
Libor: the bankers who fixed the world’s most important number - ghosh
https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-number
======
Lazare
Eh.

Libor was "fixed" by design. Literally, the concept behind Libor was to ask
some guys to make up a rate they thought they could borrow money at (note: Not
the rate they WERE borrowing money at). Totally subjective. For the purposes
it was originally intended for, that was fine. Later it began to be used for
other purposes, but it seems like a lot of people forgot that it was, at base,
asking some bankers to make up a number. Which...they did. And then people got
upset, because they didn't want a made up number, they wanted some objective
benchmark. Well, maybe you shouldn't have been using Libor?

Okay, sure, the number was being made up for selfish reasons and did not
represent a good faith effort to try and make up a number that accurately
reflected the rate that the people being asked believed they could borrow
hypothetical money, if they tried. If you squint a bit, that's...I dunno, I
guess it's bad? It wasn't _obviously_ against the law, and I'm hard pressed to
articulate a clear moral argument about how bankers should make up
hypothetical numbers, but okay, let's just say it was bad and wrong.

But... At any given point some banks were trying to drive the numbers up;
others down. Net movement was often nil but _generally_ downwards. Since
mortgages are often linked to Libor (in some countries) that means all this
probably means a bunch of people saved a few pennies (literally) on their
mortgage payments a few years back, mostly at the expense of large investors.
Yeah, I know, that doesn't mean it's either moral or legal but...stealing an
almost immeasurably small amount of money from a hedge fund and giving it to a
home owner is not exactly "robbing widows and orphans" territory.

In short, I'm decidedly underwhelmed by the entire "scandal". And I think the
sentence was wildly disproportionate; there's no way you can say the magnitude
of the crime justified it, especially given the small scale and vague legal
situation.

~~~
koliber
I think the issue was the collusion in making up this number, and not the fact
that the number was made up.

You're right about every single thing you said. However, the conclusion is
slightly off.

Think about prices at a gas station. Each gas station owner is free to price
their gas at a price at which he thinks people will buy it from him. This is
normal and most definitely legal.

What is not legal is if even two or more has station owners make a secret pact
to keep prices the same. This is called price fixing. It does not matter if
the price is a bit higher than normal (to maximize profits) or lower than
normal (to keep a third gas station from opening up). What matters is that the
prices are being fixed.

If you slice and dice price fixing, you can come up with the same conclusion
as you have. And yet price fixing is considered illegal and bad.

[https://en.wikipedia.org/wiki/Price_fixing](https://en.wikipedia.org/wiki/Price_fixing)

In the case of LIBOR, it is a situation very similar to price fixing, but at
an imaginably large scale. That is why it was a huge scandal and that is why
people and institutions got punished for it.

~~~
SilasX
That's a good point, but I don't think it fully addresses what that parent was
saying, which is that Libor _isn 't_ a price, but a subjective assessment. So
it would be more like if two gas stations agreed to use the same marketing
language to promote their stores [1] -- yes, it's collusion, but over a signal
they never represented as an objective benchmark, even though people started
using it as one.

[1] "we'll both say we have 'fresh produce', and one month out of the year
we'll both say it's 'very fresh produce'"

~~~
AnimalMuppet
Libor is in fact a price - the price of renting money. There are actual loans
and/or bonds made at Libor (often plus an offset).

~~~
SilasX
The point is that there is a subtlety -- the difference between a price, and a
signal that other people use to set prices. Libor is the latter. Colluding on
a signal is not the same as colluding on the prices themselves, the argument
goes.

~~~
hermitdev
A lot of large loans are set to Libor plus an offset. You might think it is a
signal, but is, in a very real sense, also a price.

~~~
AnimalMuppet
Well... SilasX has at least half a point. If the Libor rate is being messed
with ( _and_ if the messing nets to a Libor that is a consistent, say, 0.05%
too low), people making contracts _could_ adjust the offset up by 0.05%.

But I still think that SilasX's view isn't the right way to look at this. Why
were people messing with Libor? It wasn't because they were going to make more
money off of interbank loans. It's because they were going to make more money
_off of other things that were keyed to Libor_. So, yes, they were using Libor
to manipulate the _price_ of things.

