20 ms·

Libor, long the most important number in finance, dies at 52

228 points by lxm 5y ago

throwthere 5y ago
52 years-- it's amazing how easy it was to cook Libor and how long it lasted. And it was mostly fine before the world started drowning in derivatives and derivatives of derivatives.
sneak 5y ago
> It turned out that bankers had been coordinating with one another to manipulate the rate, pronounced “LIE-bore,” by skewing the number higher or lower for their banks’ gain. It's rare to see shade thrown so overtly in the Times, because it's so rare it can be done this deniably, and always makes me chuckle when it does.
- neil_s 5y ago
  OMG, I was wondering why they waited so far down in the article to describe the pronunciation. Only after seeing your comment did it click!
  - sneak 5y ago
    The Grey Lady maintains plausible deniability at (in?) all times. :)
akmarinov 5y ago
Paywalled
Retric 5y ago
TLDR; “Libor was the interest rate that banks themselves had to pay, so it offered a convenient base line for the rates they charged customers who wanted to borrow cash to buy a home or issue a security to finance a business expansion.” “Because Libor relied on self-reported estimates, it was possible for a bank to submit a rate that was artificially high or low, thus making certain financial holdings more profitable.” “Libor could no longer be used to calculate new deals as of Dec. 31 — more than six years after a former UBS trader was jailed for his efforts to manipulate it and others were fired, charged or acquitted.”
phaer 5y ago
https://archive.is/ujVCY https://archive.is/ujVCY
unixhero 5y ago
The vestiges of the Bretton Woods system.
siliconlotus 5y ago
When I worked in investment banking, all our debt models were pegged to LIBOR. Rest In Peace! God bless the IB analysts scrambling to plug their models with replacement rates and weird hardcodes!
- HarryHirsch 5y ago
  So - considering that LIBOR was not an observed number, but a made-up number that was nonetheless useful, what did the LIBOR actually measure?
  - dmurray 5y ago
    Bankers' consensus of what the overnight interest rate should be for a well-capitalized, creditworthy bank.
    - deleted 5y ago
      [deleted]
  - tomc1985 5y ago
    LIBOR is often part of the formula for calculating loan interest rates. Last time I saw such code it looked something like: LIBOR + bank's minimum interest rate + a rate based on creditworthiness = your offered interest rate Planet Money recently had a really good episode on how some banks are deciding on a replacement rate: https://www.npr.org/2021/10/08/1044598674/libor-pains https://www.npr.org/2021/10/08/1044598674/libor-pains
    - fennecfoxen 5y ago
      That's not what it's measuring, that's how it's used.
      - ChrisLomont 5y ago
        That's also what it measures, as measured by the people doing the estimation of creditworthiness, who are the experts in understand how to measure that value. If anyone else was more accurate at this measurement, then they had arbitrage against those using the measure, giving those doing the initial measurement incentive to get it as right as is humanly possible, since they usually worked at places that use LIBOR to price things. Since LIBOR underlied hundreds of trillions in assets, there are ample papers on all aspects of LIBOR, including those trying to see how well it was computed versus post outcomes. It holds up well. https://scholar.google.com/scholar?hl=en&as_sdt=0%2C14&q=LIBOR+accuracy+empirical&btnG= https://scholar.google.com/scholar?hl=en&as_sdt=0%2C14&q=LIB...
hardtke 5y ago
I have an adjustable rate mortgage based on LIBOR and the lender still has not said what they plan to do. The presumed replacement rate (SOFR) seems to be pegged near 0% which would be good.
- gadders 5y ago
  If you're in the US and the mortgage is dollar-based I would expect you to be transitioned to a SOFR-based loan, possibly with a credit adjustment spread.
  - codebolt 5y ago
    What about SONIA, isn't that the dollar based equivalent?
    - NoboruWataya 5y ago
      SONIA is the Sterling Overnight Index Average, an overnight rate for pound sterling.
- EugeneG 5y ago
  Yeah there will be a spread, won’t go from LIBOR+0 to SOFR+0, but to SOFR+0.20% for example
- javajosh 5y ago
  Why is this purely up to the lender? And if it is, of course they'll add something. You can't have individuals borrowing money interest free now, can we? (Institutions...that's more than fine, its expected.)
  - stanleydrew 5y ago
    It's not "purely up to the lender." It's agreed upon in a mortgage contract, which the borrower signed. Both parties decided that it was a good idea, otherwise there wouldn't have been an agreement.
JaggerFoo 5y ago
Mainly was LIBOR used in the EuroDollar market? Anyways, it seems like there is a need for a system that is transparent, immutable, and accessible to everyone... Crypto? Matt Damon is calling. Cheers
- Hjfrf 5y ago
  I worked at a European bank ten years ago, and libor was at least one leg of effectively every product offered. Interest rate swaps, credit, loans, fixed income, exotic derivatives, CDO, whatever. You have to hedge the interest rate risk somewhere or get stuck with huge collateral requirements/XVA. Cryptocurrencies don't solve the problem since they're largely traded on opaque exchanges and other l2 solutions even less trustworthy than the libor cartel.
  - csdvrx 5y ago
    I think the parent poster meant that the actual going prices on multiple exchanges could be used for data inference. While there are rumors of wash tradings on some exchanges, the price at which such trades would be going will be constrained by the larger network, and the risk of triangular trade will limit the possible divergences to a larger spread (instead of going one direction only) Add enough data, and you may get something that would be almost impossible to trick, simply due to the sheer number of exchanges, and bots that would gladly take the money of those who would try to rig the game.
    - erosenbe0 5y ago
      Ummm the whole point is that it is a measure of relatively unregulated dollar for dollar transactions not subject to any clearinghouse, exchange, or blockchain regulation or visibility. LIBOR is supposed to be the benchmark of dollars anywhere, so to speak. So you're talking about apples and oranges
      - csdvrx 5y ago
        Well, you do with what you have (and the prices of apples may be correlated enough with the price of oranges to act as a proxy if you can't get the price of oranges), and the pros of "resilient to rigging" might be worth more than the cons.
