Taibbi: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

["Dave Farber" <farber () gmail com>]

Begin forwarded message:

> From: the keyboard of geoff goodfellow <geoff () iconia com>
> Date: August 13, 2017 at 11:06:00 PM EDT
> To: undisclosed-recipients:;
> Subject: Taibbi: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?
>
> Taibbi: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?
> While nuke kooks rage, British regulators reveal rip in financial space-time continuum and $350 trillion headache
> By Matt Taibbi
> Aug 11 2017
> <https://www.rollingstone.com/politics/news/taibbi-is-libor-crucial-financial-benchmark-a-lie-w497305>
>
> It was easy to miss, with the impending end of civilization burning up the headlines, but a beyond-belief financial 
> story recently crept into public view.
>
> A Bloomberg headline on the story was a notable achievement in the history of understatement. It read:
>
> LIBOR'S UNCERTAIN FUTURE TRIGGERS $350 TRILLION SUCCESSION HEADACHE
>
> The casual news reader will see the term "LIBOR" and assume this is just a postgame wrapup to the LIBOR scandal of a 
> few years back, in which may of the world's biggest banks were caught manipulating interest rates.
>
> It isn't. This is a new story, featuring twin bombshells from a leading British regulator – one about our past, the 
> other our future. To wit:
>
>         • Going back twenty years or more, the framework for hundreds of trillions of dollars worth of financial 
> transactions has been fictional.
>         • We are zooming toward a legal and economic clusterfuck of galactic proportions – the "uncertain future" 
> Bloomberg humorously referenced.
>
> LIBOR stands for the London Interbank Offered Rate. It measures the rate at which banks lend to each other. If you 
> have any kind of consumer loan, it's a fair bet that it's based on LIBOR.
>
> A 2009 study by the Cleveland Fed found that 60 percent of all mortgages in the U.S. were based on LIBOR. Buried 
> somewhere in your home, you probably have a piece of paper that outlines the terms of your credit card, student loan, 
> or auto loan, and if you peek in the fine print, you have a good chance of seeing that the rate you pay every month 
> is based on LIBOR.
>
> Years ago, we found out that the world's biggest banks were manipulating LIBOR. That sucked.
>
> Now, the news is worse: LIBOR is made up.
>
> Actually it's worse even than that. LIBOR is probably both manipulated and made up. The basis for a substantial 
> portion of the world's borrowing is a bent fairy tale.
>
> The admission comes by way of Andrew Bailey, head of Britain's Financial Conduct Authority. He said recently 
> (emphasis mine):
>
> "The absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks. 
> If an active market does not exist, how can even the best run benchmark measure it?"
>
> As a few Wall Street analysts have quietly noted in the weeks since those comments, an "absence of underlying 
> markets" is a fancy way of saying that LIBOR has not been based on real trading activity, which is a fancy way of 
> saying that LIBOR is bullshit.
>
> LIBOR is generally understood as a measure of market confidence. If LIBOR rates are high, it means bankers are 
> nervous about the future and charging a lot to lend. If rates are low, worries are fewer and borrowing is cheaper.
>
> It therefore makes sense in theory to use LIBOR as a benchmark for borrowing rates on car loans or mortgages or even 
> credit cards. But that's only true if LIBOR is actually measuring something.
>
> Here's how it's supposed to work. Every morning at 11 a.m. London time, twenty of the world's biggest banks tell a 
> committee in London how much they estimate they'd have to pay to borrow cash unsecured from other banks.
>
> The committee takes all 20 submissions, throws out the highest and lowest four numbers, and then averages out the 
> remaining 12 to create LIBOR rates.
>
> Theoretically, a fine system. Measuring how scared banks are to lend to each other should be a good way to gauge 
> market stability. Except for one thing: banks haven't been lending to each other for decades.
>
> Up through the Eighties and early Nineties, as global banks grew bigger and had greater demand for dollars, trading 
> between banks was heavy. That robust interbank lending market was why LIBOR became such a popular benchmark in the 
> first place.​..​
>
> [snip]
>
> -- 
> Geoff.Goodfellow () iconia com
> living as The Truth is True
> http://geoff.livejournal.com  
>
>
>
> This message was sent to the list address and trashed, but can be found online.



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