And if I understand correctly, it works like this: The contract says Libor +
X%. The X is fixed at the time the contract is negotiated, not at the time it
closes. Then, later, the contract closes, and uses the Libor at the date of
closing. This means that the Libor-setters move last, _after_ the offset is
determined. This makes it impossible in practice to use the offset to fix the
Libor machinations.

~~~
hermitdev
Agreed, in that every loan I ever saw had a fixed Libor offset. Disagree, in
that Libor was fixed at closing, instead it was most often used as a floating
rate. So, you had a floating Libor + a fixed offset. In regards to
manipulating Libor to move downwards would have only hurt the bottom line of
my firm.

------
lordnacho
I actually traded with these guys. Not personally but definitely through
agents.

It's interesting to note that whenever there was a fixing of any kind in a
visible market like fx or equities, people who held dependent instruments such
as options would always comment on how it seemed fixed.

You'd stare at the graph during the fixing and wonder why on earth it was
moving so strangely. They'd typically be rumours of someone having a large
interest via barriers and such but of course your broker would not actually
tell you who.

I'm not surprised libor was also rigged, it actually seems to suit the
culture. Add to that the fact a lot of these guys (these types of traders and
brokers, not necessarily these exact guys) knew each other from childhood, or
at least had a very strong common culture.

~~~
JumpCrisscross
> _your broker would not actually tell you who_

Former algorithmic options market maker. Brokers don't tell because they don't
know. (We did, along with the one broker whose client placed the order did.)

~~~
lordnacho
I used to trade voice before I went full algo. They know, and they go for
drinks with them after work. They're supposed to not tell you because the
whole point of them is to be the go-between, so that it's not too obvious what
they want to do.

That sort of broking is a lot smaller now, and there is something to be said
for the screen model of market making.

~~~
JumpCrisscross
Each broker goes for drinks with their clients, and knows what their client
trades. But they can rarely connect the dots without the help of a market
maker. Hence why I got drinks :)

------
cm2187
I think it's worth clarifying a couple of things. This is my personal
understanding of what happened.

There were two separate scandals in the libor fixing scandal.

Scandal one is the one covered in this article. Before the crisis, swap
traders getting the libor submitters to skew their submissions in one way or
another to fit their positions. One thing to know about that is that the
amount by which the libor fixings were moved was very marginal, typically 5-10
basis points (0.05-0.1%), which would then get averaged out, and probably well
within the range of uncertainty for the cost of funding of a bank. The impact
would be nothing more than a rounding error to pretty much any borrower with a
loan indexed on Libor. It would matter to a swap trader as he would be sitting
on a massive libor future position, and would be running the basis risk
between that position and the derivatives this position is hedging. But it is
kind of like stealing 1 cent from 10 millions bank accounts. It is still
stealing, it doesn't excuse it, but people who pretend that the economy has
been impacted are insincere.

The other scandal was of a whole different nature and scale. During the peak
of the crisis, as banks were going bust one after the others, the management
of these banks were asking libor submitters to lower their contribution
significantly, typically by several percents, because these contributions were
public, and they did not want to give the sentiment that the bank was
struggling to fund itself, and may go bust soon too. This had a much larger
impact on everyday loans, though at the benefit of the borrowers, as rates
were lower than they should. People who pretend that struggling borrowers were
cheated got their math wrong. Investors were cheated. Although one could argue
that when people were choosing libor for their contract, they meant it as a
good indicator of the general level of interest rates, but didn't mean to
index their own borrowing cost to the credit risk of a bank, which has very
little to do with interest rates, and is what caused libor to spike, as
interest rates were otherwise going down.

