
Lies, Damn Lies and LIBOR - gruseom
http://londonbanker.blogspot.co.uk/2012/07/lies-damn-lies-and-libor.html
======
praptak
Real life dwarfs gaming. Remember the recent EVE exploit? Someone discovered
that it was possible to pump prices of low liquidity goods, pack ships with
said goods, destroy the ships and score an unusually high LP, due to the
artificialy inflated "value" of those goods.

The underlying mechanism is the same - someone ties some kind of payout to a
market price. Then someone other discovers that th price is not something that
reflects the market equilibrium but rather something that can be manipulated
so that it maximizes said payout rather than market efficiency.

It is a bit scary, especially if you tie real money in gaming goods. Or if you
tie real money in goods whose price can be gamed.

~~~
batgaijin
I' still surprised the SEC doesn't actively try to game the system. I mean we
all know that we aren't dealing with the worlds best people, why not try to
play the psycopath game ourselves?

~~~
newbie12
They do. It is called the "revolving door". After a few years, most senior SEC
staff go on to work in the banks they are supposed to regulate.

------
olalonde
> We need to rethink as a society what banks are for, what exchanges are for,
> and what clearing houses are for. If they are for the profit of the few at
> the expense of the many now, that is because it is the business model we
> have permitted.

Is that really true compared to Silicon Valley? Do banks concentrate wealth a
lot more than a Google or a Facebook? If not, how would you feel about some
random dude commenting on his blog: "We need to rethink as a society what tech
startups are for, what angel investors are for, and what venture capitalists
are for. If they are for the profit of the few at the expense of the many now,
that is because it is the business model we have permitted."?

Regardless, if banks are "concentrating wealth" they must be doing something
right since after all, the ultimate purpose of a business is to make money. If
they do so through illegal means (fraud, deception, etc.), we already have a
legal system in place to deal with that. If they don't serve us well, we have
the ability to vote with our money and move to another bank which treats us
well.

If those two mechanisms are failing us, as some people claim, I'd be genuinely
curious to know why it fails specifically for banks while it works wonders in
other industries such as tech. I'm tempted to think that it is because the
barrier to entry to the banking industry is so amazingly high _largely due to
regulations_ that it favors a few large banks at the expense of eventual
competitors. I'd be curious to hear what others here think and welcome
rebuttals.

~~~
scarmig
"the ultimate purpose of a business is to make money"

No.

The _proximate_ purpose of a business is to make money. It's a means to the
end: the ultimate purpose of businesses are to improve human well being.

~~~
Variance
That's your opinion of it. I can have a contrary opinion that's just as valid,
and so opinions of the "ultimate" purpose of business are moot.

Legally, the ultimate purpose of a business is to make money as well as
legally possible; specifically, maximize shareholders' stake NPVs.

~~~
pyoung
First of all, if I am the sole owner of a business, and I want to run it into
the ground, that is my prerogative, and it is completely legal. Secondly, the
'maximize shareholder value' idea is a management principle, and it is not,
and never has been, a legally binding requirement for corporations, public or
not. Public corporations can be sued for purposefully or negligently
destroying shareholder value, but not for failing to 'maximize shareholder
value', which would be an absurd and difficult thing to argue in court
anyways.

~~~
Variance
The context was a publicly-traded for-profit company, like most large members
of the banking system. And for those companies, you are indeed given a
fiduciary duty to maximize profits (See _eBay v Newmark_ ,
[http://www.delawarelitigation.com/uploads/file/int51%281%29....](http://www.delawarelitigation.com/uploads/file/int51%281%29.pdf)).
So they can indeed be theoretically sued for failing to maximize shareholder
value to the best of their ability as a fiduciary: negligence includes
knowingly failing to take action that would increase shareholder value, not
just destroying it. After all, the two actions are the same thing.

------
hxa7241
There should be another entry in the YC RFS <http://ycombinator.com/rfs.html>
:

10\. Kill Wall Street (etc.)

We now have the technology to _completely_ remake the financial system -- not
just make 'banking' or whatever easier online, but a thorough and innovative
re-imagining of what the whole thing should even be about.

Information structure is the essence of all cooperative systems, and that
means the economics of tomorrow is absolutely about software -- its
architecture, its engineering.

The practicalities mean this cannot be tackled directly, but someone needs to
think big and work on it (in various ways).

~~~
gaius
You're missing that all of these things have valid uses. Take CDS for example.
They're a very efficient way for organizations to mutually insure each other's
risks, cutting out the middleman. The trick is to cross them with two
uncorrelated things (pork bellies and frozen OJ, for example) rather than
using defaulted mortgages to insure umm defaulted mortgages. Or CDOs, done
right they're how a bank protects itself against a run and is still able to do
maturity transformations (e.g. turning monthly salaries into 25-year
mortgages).