neom 5y ago
What Is Libor And Why Is It Being Abandoned? - https://www.forbes.com/advisor/investing/what-is-libor/ https://www.forbes.com/advisor/investing/what-is-libor/
nerdponx 5y ago
> In 1986, at age 17, it hit the big time: Libor was taken in by the British Bankers Association, a trade group described later by The New York Times as a “club of gentlemen bankers.” What are the chances that this "club of gentlemen bankers" always intended to manipulate Libor to some extent? I know finance and banking is very complicated; maybe someone will come along who happens to have been a banker in London in 1986 and will set me straight. Otherwise I find it hard to limit my cynicism when enormous amounts of money are involved.
- lmm 5y ago
  Banks took both sides of LIBOR contracts. So it wasn't really about manipulation so much as just having a standard to follow. Do you read about clubs of Silicon Valley browser makers meeting up to come up with a new HTML standard and assume that this is some nefarious plot? I imagine your London banker counterpart does.
  - nerdponx 5y ago
    Yes, the same level of skepticism is definitely warranted when it comes to proposals by big tech companies. That doesn't mean all proposals are bad.
- MR4D 5y ago
  > Otherwise I find it hard to limit my cynicism when enormous amounts of money are involved. You should always be cynical when large amounts of money are involved. It helps you avoid large losses. Side note - one of the best questions to ask in any deal is “how are you making money on this”. If the other party doesn’t tell you, then they probably know something that they don’t want you to know. If you doesn’t get a straight answer, walk away [0]. [0] - I work in finance and never do business with someone who is not transparent about this. Been doing it a long time and it serves me well. I learned it from an old hand, and cringes the first few times he asked it. Then, I got the nerve to ask why he asked such a cringeworthy question. Glad I did!
- JackFr 5y ago
  LIBOR grew out of the same ecosystem that created Eurodollars. Originally a Eurodollar was simply a dollar held in a non-US domiciled bank, in particular a bank outside of the Federal Reserve System. The story, at least partly true, is that the Soviet Union was making a ton of money selling oil. Thanks to OPEC, the market for oil is denominated in dollars. Soviet oil companies didn't mind the dollars, but they didn't want money in US banks, and so the Eurodollar was created. In the USD money market (the interbank lending market for terms < 12 months) the most riskfree rate is the Fed Funds rate -- that is the rate which banks lend to ach other within the Fed system. In the money market for USD, everything was quoted in terms of Fed Funds, e.g. Fed Funds + 50 etc. Banks with EuroDollar deposits couldn't partake in the Fed system, but they needed something similar, and so LIBOR was created. Well, then it grew. US banks got involved in EuroDollars and foreign banks got US subsidiaries and everything kind of ballooned. But the big change was the invention of interest rate swaps. Interest rate swaps create a linkage between the Money Market (terms < 12 months) and the Capital Market (terms > 12 months). There are a bunch of economic explanations as to why interest rate swaps exist and some of them have to be true, but they're irrelevant to the LIBOR story. A vanilla fixed-floating swap needs a floating rate, and that's LIBOR. A couple of trillion dollars (notional) worth of derivatives later, instead of simply being a pragmatic way to quote rates in the money market, it then drove P&L of derivatives desks. I think everyone knew the potential for manipulation was always possible, but for a long time I think, until the tail started wagging the dog, it worked. But there's no going back now.
TameAntelope 5y ago
> It turned out that bankers had been coordinating with one another to manipulate the rate, pronounced “LIE-bore,” by skewing the number higher or lower for their banks’ gain. The authors must be very pleased with themselves about this one...
ddlatham 5y ago
There's a great Planet Money episode explaining the story https://www.npr.org/transcripts/1044598674 https://www.npr.org/transcripts/1044598674
epa 5y ago
Unfortunately the replacement of SOFR is a collateralized rate where as LIBOR is non-collateralized. Adoption of SOFR has been slow because its not 1:1. Plus, LIBOR is not dead yet, still a lot of contracts that need to go through maturity before the rate truly dies. Interesting history on LIBOR, was created related to an Iran loan in the 1960s. Doesnt seem that long ago but that is pushing 50 years now. Imagine apple told you that mouse will no longer be supported on OSX, please everyone switch to touch screen -- the adoption would be slow at best.
- gadders 5y ago
  The other difference is that LIBOR is a forward-looking rate, whereas SOFR (unless you have Term SOFR) is a backward looking rate (i.e. that is for LIBOR you know at the start of the month what rate you will pay for the following month, whereas with SOFR you don't know the rate until the end of the interest period [or 5 days before in the case of lookback])
  - JackFr 5y ago
    And the SOFR is only an overnight rate. There is no official Term SOFR. The CME has forward SOFR contracts for 1, 3, 6 and 12 months -- which are not really the same thing, but if you squint hard you can treat them kind of like forward looking term rates.
divbzero 5y ago
Past HN discussions on the LIBOR scandal — [2012]: https://news.ycombinator.com/item?id=4224873 https://news.ycombinator.com/item?id=4224873 "Lies, Damn Lies and LIBOR" [2015]: https://news.ycombinator.com/item?id=9426247 https://news.ycombinator.com/item?id=9426247 "Deutsche Bank to Pay Record $2.5B to Resolve Libor" [2017]: https://news.ycombinator.com/item?id=13497578 https://news.ycombinator.com/item?id=13497578 "Libor: the bankers who fixed the world’s most important number" [2017]: https://news.ycombinator.com/item?id=14075230 https://news.ycombinator.com/item?id=14075230 "Libor: Bank of England implicated in secret recording" [2017]: https://news.ycombinator.com/item?id=14994122 https://news.ycombinator.com/item?id=14994122 "Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?" [2018]: https://news.ycombinator.com/item?id=16418629 https://news.ycombinator.com/item?id=16418629 "The brazenness of the LIBOR scam"
tomc1985 5y ago
Man I'm glad I don't work for a fintech right now, there's a lot of very complicated code with LIBOR as an input
- wsc981 5y ago
  Think about all the job security. You'll be set for many years!
