar things. You also gain an understanding for the kinds of scaling problems financial markets run into, which are quite unlike scaling problems in other contexts.
      - skybrian 9y ago
        What makes you think it's "not a material difference" and how would you know?
- c3534l 9y ago
  Yeah, the article flips between somewhat sensationalist black-and-white statements that imply to the less savvy reader that LIBOR is an arbitrary number decided by a secret cabal of bankers to more reasonable statements like interbank lending is falling and LIBOR is an increasingly poor choice to measure interest rates.
  - throw2016 9y ago
    Except it doesn't. Libor IS an arbitrary number decided by a cabal of bankers. This process has zero transparency and accountability which lead to the fixing and abuse in the first place. Its not Matt Taibbi but the regulators who concluded there is no basis for LIBOR as reported in the article so perhaps you meant to accuse the regulator of sensationalism.
    - JumpCrisscross 9y ago
      > regulators...concluded there is no basis for LIBOR Regulators did not conclude this. They concluded (a) better metrics for banks' costs of capital exist (e.g. the Fed funds rate [1]), (b) the market Libor is based on (wholesale unsecured interbank term lending) is too small and inactive to provide the sort of precision Libor implies and (c) transitioning from Libor will be messy [2]. [1] https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS [2] https://www.fca.org.uk/news/speeches/the-future-of-libor https://www.fca.org.uk/news/speeches/the-future-of-libor
      - throw2016 9y ago
        In other words there is no basis for libor.
        c3534l 9y ago
        What do you mean by "no basis"? I suspect to you it means something like "too abstract" or "not good enough"?
        JumpCrisscross 9y ago
- throw2016 9y ago
  On the contrary Matt Taibbi has done some incredible work exposing the out of control culture of fraud and greed in the financial markets and the litany of fixing scandals. Please read his work and make up your own mind. The Libor fixing is real as is the FX rate fixing. Apologists for the banking system and governments often demand the the smoking gun in fraud and conspiracy even when its not always possible, unless at great personal cost like in Snowden, but here the smoking gun and entire armory is out in the open. Attempting now to discredit the messenger is disingenuous.
  - yborg 9y ago
    Yes, especially since the insiders aren't pretending that it's anything but a lever to tip more money into their pockets. It's funny reading comments here with people soberly defending the deep meaning of LIBOR and that civilians like Taibbi just don't get it while traders in the game are saying things like "It's just amazing how LIBOR fixing can make you that much money!"[1] [1] http://www.hitc.com/en-gb/2013/11/01/5-firms-21-astonishing-emails/ http://www.hitc.com/en-gb/2013/11/01/5-firms-21-astonishing-...
- jkaptur 9y ago
  I'm not a domain expert, but both could be right - isn't the point that some currencies and tenors are very illiquid, not that the entire market doesn't exist?
  - tigershark 9y ago
    Neither am I, but you can easily interpolate from Fx rates and from other tenors plus the liquidity informations and create synthetic instruments from others that you already own. Everyone that trades in Fixed Income does (or should do) this. And as I read in another comment for sure everyone has been migrating to alternative benchmark like OIS for a while to get their official risk numbers.
  - JumpCrisscross 9y ago
    > isn't the point that some currencies and tenors are very illiquid Yes. It's a subtlety bulldozed over in this article because nuance doesn't sell clicks like outrage. Recapitulating an earlier comment, the regulator Taibbi cites speaks competently about this [1]; the least actively-traded currency-tenor traded only about once a month. (Every other currency-tenor traded more often.) That may be a fine frequency for 6-month wholesale interbank rates in Danish krona (which, until recent reforms, was one of the currencies Libor was quoted for [2]). But turning it into a daily rate with three decimal places of precision is silly. [1] https://www.fca.org.uk/news/speeches/the-future-of-libor https://www.fca.org.uk/news/speeches/the-future-of-libor [2] https://en.wikipedia.org/wiki/Libor#Currency https://en.wikipedia.org/wiki/Libor#Currency
- twic 9y ago
  AIUI, most of that lending is overnight. LIBOR ostensibly measures three-month deposits, which don't see much volume these days.

JumpCrisscross 9y ago

> there is no market that LIBOR measures Except that's not true. Interbank lending is still a $70 billion market in the United States alone [1]. Small compared to banks' balance sheets and less than the $500 billion from as recently as February 2008, but material nonetheless. Good rule of thumb in finance is to ignore Matt Taibbi. [1] https://fred.stlouisfed.org/series/IBLACBM027NBOG https://fred.stlouisfed.org/series/IBLACBM027NBOG

