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High finance even fairly recently (80s) was based on handshakes and trust. The value of contracts tied to LIBOR grew by an order of magnitude or two while the d

High finance even fairly recently (80s) was based on handshakes and trust. The value of contracts tied to LIBOR grew by an order of magnitude or two while the definition of LIBOR wasn’t adjusted. Why wasn’t it fixed? Because replacing it would require an enormous amount of coordination and there was no clear evidence that it was broken. When that changed it finally got replaced by SOFR.

rvba 3y ago
LIBOR not broken? It was a club used by the big boys from banks to screw everyone else. With a madeup number that benefitted them. https://en.wikipedia.org/wiki/Libor_scandal https://en.wikipedia.org/wiki/Libor_scandal
- smallnamespace 3y ago
  LIBOR was developed in '86. The LIBOR scandal broke in 2012, with evidence of bad conduct going back to '08 or so. The LIBOR to SOFR transition was officially kicked off around 2016. Due to the complexity, the transition took 5 years. The LIBOR rate-setting mechanism was a reasonable design for the world of 1986 [1], when finance was a smaller club and trust among bankers was higher. Also, it wasn't clear back then that the volume of contracts referencing LIBOR would grow to become many trillions of dollars just a short couple decades later. When problems finally became very clear, we replaced it. [1] One criticism often levied at LIBOR is why it sufficed to take a windsorized bank poll instead of looking at something more reliable, such as market transactions. But that's ahistoric: in 1986, banks didn't always do unsecured 3m lending on a daily basis. And later on, banks mostly stopped doing unsecured lending to one another entirely. So critics who suggest that LIBOR should've looked at market transactions entirely miss that finance, actually practiced, is a constantly moving target and it's hard to predict the future when designing benchmarks. SOFR, LIBOR's replacement, looks at secured interbank lending — a practice that was rare when LIBOR was created.
  - rvba 3y ago
    They knew very well what they were doing.

rvba 3y ago

LIBOR not broken? It was a club used by the big boys from banks to screw everyone else. With a madeup number that benefitted them. https://en.wikipedia.org/wiki/Libor_scandal https://en.wikipedia.org/wiki/Libor_scandal

smallnamespace 3y ago
LIBOR was developed in '86. The LIBOR scandal broke in 2012, with evidence of bad conduct going back to '08 or so. The LIBOR to SOFR transition was officially kicked off around 2016. Due to the complexity, the transition took 5 years. The LIBOR rate-setting mechanism was a reasonable design for the world of 1986 [1], when finance was a smaller club and trust among bankers was higher. Also, it wasn't clear back then that the volume of contracts referencing LIBOR would grow to become many trillions of dollars just a short couple decades later. When problems finally became very clear, we replaced it. [1] One criticism often levied at LIBOR is why it sufficed to take a windsorized bank poll instead of looking at something more reliable, such as market transactions. But that's ahistoric: in 1986, banks didn't always do unsecured 3m lending on a daily basis. And later on, banks mostly stopped doing unsecured lending to one another entirely. So critics who suggest that LIBOR should've looked at market transactions entirely miss that finance, actually practiced, is a constantly moving target and it's hard to predict the future when designing benchmarks. SOFR, LIBOR's replacement, looks at secured interbank lending — a practice that was rare when LIBOR was created.
- rvba 3y ago
  They knew very well what they were doing.