  - queuebert 5y ago
    They should start a club with the COBOL maintainers.
  - toomuchtodo 5y ago
    Chaos is a ladder. Run towards it to prosper.
- pessimizer 5y ago
  They've had years.
- marginalia_nu 5y ago
  Having worked in fintech, I assume everyone ignored all signs toward this coming, assumed it would be postponed forever, and then collectively burst into a choir of "LIBOR gone? Inconceivable!"
  - tomc1985 5y ago
    Yup! I remember hearing murmurs of LIBOR's unsuitability but didn't see much of a reaction. Wonder how things are now
  - twic 5y ago
    How did you get access to my commit logs?!
- gadders 5y ago
  Or an actual real bank...
erwincoumans 5y ago
From the title it seems like Mr. or Dr. Libor died. For a paragraph, it is cute to have Libor personified. Doing it until the end of the story feels a bit artificial to me.
- svnpenn 5y ago
  Yeah this just screams clickbait. "Let's create a title that makes no sense, followed by an entire article with a strained metaphor".
  - mhh__ 5y ago
    How is it clickbait? LIBOR is omnipresent in finance and it is being killed. Sterling LIBOR is already dead for example.
    - svnpenn 5y ago
      Well: 1. Its LIBOR, not Libor 2. LIBOR is not a number, its a rate. Thats literally what the "R" stands for 3. LIBOR cant die, as its not a person Its just an awful title because it calls LIBOR a number, which its not, then goes on to treat it as a human, which its also not.
      - recursive 5y ago
        I don't know anything about LIBOR, but I know a few things about rates. Every rate I've ever heard of is a number. How can a rate not be a number?
      - danielmarkbruce 5y ago
        It's a tongue in cheek article in the NY Times. NY has a lot of finance folks. To a lot of finance folks, libor has been a meaningful number for a long time and a million contracts are based on it. As for "treating it as a human", the financial industry has long used the term "mr market". Ie it's sort of an inside joke. To the target audience it is not an awful title, nor an awful article. As for the semantics of numbers v rates - the rate is specified in numbers. And LIBOR v Libor - the number was used so extensively for so long many people didn't even know what the acronym meant. It's like correcting someone for calling a tissue a kleenex.
ptr2voidStar 5y ago
decafninja 5y ago
I was working at an investment bank (as a developer) when this scandal hit. My entire department was laid off as a result. Not because we were involved or complicit in the scandal, but because the scandal indirectly caused a big financial hit to the bank and we were part of the cost cutting measures. It was a traumatic and tragic moment for me at the time. But in hindsight it was the event that lead to my eyes being opened to the world of Silicon Valley tech companies. Until then, I had naively thought that working as a developer in the IT departments of Wall Street investment banks and hedge funds* was the pinnacle of a SWE career. * Not referring to places like Citadel or Jane Street or Two Sigma, etc.
- citizenpaul 5y ago
  >part of the cost cutting measures. Not sure why you would believe this. It is much harder for regulators to interview employees about their activities when they are no longer centrally located for convenient discussions. Its the same tactic they use in bury investigators with paperwork but for people.
  - decafninja 5y ago
    My department was very far removed from the issues in the scandal. I doubt investigators would have had much interest in us or found anything of use from interviewing any of us.
    - citizenpaul 5y ago
      I believe that it was separated and 100% not involved. Do you think your company is above laying off an entire department to keep investigators off the trail of the real problem department?
  - skrebbel 5y ago
    Don't assume, you know nothing about the parent's situation.
    - 5y ago
pessimizer 5y ago
Quote from earlier linked article explaining why it took so long after the scandal to do this: > The transition to a post-Libor world would not be painless. Remember those $190 trillion of Libor-linked derivatives? Hardly any of those instruments — essentially contracts between two parties — provide a workable option for what to do if Libor were to vanish. > In a worst-case scenario, banks and their customers would effectively have to negotiate how to end Libor-based contracts over the phone, said Darrell Duffie, a Stanford University finance professor. For a sense of what is at stake, Lehman Brothers was a party to more than 900,000 derivatives contracts when it went bankrupt in 2008, according to research published by the Federal Reserve Bank of New York. > “It’ll be really nasty in terms of costly, difficult workouts,” he said. https://archive.fo/LKI4J https://archive.fo/LKI4J The Most Important Number in Finance Is Going Away. Wall St. Isn’t Prepared.
deleted 5y ago
[deleted]
lordnacho 5y ago
I traded LIBOR instruments that were probably manipulated, and there was suspicion at the time. Same with FX, there was a cartel manipulating that as well, and people in my firm also wondered at times why things were moving around at the exact wrong time. It's probably best that the LIBOR system goes in favor of something more transparent. But I have a friend who is involved in the transition at a bank, and it's incredibly complex to move over such a huge mass of contracts to this new thing. Definitely a lot of work for a lot of people.
- splittingTimes 5y ago
  The Libor - interest rates scandal is only one in a long list of documented manipulations in the last 5-10 years ISDAfix - swaps Platts - oil prices WM/Reuters - FX High-Frequency Trading - equities Commodities - Gold, Silver Stock indices Are all rigged. With that history, how can we give that new system the benefit of a doubt. It will be gamed as well.
  - whimsicalism 5y ago
    > High-Frequency Trading - equities > Commodities - Gold, Silver Stock indices ? It doesn't help for FX that it is effectively unregulated.
fanzhang 5y ago
When I first heard about LIBOR in 2002, I was surprised that the number is just based on a survey of bankers. Surely there would be accuracy issues with that? But at that time I was young and had no finance experience, so though that the adults in the room knew best. Turns out not! I don't think the base problem is that people shaded their numbers one way or another, it's that the system is designed wrong.
- cromulent 5y ago
  The Corruption Index is similar - it’s based on how corrupt people think a nation is. Nothing to do with how much actual corruption exists.