That second scandal though, was not something that happened, hidden, between a
handful of traders. Regulators were informed either by whistle blowers, or
even potentially by the management of banks. They decided not to act as they
percieved the threat of major banks going bust as a much greater problem than
where interest rates were. Now I am not saying I condone manipulating rate
submissions. But people who are outraged on HN should ask themselves whether
they would have preffered the alternative, a much more violent financial
crisis than 2008, which was already off the chart.

~~~
bboreham
"[November 15, 2007], the Sterling Money Markets Liaison Group [...] including
bankers from Barclays, Citigroup, JP Morgan Chase, Royal Bank of Scotland,
Deutsche, Goldman Sachs, HSBC Holdings and Lloyds. Eight attended from the
Bank of England, including Tucker.

According to the minutes, "Several group members thought that Libor fixings
had been lower than actual traded interbank rates throughout the period of
stress."

[http://reuters.com/article/idUSBRE86114M20120703](http://reuters.com/article/idUSBRE86114M20120703)

------
smcl
Reading back the messages on libor fixing is why I have a "how would this look
being read out in court" mental check before communicating with colleagues on
internal IM or email. There's nothing illegal that I do (or even that I _can_
do, really) but I've no idea what anyone else is up to, and it would be
extremely embarrassing for a silly in-joke or throwaway comment to be taken
completely out of context. What these folks were up to was pretty bad but the
pally, casual way they talked about it probably didn't help them one bit.

~~~
cm2187
If you are not completely paranoid already, the Fabrice Tourre scandal should
push you over the edge. The SEC and congress edited sentences and took them
out of context in a pretty shameless way.

Two examples I noted:

First the SEC quotes Tourre _" More and more leverage in the system, The whole
building is about to collapse anytime now…Only potential survivor, the
fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly
leveraged, exotic trades he created without necessarily understanding all of
the implications of those monstruosities!!!"_ [1]

Where the actual sentence was (translating the bits in French): _You should
take a look at this article... Very insightful... More and more leverage in
the system, the whole building is about to collapse anytime. Only potential
survivor, the fabulous fab (as Mitch would kindly call me, even though there
is nothing fabulous about me, just kindness, altruism and deep love for some
gorgeous and super-smart French girl in London), standing in the middle of all
these complex, highly leveraged, exotic trades he created without necessarily
understanding all the implications of these monstruosities!!! Anyway, not
feeling too guilty about this, the real purpose of my job is to make capital
markets more efficient and ultimately provide the US consumer with more
efficient ways to leverage and finance himself, etc_ [2]

I wouldn't write that in an email, but still, the sentence has a very
different meaning with the bits edited out by the SEC back in.

Second example, one of Tourre's managers was quoted writing _" boy that
timeberwof was one shitty deal"_. This was repeated over and over by congress
as if it was a reference to the quality of the collateral of the transaction,
i.e. Goldman Sachs sells some product to a client that they call internally a
shitty product. But if you look at the actual email trail [3], they are not
discussing about the quality of the collateral in that CDO, but of the fact
that they are left with a $300m unsold position, which understandably is
undesirable as a market maker.

So my advice to everyone. No personal stuff in professional emails. No humor,
no joke, no second degree, no sarcasm. None of that is safe. The sentence you
add at the end to provide context in case a third party reads it will not help
you, it will be edited out.

[1] [https://www.sec.gov/litigation/complaints/2010/comp-
pr2010-5...](https://www.sec.gov/litigation/complaints/2010/comp-
pr2010-59.pdf) page 7

[2]
[http://i.telegraph.co.uk/multimedia/archive/01623/Fabrice_To...](http://i.telegraph.co.uk/multimedia/archive/01623/Fabrice_Tourre_ema_1623617a.pdf)

[3]
[http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/...](http://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/FN1623-2406.pdf?attempt=2)
page 224

~~~
smcl
That's insane - previously I'd noted that some court cases in the US seemed
geared towards finding _someone_ who could be dressed up and manipulated to
look guilty, and then just throw the full might of the law (and the media) at
them. This only confirms this - there's no way anyone's reading that original
sentence and editing it that way unless they're just casting about for a
scapegoat

~~~
cm2187
And interestingly it is probably Goldman who designated this guy as a
scapegoat. The email is unrelated to any transaction, and was clearly selected
and sent by GS to the SEC for that purpose.