~~~
r00fus
How can CDOs be both limited in abuse as well as a meaningful

The problem is that in any realm, commotidization acts as a one-way function,
with enough complexity it becomes difficult or impossible to track, thus
allowing effective money laundering (or outright theft).

The real problem is lack of oversight, or traceability inherent in these
devices. This draws in shady money and, essentially, evil.

------
cluda01
I don't understand why this stuff isn't front page news of mainstream (cnn,
fox news, etc.) newspapers. You'd figure with all the lingering resentment
this would be a huge field day. Currently relegated to business news journals.

~~~
Tycho
It's very big news in the UK.

~~~
olefoo
It's big news in the very narrow segment of American society that pays
attention to hard news. In the sense that we can see the mechanisms by which
the general public is being robbed. It is not news in the sense that most
anyone who has been paying attention the last 3 decades knows that the both
the markets and the regulation of the markets is a rigged game.

~~~
Tycho
This angle seems a bit overplayed to me. The main victims of the fraud are
just the counter parties on these large derivative trades that investment
banks make between each other. One side was tilting the scales.

At least that's what I make of it.

~~~
intended
Considering that libor affects mortgage rates, I'd say that's a lot of people
affected.

that's like saying the only people affected by oil speculation are the counter
parties.

~~~
Tycho
I've not been able to find any analyses about mortgage borrowers being
adversely affected. Regardless, they are not the targets of the fraud, so the
idea about libor rate fixers robbing the public is disingenuous.

~~~
olefoo
Your savings account underperforming, or your adjustable rate mortgage being
more expensive than it would be otherwise aren't obvious forms of theft...

And the second order effects as businesses smaller than major banks attempt to
make up for their losses are even less obvious forms of theft.

And if the marks don't know they're being clipped, what's the harm, right?

~~~
Dylan16807
Savings account underperforming and adjustable rate mortgage being LESS
expensive.

------
intended
If you want to see what the different libor submissions by banks were:

[http://www.guardian.co.uk/news/datablog/interactive/2012/jul...](http://www.guardian.co.uk/news/datablog/interactive/2012/jul/03/libor-
rate-fixing-bank-submissions)

~~~
danielweber
What should I get out of that? I see that some banks wanted it higher, some
wanted it lower. That doesn't seem like a scandal.

~~~
chollida1
Well, IMHO, Barclay's is taking alot of heat for the entire industry.

They were correctly reporting their libor rate, which scared some people as it
was higher than other banks libor rates.

Partially because other banks were lying, partially because they were in more
trouble than other banks.

The government asked Barclays to falsely report their libor rate at a lower
amount.

This has the effect of lowering the reported libor rate. The libor rate is
important as it's the base rate for pricing alot of other paper. This other
paper is the base rate for pricing alot of derivatives,etc.

if you follow the chain, the libor rate can indirectly affect the price of
literally trillions of dollars of financial instruments.

Hence the hoopla surrounding the rates manipulation.

~~~
desas
> The government asked Barclays to falsely report their libor rate at a lower
> amount.

Allegedly

~~~
gaius
Tucker has fallen back on the "no recollection" defence, which is only one
step up from "only following orders". Looks like him and Diamond are
sacrificing themselves to protect the real power brokers.

~~~
intended
The emails are available though, so recollection or not it's clear no pressure
is being applied.

At the same time it's clear that the traders were pushing for rates to be
fixed, which is why they got fined.

~~~
gaius
The story of Thomas Becket is relevant here
[http://www.bbc.co.uk/history/british/middle_ages/becket_01.s...](http://www.bbc.co.uk/history/british/middle_ages/becket_01.shtml)

"Who will rid me of this turbulent rate?"

------
dreamdu5t
Why do we tolerate price-fixing and interest rate manipulation of the whole
economy through the Bank of England's control of the pound sterling dealing
rate? The central bank of the UK is setting interest rates for the entire
economy yet people only care about Libor rates being manipulated. It's a
hypocrisy.

~~~
peteretep
Oooh, oooh, I know this one! Next up:

\- Why are the army the only people allowed guns?! \- Why are doctors the only
ones who can prescribe medicine?! \- Why do we let the police have sirens on
their cars, but I can't get one on mine?!

------
Tycho
The trouble with articles like this is that they focus entirely on the
problems created by 'relaxation' of regulation, but the benefits are not
discussed. What we need to know is the net outcome (if it's knowable... But
it's definitely worth discussing).

~~~
intended
We have the net outcome in front of us? Did you mean to say something other
than wealth concentration to financiers, the meltdown of the world economy,
the euro crisis...

Sorry, are you saying what the net benefit would be once you remove the
calamities it has caused?