  - sokoloff 5y ago
    It seems overwhelmingly likely that "how corrupt people think a nation is" does have "[something] to do with how much actual corruption exists".
    - deleted 5y ago
      [deleted]
    - tacostakohashi 5y ago
      Kind of... but certain countries have done a great job of gaming the system, particularly one of the countries that is currently ranked #3.
      - Shorel 5y ago
        Switzerland?
    - refurb 5y ago
      Not in the least. Look at crime statistics versus how safe people feel. People say “crime is worse than 20 years ago” when the murder rate is 1/5th. Perception =\= reality.
    - 5y ago
panoramas4good 5y ago
Would highly recommend the book, The Spider Network, which gives an in-depth view (perhaps slightly dramatised) of how one trader manipulated Libor.
yob22 5y ago
r00fus 5y ago
The salient info buried at the end: "Libor is survived by several successors, each making a claim to its crown. The Secured Overnight Financing Rate, or SOFR — a rate produced by the Federal Reserve Bank of New York that is based on transaction data, not estimates — has already been embraced by many banks in the United States and has the endorsement of the Fed. Others, like the American Interbank Offered Rate, or Ameribor, and the Bloomberg Short-Term Bank Yield Index, or BSBY, have their adherents. In Britain, the Sterling Overnight Index Average, or SONIA, seeks to inherit Libor’s place as the do-it-all benchmark." My only remaining question is, since we used to have a single reference rate, and now we have multiple reference rates - how does this impact existing contracts?
- mathattack 5y ago
  The article references that existing contracts will stay on LIBOR. It’s only dead for new deals.
- Havoc 5y ago
  For any new lending the contracts get replaced with new ones referencing Sonia. Even existing debt facilities that get drawn down - the banks don’t want more lending under libor. It’s a pretty painless substitution though
- riskneutral 5y ago
  > how does this impact existing contracts? This has kept lawyers busy for past the few years. The "LIBOR fallback language" was created and then inserted into existing contracts, to address this question. It's like a pull request for a patch. Most of the legacy contracts out there have been "patched" with the "fallback language" at this point, and as of Jan 1, 2022, no new LIBOR contracts are allowed.
NoboruWataya 5y ago
Transitioning from LIBOR has been a huge project in the finance industry. I would say most banks' in-house legal departments have been living and breathing this stuff for the last two years. Most contracts drafted after the scandals broke (when it became clear that LIBOR's days were numbered) were drafted with fallback language language built in, so that upon the cessation of LIBOR the contract would automatically switch to a successor rate. But there were a lot of longer-dated contracts that required manual intervention. For derivatives, it wasn't so bad because ISDA (the industry association for derivatives users) published an IBOR fallback protocol which counterparties could adhere to. All contracts between two adherents to that protocol were deemed amended so as to include market-standard fallback language. There was no such neat solution for bonds and loans, so banks had to look at them pretty much one-by-one. The economic and legal terms of the amendments required to replace LIBOR were mostly standardised across the market, so they typically didn't involve any tough negotiation - the issue was more the operational burden of amending many thousands of contracts. In a simple bilateral loan the process is straightforward: bank reaches out to borrower, borrower and bank sign amendment agreement, done. But bonds which are widely held through clearing systems posed a much bigger problem, because material amendments typically need the consent of at least half (or sometimes two thirds or three quarters) of bondholders. A single bond issuance can be held by thousands of (ultimate) investors, and ownership can be heavily intermediated: an investor might hold her bonds in an account with her broker, that broker might hold the bonds in an account with a custodian, that custodian holds them in an account with a securities depositary, etc. The issuer does not know who the ultimate holders are; it can only send out a consent solicitation through the clearing systems. Even if that solicitation manages to work its way through the ownership chain to the end investors, most of them will probably just ignore it. So a lot of consent solicitations fail even for routine, unobjectionable amendments. When this happens (or is likely to happen), issuers need to look at other ways to push the amendments through, like asking the security agent (who basically represents the bondholders as a class) to consent to the amendment without first receiving the consent of the underlying bondholders. Most deal documents allow security agents to do this where the proposed amendments are not materially prejudicial to bondholders, but security agents are very reluctant to make that determination.
jayflux 5y ago
https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-numbern https://www.theguardian.com/business/2017/jan/18/libor-scand... is a good read about what went on about it.
jcuenod 5y ago
If you're a neophyte like me, take a look at the Odd Lots podcast: https://www.listennotes.com/search/?ocid=c1a7b213882c4e329643412087adcfe5&q=libor https://www.listennotes.com/search/?ocid=c1a7b213882c4e32964... There's a ton of good info in there on what Libor is, why it needed to live, why it needed to die, and some attempts to replace it.
cyanydeez 5y ago
after swindling millions for decades
RocketOne 5y ago
The Libor scandal ripped off just about every person who held any kind of debt. And yet it's STILL barely known. When I got my mortgage I asked my banker agent what she thought about it. She had no clue what Libor was, let alone the scandal.
- lmm 5y ago
  The scandal mostly meant that mortgage rates were lower than they should have been, so it's hard to get regular people angry about it.
- aidenn0 5y ago
  I don't know where you are, but at least in the US, the banks that make the loans don't hold the debt; they sell it off almost immediately.
- Dylan16807 5y ago
  Did it? Wasn't the scandal part about manipulating it up or down very slightly on a per-day basis? Shouldn't that have basically no effect on a normal person?
jhgb 5y ago
That is a very confusing headline, coming from a country where Libor is fairly common personal name. Why not spell it LIBOR instead?