rcarrigan87 9y ago
I agree, his reporting is terribly one-sided.
zzalpha 9y ago
And Matt Levine, who said the exact same thing in an article posted in this comment thread? But a second problem is that the banks might not even know. Libor surveys asked banks each day what they would have to pay to borrow money unsecured from other big banks, but over time the banks sort of stopped doing that, particularly in some of the more obscure combinations of tenors and currencies that nonetheless reported Libor rates. So the banks' Libor submitters would guesstimate their submissions based on deposit rates and commercial-paper rates and secured-borrowing rates and other tenors and what brokers and their buddies were telling them. Last I'd checked Mr. Levine was pretty well regarded. Not that it matters... We're well into ad hominem and argument from authority territory here.
- JumpCrisscross 9y ago
  > We're well into ad hominem I'm not saying it is wrong because Taibbi wrote it. It's wrong because he got basic facts about interbank lending wrong, i.e. that it exists. I'm then passing along my observation that, whenever I've fact checked Taibbi, his facts have tended to be wrong. > Matt Levine...said the exact same thing Taibbi said there is no interbank lending. Libor is totally made up. Levine said that there is less interbank lending and so some of the numbers had to be made up some of the time. He concludes the paragraph you quote with this sentence: "[Libor] was all more or less good enough as a casual system for resetting the rates on a few billion dollars worth of syndicated loans, but it was not accurate down to the hundredth of a basis point as a foundation for the financial system, or as the source for pricing hundreds of trillions of dollars of derivatives." That's important context. Libor was a good enough number for a market where precision didn't matter (syndicated loans). It proceeded to be used, and abused, improperly. It's not a totally made up number like Taibbi makes it out to be. It's a totally inappropriately-used number. TL; DR You'll walk away better informed about almost any financial topic reading Levine over Taibbi.
  - zzalpha 9y ago
    Honestly this is hair splitting. Ultimately the point remains: there isn't sufficient market activity to build a real value for Libor so it's basically made up from whole cloth Your nuance, while interesting if you care to dig deeply, doesn't change the conclusion. It's a distinction without a material difference.
    - JumpCrisscross 9y ago
      > there isn't sufficient market activity to build a real value for Libor so it's basically made up from whole cloth The least active currency-tenor, since deprecated, traded once a month. Most currency-tenors trade many, many, many times a day. There's plenty of market activity to build Libor-esque metrics. > It's a distinction without a material difference It's a world of material difference. The Fed Funds rate in the United States is based on the same kind of wholesale unsecured interbank lending as Libor is supposed to be. The metric, and the market it's based on, work. We can have something like Libor based on market activity. It just won't be published every day for every tenor and currency. If you just read Taibbi, the answer would seem to be to scrap any attempt at measuring the market because you cannot measure something that does not exist. If you understand the nuance, you walk away better appreciating what (a) went wrong, (b) we should do to improve future metrics and (c) one should look for when evaluating other metrics purporting to do similar things. You also gain an understanding for the kinds of scaling problems financial markets run into, which are quite unlike scaling problems in other contexts.
    - skybrian 9y ago
      What makes you think it's "not a material difference" and how would you know?
c3534l 9y ago
Yeah, the article flips between somewhat sensationalist black-and-white statements that imply to the less savvy reader that LIBOR is an arbitrary number decided by a secret cabal of bankers to more reasonable statements like interbank lending is falling and LIBOR is an increasingly poor choice to measure interest rates.
- throw2016 9y ago
  Except it doesn't. Libor IS an arbitrary number decided by a cabal of bankers. This process has zero transparency and accountability which lead to the fixing and abuse in the first place. Its not Matt Taibbi but the regulators who concluded there is no basis for LIBOR as reported in the article so perhaps you meant to accuse the regulator of sensationalism.
  - JumpCrisscross 9y ago
    > regulators...concluded there is no basis for LIBOR Regulators did not conclude this. They concluded (a) better metrics for banks' costs of capital exist (e.g. the Fed funds rate [1]), (b) the market Libor is based on (wholesale unsecured interbank term lending) is too small and inactive to provide the sort of precision Libor implies and (c) transitioning from Libor will be messy [2]. [1] https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS [2] https://www.fca.org.uk/news/speeches/the-future-of-libor https://www.fca.org.uk/news/speeches/the-future-of-libor
    - throw2016 9y ago
      In other words there is no basis for libor.
      - c3534l 9y ago
        What do you mean by "no basis"? I suspect to you it means something like "too abstract" or "not good enough"?
      - JumpCrisscross 9y ago
throw2016 9y ago
On the contrary Matt Taibbi has done some incredible work exposing the out of control culture of fraud and greed in the financial markets and the litany of fixing scandals. Please read his work and make up your own mind. The Libor fixing is real as is the FX rate fixing. Apologists for the banking system and governments often demand the the smoking gun in fraud and conspiracy even when its not always possible, unless at great personal cost like in Snowden, but here the smoking gun and entire armory is out in the open. Attempting now to discredit the messenger is disingenuous.
- yborg 9y ago
  Yes, especially since the insiders aren't pretending that it's anything but a lever to tip more money into their pockets. It's funny reading comments here with people soberly defending the deep meaning of LIBOR and that civilians like Taibbi just don't get it while traders in the game are saying things like "It's just amazing how LIBOR fixing can make you that much money!"[1] [1] http://www.hitc.com/en-gb/2013/11/01/5-firms-21-astonishing-emails/ http://www.hitc.com/en-gb/2013/11/01/5-firms-21-astonishing-...
jkaptur 9y ago
I'm not a domain expert, but both could be right - isn't the point that some currencies and tenors are very illiquid, not that the entire market doesn't exist?
- tigershark 9y ago
  Neither am I, but you can easily interpolate from Fx rates and from other tenors plus the liquidity informations and create synthetic instruments from others that you already own. Everyone that trades in Fixed Income does (or should do) this. And as I read in another comment for sure everyone has been migrating to alternative benchmark like OIS for a while to get their official risk numbers.
- JumpCrisscross 9y ago
  > isn't the point that some currencies and tenors are very illiquid Yes. It's a subtlety bulldozed over in this article because nuance doesn't sell clicks like outrage. Recapitulating an earlier comment, the regulator Taibbi cites speaks competently about this [1]; the least actively-traded currency-tenor traded only about once a month. (Every other currency-tenor traded more often.) That may be a fine frequency for 6-month wholesale interbank rates in Danish krona (which, until recent reforms, was one of the currencies Libor was quoted for [2]). But turning it into a daily rate with three decimal places of precision is silly. [1] https://www.fca.org.uk/news/speeches/the-future-of-libor https://www.fca.org.uk/news/speeches/the-future-of-libor [2] https://en.wikipedia.org/wiki/Libor#Currency https://en.wikipedia.org/wiki/Libor#Currency
twic 9y ago
AIUI, most of that lending is overnight. LIBOR ostensibly measures three-month deposits, which don't see much volume these days.