To their credit, the senators that grilled Goldman executives over this thing
asked GS why they sent this to the SEC other than to give them a scapegoat.

~~~
smcl
Wow - the plot thickens! I need to escape the world of finance I think :)

------
djhworld
What I don't understand is how this guy thought he would get away with it?

I mean, he's a millionaire, millions of pounds in bonuses and salary, getting
a job like his isn't easy - why throw all that away?

------
known
[https://en.wikipedia.org/wiki/Information_asymmetry](https://en.wikipedia.org/wiki/Information_asymmetry)
is a behemoth

------
kevin_thibedeau
Who was saving the text messages?

~~~
illektr1k
I use SMS Backup + [1] which saves all my text messages to my Google account
allowing me to easily search and archive. It's followed me through android
phones for many years, automagically installing as I sign-in for the first
time on each 'new' device.

[1]
[https://play.google.com/store/apps/details?id=com.zegoggles....](https://play.google.com/store/apps/details?id=com.zegoggles.smssync&hl=en)

------
TwoBit
His prison sentence (11 years) and fine (800K pounds) should have been much
worse. People go to prison in the US for 11 years for smoking weed.

~~~
JumpCrisscross
I'd prefer shorter sentences for non-violent drug offenses.

Tom Hayes interned at UBS in 2001 [1]. Most interns are about 20 years old; we
can thus estimate his age at about 35. A man born in the UK in 1981 is
expected to live about 70 years [2]. Hayes' 14-year sentence thus represents
almost 40% of his remaining life.

[1]
[https://en.wikipedia.org/wiki/Tom_Hayes_(trader)](https://en.wikipedia.org/wiki/Tom_Hayes_\(trader\))

[2]
[https://www.ons.gov.uk/peoplepopulationandcommunity/birthsde...](https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/nationallifetablesunitedkingdom/20132015#main-
points)

~~~
slavik81
When he was born in 1981 he had a life expectancy of 71 years. By surviving
until now he has increased that value.

------
rissicay
this is why bitcoin is important...

~~~
neximo64
How would bitcoin change anything? The market pricing mechanism for bitcoin is
outside the scope of the blockchain - in other words traders set that.

Likewise interest rates on bitcoin would be exactly the same.

~~~
jakeogh
It's competition with standard banking and payment at least.

~~~
UweSchmidt
You really think politics/central banks will sit back and shrug "oh we can't
regulate money supply any more, a small number of anonymous people who
invested in Bitcoin early are in charge of the world economy? Bummer."

~~~
jakeogh
Nope. But they are not omnipotent.

------
arca_vorago
I don't get how someone can write about Libor and not get into more details
about the structure. I consider it one of the most important and yet most
under-reported key stories of the 08 crash.

My primary issue isn't with LIBOR persay, because, as the name implies, it's a
_London_ bank rate. My primary issue is with the fact that the Fed board of
governors so quickly and easily chose it as the rate, in effect ceding a
_huge_ part of their power (interest rate setting) to fucking London bankers!
They had all the power to choose an American rate or create one of their own,
but chose not to.

To me, this is a perfect example of the danger of the Fed and it's
unsupervised, unchecked power of agency, and it leads credence to the anti-fed
sentiment and documentation I have read.

That the Wall Street bankers truly are subservient to The City (London) is
more of a threat to US national security than ISIS.

~~~
JumpCrisscross
> _LIBOR...[is] a London bank rate_

In 2014 "a private corporation called ICE Benchmark Administration (IBA) took
over the daily production and administration of [LIBOR] subject to the
regulation and supervision of" the UK's Financial Conduct Authority [1]. ICE
is an American company that trades on the NYSE.

> _the Fed [ceded]...power...to...London_

Of the 18 LIBOR member banks, 3 are American and _all_ have a presence in New
York City [2]. That's how the Fed is able to regulate them. Also, I don't
think the Fed pushes LIBOR. Lenders baked it into their private contracts much
as the _Wall Street Journal_ prime rate is baked into some mortgages.

> _Wall Street bankers...are subservient to The City_

Other way around. If Washington cut London's dollar clearing privileges the
City would implode.

[1]
[https://www.federalreserve.gov/newsevents/speech/powell20140...](https://www.federalreserve.gov/newsevents/speech/powell20140904a.htm)

[2] [https://en.wikipedia.org/wiki/Libor](https://en.wikipedia.org/wiki/Libor)

~~~
arca_vorago
> In 2014 "a private corporation called ICE Benchmark Administration (IBA)
> took over the daily production and administration of [LIBOR] subject to the
> regulation and supervision of" the UK's Financial Conduct Authority [1]. ICE
> is an American company that trades on the NYSE.