228 points by lxm 5y ago

52 years-- it's amazing how easy it was to cook Libor and how long it lasted. And it was mostly fine before the world started drowning in derivatives and derivatives of derivatives.

sneak 5y ago

> It turned out that bankers had been coordinating with one another to manipulate the rate, pronounced “LIE-bore,” by skewing the number higher or lower for their banks’ gain. It's rare to see shade thrown so overtly in the Times, because it's so rare it can be done this deniably, and always makes me chuckle when it does.

neil_s 5y ago
OMG, I was wondering why they waited so far down in the article to describe the pronunciation. Only after seeing your comment did it click!
- sneak 5y ago
  The Grey Lady maintains plausible deniability at (in?) all times. :)

akmarinov 5y ago

Paywalled

Retric 5y ago

TLDR; “Libor was the interest rate that banks themselves had to pay, so it offered a convenient base line for the rates they charged customers who wanted to borrow cash to buy a home or issue a security to finance a business expansion.” “Because Libor relied on self-reported estimates, it was possible for a bank to submit a rate that was artificially high or low, thus making certain financial holdings more profitable.” “Libor could no longer be used to calculate new deals as of Dec. 31 — more than six years after a former UBS trader was jailed for his efforts to manipulate it and others were fired, charged or acquitted.”

phaer 5y ago

https://archive.is/ujVCY https://archive.is/ujVCY

unixhero 5y ago

The vestiges of the Bretton Woods system.

siliconlotus 5y ago

When I worked in investment banking, all our debt models were pegged to LIBOR. Rest In Peace! God bless the IB analysts scrambling to plug their models with replacement rates and weird hardcodes!

HarryHirsch 5y ago
So - considering that LIBOR was not an observed number, but a made-up number that was nonetheless useful, what did the LIBOR actually measure?
- dmurray 5y ago
  Bankers' consensus of what the overnight interest rate should be for a well-capitalized, creditworthy bank.
  - deleted 5y ago
    [deleted]
- tomc1985 5y ago
  LIBOR is often part of the formula for calculating loan interest rates. Last time I saw such code it looked something like: LIBOR + bank's minimum interest rate + a rate based on creditworthiness = your offered interest rate Planet Money recently had a really good episode on how some banks are deciding on a replacement rate: https://www.npr.org/2021/10/08/1044598674/libor-pains https://www.npr.org/2021/10/08/1044598674/libor-pains
  - fennecfoxen 5y ago
    That's not what it's measuring, that's how it's used.
    - ChrisLomont 5y ago
      That's also what it measures, as measured by the people doing the estimation of creditworthiness, who are the experts in understand how to measure that value. If anyone else was more accurate at this measurement, then they had arbitrage against those using the measure, giving those doing the initial measurement incentive to get it as right as is humanly possible, since they usually worked at places that use LIBOR to price things. Since LIBOR underlied hundreds of trillions in assets, there are ample papers on all aspects of LIBOR, including those trying to see how well it was computed versus post outcomes. It holds up well. https://scholar.google.com/scholar?hl=en&as_sdt=0%2C14&q=LIBOR+accuracy+empirical&btnG= https://scholar.google.com/scholar?hl=en&as_sdt=0%2C14&q=LIB...

hardtke 5y ago

I have an adjustable rate mortgage based on LIBOR and the lender still has not said what they plan to do. The presumed replacement rate (SOFR) seems to be pegged near 0% which would be good.

gadders 5y ago
If you're in the US and the mortgage is dollar-based I would expect you to be transitioned to a SOFR-based loan, possibly with a credit adjustment spread.
- codebolt 5y ago
  What about SONIA, isn't that the dollar based equivalent?
  - NoboruWataya 5y ago
    SONIA is the Sterling Overnight Index Average, an overnight rate for pound sterling.
EugeneG 5y ago
Yeah there will be a spread, won’t go from LIBOR+0 to SOFR+0, but to SOFR+0.20% for example
javajosh 5y ago
Why is this purely up to the lender? And if it is, of course they'll add something. You can't have individuals borrowing money interest free now, can we? (Institutions...that's more than fine, its expected.)
- stanleydrew 5y ago
  It's not "purely up to the lender." It's agreed upon in a mortgage contract, which the borrower signed. Both parties decided that it was a good idea, otherwise there wouldn't have been an agreement.

JaggerFoo 5y ago

Mainly was LIBOR used in the EuroDollar market? Anyways, it seems like there is a need for a system that is transparent, immutable, and accessible to everyone... Crypto? Matt Damon is calling. Cheers

Hjfrf 5y ago
I worked at a European bank ten years ago, and libor was at least one leg of effectively every product offered. Interest rate swaps, credit, loans, fixed income, exotic derivatives, CDO, whatever. You have to hedge the interest rate risk somewhere or get stuck with huge collateral requirements/XVA. Cryptocurrencies don't solve the problem since they're largely traded on opaque exchanges and other l2 solutions even less trustworthy than the libor cartel.
- csdvrx 5y ago
  I think the parent poster meant that the actual going prices on multiple exchanges could be used for data inference. While there are rumors of wash tradings on some exchanges, the price at which such trades would be going will be constrained by the larger network, and the risk of triangular trade will limit the possible divergences to a larger spread (instead of going one direction only) Add enough data, and you may get something that would be almost impossible to trick, simply due to the sheer number of exchanges, and bots that would gladly take the money of those who would try to rig the game.
  - erosenbe0 5y ago
    Ummm the whole point is that it is a measure of relatively unregulated dollar for dollar transactions not subject to any clearinghouse, exchange, or blockchain regulation or visibility. LIBOR is supposed to be the benchmark of dollars anywhere, so to speak. So you're talking about apples and oranges
    - csdvrx 5y ago
      Well, you do with what you have (and the prices of apples may be correlated enough with the price of oranges to act as a proxy if you can't get the price of oranges), and the pros of "resilient to rigging" might be worth more than the cons.