~~~
Tycho
The major problem facing the world economy is excessive sovereign debt, and
you cant blame the banks for that. Nor for the many other structural problems
in the economy, or for shortage of natural resources, or AIDS, or wars, etc.

What people do is focus on one visible failing of the financial system, then
assume everything would be rosy if not for that problem, ergo the banks are a
drag on society. And then just devolve into a generic rant about the public
being screwed by The Man.

The net outcome is whatever benefits the current banking system (or whatever
aspect of it you're discussing) has brought minus whatever problems it caused.

~~~
recoil
> The major problem facing the world economy is excessive sovereign debt, and
> you cant blame the banks for that.

In a country like Greece this may be true, but in Spain - for instance - the
country's sovereign debt before the financial crisis was low: it's the
possibility of Spain having to bail out its over-indebted banks that is
driving government bond yields higher there.

In the UK, the government was forced to nationalise the imprudent RBS and as
such increase its own debt burden.

And in the US, the government has been motivated to issue more and more debt
partly to help re-capitalise insolvent banks...

The banks are definitely to blame.

------
barret907k
It will be interesting to see when the banks have the same fallout we had in
1929. How much wealth actually exists?

This article makes a good point about how we can't know. Too many shady things
are happening and no regulation to figure it out.

------
johnnyg
If you want the same story, just played out in commodities markets, check out
<http://www.tfmetalsreport.com>.

~~~
debacle
A little context? I checked out the link and didn't really see anything that
caught my eye. Read a few blog posts, still didn't get it.

------
kenster07
The problem is fundamentally very simple. Would you ever lend your money to
someone dishonest? You are lending your bank money every time you deposit in
their vaults.

------
lifeisstillgood

      We have allowed markets to evolve in ways that make supervision of markets almost impossible. 
    

This reminds me of the big monolithic app vs small services debate. A some
point an app becomes harder and harder to break out Into testable pieces,
becomes Interdependant and complex

------
adnam
Here's a thought: : if you have a LIBOR-linked mortgage with Barclays, you
could probably cease repayments, report the bank to credit rating agencies and
and sue them for contractual misrepresentation.

~~~
SideburnsOfDoom
> if you have a LIBOR-linked mortgage with Barclays,

They all did it. Barclays were the last bank to start doing it, and the first
to confess.

~~~
adnam
So far, only Barclays, Citigroup, RBS, UBS AG, ICAP, Lloydsand Deutsche Bank
are being investiagted.

[http://www.businessweek.com/news/2012-07-09/libor-
criminal-p...](http://www.businessweek.com/news/2012-07-09/libor-criminal-
probe-cftc-bank-exemptions-canada-compliance)

~~~
SideburnsOfDoom
I don't think there's a contradiction between "they all did it" and "so far,
only many of the big banks are being investigated".

We don't have proof that "they all did it" so perhaps I overstated the case a
little. We do know that the UK government contacted Barclays because their
rates were higher than everyone else's. Perhaps some of those lower rates were
legitimate. Perhaps not.

But if we're going to be pedantically accurate, perhaps you should say "if you
have a LIBOR-linked mortgage with Barclays, Citigroup, RBS, UBS AG, ICAP,
Lloyds or Deutsche Bank" ....

~~~
adnam
A little touchy, aren't we?

The involvement of Barclays has been widely reported, so you could (maybe)
demand adequate assurance without being dishonourable.

~~~
SideburnsOfDoom
> A little touchy, aren't we?

I really don't know what you're trying to imply.

But actually I'd say I'm being pedantic at most. Because factual accuracy
matters.

------
rwmj
He had me up until he said "How [can] profits in the financial sector to be
consistently higher than profits from [...] agriculture, transport, health
care or utilities?"

Those are four very poorly chosen examples which suffer from Baumol's Disease
[1]

[1] <https://en.wikipedia.org/wiki/Baumol%27s_cost_disease>

Now whether or not it is true that banks can really be efficient, it's better
to compare banks to technology and industrial production that don't suffer
from Baumol's disease.

~~~
Variance
Agreed on the poor choices of examples, though that Wikipedia article is
terrible. There's absolutely nothing contrary to classical economics in "cost
disease", and Baumol's stuff was more an analysis of the economics of a
situation than a sudden discovery of some unforeseen phenomenon.

Articles like the OP link are little more than populist sensationalism. Valid
and extremely strong arguments can be made for reform in the banking system,
but they aren't made by expressing that banks should be "in service of the
people, not the profit." Those are political talking points, and the most
offensive is that he compared financial markets to casinos, which is where
authors lose all credibility to anyone who understands economics.

Also:

>Price discovery is not a sexy function of markets

Hell yeah price discovery is sexy. If it isn't, what is? The entire stock
market exists literally only to set prices as quickly and accurately as
possible.