neom 5y ago

What Is Libor And Why Is It Being Abandoned? - https://www.forbes.com/advisor/investing/what-is-libor/ https://www.forbes.com/advisor/investing/what-is-libor/

nerdponx 5y ago

> In 1986, at age 17, it hit the big time: Libor was taken in by the British Bankers Association, a trade group described later by The New York Times as a “club of gentlemen bankers.” What are the chances that this "club of gentlemen bankers" always intended to manipulate Libor to some extent? I know finance and banking is very complicated; maybe someone will come along who happens to have been a banker in London in 1986 and will set me straight. Otherwise I find it hard to limit my cynicism when enormous amounts of money are involved.

lmm 5y ago
Banks took both sides of LIBOR contracts. So it wasn't really about manipulation so much as just having a standard to follow. Do you read about clubs of Silicon Valley browser makers meeting up to come up with a new HTML standard and assume that this is some nefarious plot? I imagine your London banker counterpart does.
- nerdponx 5y ago
  Yes, the same level of skepticism is definitely warranted when it comes to proposals by big tech companies. That doesn't mean all proposals are bad.
MR4D 5y ago
> Otherwise I find it hard to limit my cynicism when enormous amounts of money are involved. You should always be cynical when large amounts of money are involved. It helps you avoid large losses. Side note - one of the best questions to ask in any deal is “how are you making money on this”. If the other party doesn’t tell you, then they probably know something that they don’t want you to know. If you doesn’t get a straight answer, walk away [0]. [0] - I work in finance and never do business with someone who is not transparent about this. Been doing it a long time and it serves me well. I learned it from an old hand, and cringes the first few times he asked it. Then, I got the nerve to ask why he asked such a cringeworthy question. Glad I did!
JackFr 5y ago
LIBOR grew out of the same ecosystem that created Eurodollars. Originally a Eurodollar was simply a dollar held in a non-US domiciled bank, in particular a bank outside of the Federal Reserve System. The story, at least partly true, is that the Soviet Union was making a ton of money selling oil. Thanks to OPEC, the market for oil is denominated in dollars. Soviet oil companies didn't mind the dollars, but they didn't want money in US banks, and so the Eurodollar was created. In the USD money market (the interbank lending market for terms < 12 months) the most riskfree rate is the Fed Funds rate -- that is the rate which banks lend to ach other within the Fed system. In the money market for USD, everything was quoted in terms of Fed Funds, e.g. Fed Funds + 50 etc. Banks with EuroDollar deposits couldn't partake in the Fed system, but they needed something similar, and so LIBOR was created. Well, then it grew. US banks got involved in EuroDollars and foreign banks got US subsidiaries and everything kind of ballooned. But the big change was the invention of interest rate swaps. Interest rate swaps create a linkage between the Money Market (terms < 12 months) and the Capital Market (terms > 12 months). There are a bunch of economic explanations as to why interest rate swaps exist and some of them have to be true, but they're irrelevant to the LIBOR story. A vanilla fixed-floating swap needs a floating rate, and that's LIBOR. A couple of trillion dollars (notional) worth of derivatives later, instead of simply being a pragmatic way to quote rates in the money market, it then drove P&L of derivatives desks. I think everyone knew the potential for manipulation was always possible, but for a long time I think, until the tail started wagging the dog, it worked. But there's no going back now.

TameAntelope 5y ago

> It turned out that bankers had been coordinating with one another to manipulate the rate, pronounced “LIE-bore,” by skewing the number higher or lower for their banks’ gain. The authors must be very pleased with themselves about this one...

ddlatham 5y ago

There's a great Planet Money episode explaining the story https://www.npr.org/transcripts/1044598674 https://www.npr.org/transcripts/1044598674

epa 5y ago

Unfortunately the replacement of SOFR is a collateralized rate where as LIBOR is non-collateralized. Adoption of SOFR has been slow because its not 1:1. Plus, LIBOR is not dead yet, still a lot of contracts that need to go through maturity before the rate truly dies. Interesting history on LIBOR, was created related to an Iran loan in the 1960s. Doesnt seem that long ago but that is pushing 50 years now. Imagine apple told you that mouse will no longer be supported on OSX, please everyone switch to touch screen -- the adoption would be slow at best.

gadders 5y ago
The other difference is that LIBOR is a forward-looking rate, whereas SOFR (unless you have Term SOFR) is a backward looking rate (i.e. that is for LIBOR you know at the start of the month what rate you will pay for the following month, whereas with SOFR you don't know the rate until the end of the interest period [or 5 days before in the case of lookback])
- JackFr 5y ago
  And the SOFR is only an overnight rate. There is no official Term SOFR. The CME has forward SOFR contracts for 1, 3, 6 and 12 months -- which are not really the same thing, but if you squint hard you can treat them kind of like forward looking term rates.

divbzero 5y ago

Past HN discussions on the LIBOR scandal — [2012]: https://news.ycombinator.com/item?id=4224873 https://news.ycombinator.com/item?id=4224873 "Lies, Damn Lies and LIBOR" [2015]: https://news.ycombinator.com/item?id=9426247 https://news.ycombinator.com/item?id=9426247 "Deutsche Bank to Pay Record $2.5B to Resolve Libor" [2017]: https://news.ycombinator.com/item?id=13497578 https://news.ycombinator.com/item?id=13497578 "Libor: the bankers who fixed the world’s most important number" [2017]: https://news.ycombinator.com/item?id=14075230 https://news.ycombinator.com/item?id=14075230 "Libor: Bank of England implicated in secret recording" [2017]: https://news.ycombinator.com/item?id=14994122 https://news.ycombinator.com/item?id=14994122 "Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?" [2018]: https://news.ycombinator.com/item?id=16418629 https://news.ycombinator.com/item?id=16418629 "The brazenness of the LIBOR scam"

tomc1985 5y ago

Man I'm glad I don't work for a fintech right now, there's a lot of very complicated code with LIBOR as an input

wsc981 5y ago
Think about all the job security. You'll be set for many years!
- queuebert 5y ago
  They should start a club with the COBOL maintainers.
- toomuchtodo 5y ago
  Chaos is a ladder. Run towards it to prosper.
pessimizer 5y ago
They've had years.
marginalia_nu 5y ago
Having worked in fintech, I assume everyone ignored all signs toward this coming, assumed it would be postponed forever, and then collectively burst into a choir of "LIBOR gone? Inconceivable!"
- tomc1985 5y ago
  Yup! I remember hearing murmurs of LIBOR's unsuitability but didn't see much of a reaction. Wonder how things are now
- twic 5y ago
  How did you get access to my commit logs?!
gadders 5y ago
Or an actual real bank...

erwincoumans 5y ago

From the title it seems like Mr. or Dr. Libor died. For a paragraph, it is cute to have Libor personified. Doing it until the end of the story feels a bit artificial to me.

svnpenn 5y ago
Yeah this just screams clickbait. "Let's create a title that makes no sense, followed by an entire article with a strained metaphor".
- mhh__ 5y ago
  How is it clickbait? LIBOR is omnipresent in finance and it is being killed. Sterling LIBOR is already dead for example.
  - svnpenn 5y ago
    Well: 1. Its LIBOR, not Libor 2. LIBOR is not a number, its a rate. Thats literally what the "R" stands for 3. LIBOR cant die, as its not a person Its just an awful title because it calls LIBOR a number, which its not, then goes on to treat it as a human, which its also not.
    - recursive 5y ago
      I don't know anything about LIBOR, but I know a few things about rates. Every rate I've ever heard of is a number. How can a rate not be a number?
    - danielmarkbruce 5y ago
      It's a tongue in cheek article in the NY Times. NY has a lot of finance folks. To a lot of finance folks, libor has been a meaningful number for a long time and a million contracts are based on it. As for "treating it as a human", the financial industry has long used the term "mr market". Ie it's sort of an inside joke. To the target audience it is not an awful title, nor an awful article. As for the semantics of numbers v rates - the rate is specified in numbers. And LIBOR v Libor - the number was used so extensively for so long many people didn't even know what the acronym meant. It's like correcting someone for calling a tissue a kleenex.

ptr2voidStar 5y ago

decafninja 5y ago

I was working at an investment bank (as a developer) when this scandal hit. My entire department was laid off as a result. Not because we were involved or complicit in the scandal, but because the scandal indirectly caused a big financial hit to the bank and we were part of the cost cutting measures. It was a traumatic and tragic moment for me at the time. But in hindsight it was the event that lead to my eyes being opened to the world of Silicon Valley tech companies. Until then, I had naively thought that working as a developer in the IT departments of Wall Street investment banks and hedge funds* was the pinnacle of a SWE career. * Not referring to places like Citadel or Jane Street or Two Sigma, etc.

citizenpaul 5y ago
>part of the cost cutting measures. Not sure why you would believe this. It is much harder for regulators to interview employees about their activities when they are no longer centrally located for convenient discussions. Its the same tactic they use in bury investigators with paperwork but for people.
- decafninja 5y ago
  My department was very far removed from the issues in the scandal. I doubt investigators would have had much interest in us or found anything of use from interviewing any of us.
  - citizenpaul 5y ago
    I believe that it was separated and 100% not involved. Do you think your company is above laying off an entire department to keep investigators off the trail of the real problem department?
- skrebbel 5y ago
  Don't assume, you know nothing about the parent's situation.
  - 5y ago

pessimizer 5y ago

Quote from earlier linked article explaining why it took so long after the scandal to do this: > The transition to a post-Libor world would not be painless. Remember those $190 trillion of Libor-linked derivatives? Hardly any of those instruments — essentially contracts between two parties — provide a workable option for what to do if Libor were to vanish. > In a worst-case scenario, banks and their customers would effectively have to negotiate how to end Libor-based contracts over the phone, said Darrell Duffie, a Stanford University finance professor. For a sense of what is at stake, Lehman Brothers was a party to more than 900,000 derivatives contracts when it went bankrupt in 2008, according to research published by the Federal Reserve Bank of New York. > “It’ll be really nasty in terms of costly, difficult workouts,” he said. https://archive.fo/LKI4J https://archive.fo/LKI4J The Most Important Number in Finance Is Going Away. Wall St. Isn’t Prepared.

deleted 5y ago

[deleted]

lordnacho 5y ago

I traded LIBOR instruments that were probably manipulated, and there was suspicion at the time. Same with FX, there was a cartel manipulating that as well, and people in my firm also wondered at times why things were moving around at the exact wrong time. It's probably best that the LIBOR system goes in favor of something more transparent. But I have a friend who is involved in the transition at a bank, and it's incredibly complex to move over such a huge mass of contracts to this new thing. Definitely a lot of work for a lot of people.

splittingTimes 5y ago
The Libor - interest rates scandal is only one in a long list of documented manipulations in the last 5-10 years ISDAfix - swaps Platts - oil prices WM/Reuters - FX High-Frequency Trading - equities Commodities - Gold, Silver Stock indices Are all rigged. With that history, how can we give that new system the benefit of a doubt. It will be gamed as well.
- whimsicalism 5y ago
  > High-Frequency Trading - equities > Commodities - Gold, Silver Stock indices ? It doesn't help for FX that it is effectively unregulated.

fanzhang 5y ago

When I first heard about LIBOR in 2002, I was surprised that the number is just based on a survey of bankers. Surely there would be accuracy issues with that? But at that time I was young and had no finance experience, so though that the adults in the room knew best. Turns out not! I don't think the base problem is that people shaded their numbers one way or another, it's that the system is designed wrong.

cromulent 5y ago
The Corruption Index is similar - it’s based on how corrupt people think a nation is. Nothing to do with how much actual corruption exists.
- sokoloff 5y ago
  It seems overwhelmingly likely that "how corrupt people think a nation is" does have "[something] to do with how much actual corruption exists".
  - deleted 5y ago
    [deleted]
  - tacostakohashi 5y ago
    Kind of... but certain countries have done a great job of gaming the system, particularly one of the countries that is currently ranked #3.
    - Shorel 5y ago
      Switzerland?
  - refurb 5y ago
    Not in the least. Look at crime statistics versus how safe people feel. People say “crime is worse than 20 years ago” when the murder rate is 1/5th. Perception =\= reality.
  - 5y ago

panoramas4good 5y ago

Would highly recommend the book, The Spider Network, which gives an in-depth view (perhaps slightly dramatised) of how one trader manipulated Libor.

yob22 5y ago

r00fus 5y ago

The salient info buried at the end: "Libor is survived by several successors, each making a claim to its crown. The Secured Overnight Financing Rate, or SOFR — a rate produced by the Federal Reserve Bank of New York that is based on transaction data, not estimates — has already been embraced by many banks in the United States and has the endorsement of the Fed. Others, like the American Interbank Offered Rate, or Ameribor, and the Bloomberg Short-Term Bank Yield Index, or BSBY, have their adherents. In Britain, the Sterling Overnight Index Average, or SONIA, seeks to inherit Libor’s place as the do-it-all benchmark." My only remaining question is, since we used to have a single reference rate, and now we have multiple reference rates - how does this impact existing contracts?

mathattack 5y ago
The article references that existing contracts will stay on LIBOR. It’s only dead for new deals.
Havoc 5y ago
For any new lending the contracts get replaced with new ones referencing Sonia. Even existing debt facilities that get drawn down - the banks don’t want more lending under libor. It’s a pretty painless substitution though
riskneutral 5y ago
> how does this impact existing contracts? This has kept lawyers busy for past the few years. The "LIBOR fallback language" was created and then inserted into existing contracts, to address this question. It's like a pull request for a patch. Most of the legacy contracts out there have been "patched" with the "fallback language" at this point, and as of Jan 1, 2022, no new LIBOR contracts are allowed.

NoboruWataya 5y ago

Transitioning from LIBOR has been a huge project in the finance industry. I would say most banks' in-house legal departments have been living and breathing this stuff for the last two years. Most contracts drafted after the scandals broke (when it became clear that LIBOR's days were numbered) were drafted with fallback language language built in, so that upon the cessation of LIBOR the contract would automatically switch to a successor rate. But there were a lot of longer-dated contracts that required manual intervention. For derivatives, it wasn't so bad because ISDA (the industry association for derivatives users) published an IBOR fallback protocol which counterparties could adhere to. All contracts between two adherents to that protocol were deemed amended so as to include market-standard fallback language. There was no such neat solution for bonds and loans, so banks had to look at them pretty much one-by-one. The economic and legal terms of the amendments required to replace LIBOR were mostly standardised across the market, so they typically didn't involve any tough negotiation - the issue was more the operational burden of amending many thousands of contracts. In a simple bilateral loan the process is straightforward: bank reaches out to borrower, borrower and bank sign amendment agreement, done. But bonds which are widely held through clearing systems posed a much bigger problem, because material amendments typically need the consent of at least half (or sometimes two thirds or three quarters) of bondholders. A single bond issuance can be held by thousands of (ultimate) investors, and ownership can be heavily intermediated: an investor might hold her bonds in an account with her broker, that broker might hold the bonds in an account with a custodian, that custodian holds them in an account with a securities depositary, etc. The issuer does not know who the ultimate holders are; it can only send out a consent solicitation through the clearing systems. Even if that solicitation manages to work its way through the ownership chain to the end investors, most of them will probably just ignore it. So a lot of consent solicitations fail even for routine, unobjectionable amendments. When this happens (or is likely to happen), issuers need to look at other ways to push the amendments through, like asking the security agent (who basically represents the bondholders as a class) to consent to the amendment without first receiving the consent of the underlying bondholders. Most deal documents allow security agents to do this where the proposed amendments are not materially prejudicial to bondholders, but security agents are very reluctant to make that determination.

jayflux 5y ago

https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-numbern https://www.theguardian.com/business/2017/jan/18/libor-scand... is a good read about what went on about it.

jcuenod 5y ago

If you're a neophyte like me, take a look at the Odd Lots podcast: https://www.listennotes.com/search/?ocid=c1a7b213882c4e329643412087adcfe5&q=libor https://www.listennotes.com/search/?ocid=c1a7b213882c4e32964... There's a ton of good info in there on what Libor is, why it needed to live, why it needed to die, and some attempts to replace it.

cyanydeez 5y ago

after swindling millions for decades

RocketOne 5y ago

The Libor scandal ripped off just about every person who held any kind of debt. And yet it's STILL barely known. When I got my mortgage I asked my banker agent what she thought about it. She had no clue what Libor was, let alone the scandal.

lmm 5y ago
The scandal mostly meant that mortgage rates were lower than they should have been, so it's hard to get regular people angry about it.
aidenn0 5y ago
I don't know where you are, but at least in the US, the banks that make the loans don't hold the debt; they sell it off almost immediately.
Dylan16807 5y ago
Did it? Wasn't the scandal part about manipulating it up or down very slightly on a per-day basis? Shouldn't that have basically no effect on a normal person?

jhgb 5y ago

That is a very confusing headline, coming from a country where Libor is fairly common personal name. Why not spell it LIBOR instead?