In 2014, a full 6 years after a crash, that doesn't negate the issue of
allowing a non-American set interest rate to be the basis for American
financial institutions in the first place. Literally billions of dollars in
city, firefighter, and police pensions, not to mention other investments, in
the US were negatively affected by the manipulation of LIBOR. Even though they
sacrificed a scapegoat, and LIBOR was indeed being abused, the structure of
LIBOR itself is part of the problem here.

> Of the 18 LIBOR member banks, 3 are American...

Not really reassuring me with those kinds of numbers.

> all have a presence in New York City [2]. That's how the Fed is able to
> regulate them.

They can regulate their American side, but not their London side, correct?
Still doesn't change the original issue. Also, the Fed regulating the banks is
sorta the fox guarding the hen house isn't it? I mean, as far as I know, the
true ownership (who owns stocks in the Fed) is private still is it not? Isn't
it a sort of inherent conflict of interest? Don't get me started on how the
SEC has their balls cut off on this subject.

> Other way around. If Washington cut London's dollar clearing privileges the
> City would implode.

I understand the power of the defense/petro-dollar, but I'm talking about
culture wise, where I have repeatedly seen the Fed and major heads of banks
bend over for bankers in the City. It's much more ancedotal and on this point
I haven't read any good academic papers or books, so if you have some reading
on the relationship between the City and Wallstreet I would love to hear about
it.

~~~
JumpCrisscross
> _allowing a non-American set interest rate to be the basis for American
> financial institutions in the first place_

American banks don't borrow based on LIBOR. Their overnight borrowing and
lending is done at the Federal funds rate [1], an arguably _much_ better-
designed system than LIBOR. The only reason LIBOR shows up in the U.S. is
people write it into contracts.

> _Of the 18 LIBOR member banks, 3 are American_

>> _Not really reassuring me with those kinds of numbers_

The U.S. overruled British regulators in 2008 regarding Lehman Brothers and
Barclays, and did so again in reforming LIBOR. The four British banks who are
LIBOR members depend more on the U.S. than any American bank depends on
London.

> _the true ownership (who owns stocks in the Fed) is private_

No, the Fed was created by Congress [2]. Its Board is appointed by the
President and confirmed by the Senate. It remits its profits to the U.S.
Treasury.

Commercial banks own "stock" in the regional reserve banks, but it's more of a
reserve accounting mechanism than actual stock. The "stock" is not
transferable and confers no management rights; "the Reserve Banks are not
operated for profit, and ownership of a certain amount of stock is, by law, a
condition of membership in the Federal Reserve System" [2].

> _I understand the power of the defense /petro-dollar_

The size of the American economy, particularly its consumption, underwrites
dollar hegemony. That size means lots of people, within the country and
without, must hold U.S. dollars. That, in turn, makes it ideal for lending and
borrowing in, which in turn makes it ideal for trading commodities.

> _I have repeatedly seen the Fed and major heads of banks bend over for
> bankers in the City_

Since World War II and the implementation of the Bretton-Woods pact the City
has served at the pleasure of Washington. For a hint at this, search the
British financial press for mentions of American regulators and then do the
same of the American financial press for British regulators.

[1]
[https://en.wikipedia.org/wiki/Federal_funds_rate](https://en.wikipedia.org/wiki/Federal_funds_rate)

[2]
[https://www.federalreserve.gov/faqs/about_14986.htm](https://www.federalreserve.gov/faqs/about_14986.htm)

~~~
arca_vorago
I just wanted to say I appreciate your taking the time to educate me on this,
banking is so cultish and esoteric sometimes, you have given me a direction to
focus my reading to expand my knowledge, so I am much obliged.

In particular, I didn't realize that LIBOR wasn't actually used by the
American banks for interbank stuff, but was used voluntarily in contracts.
That LIBOR impacted so much of America and they allowed it to do so
voluntarily (or out of ignorance) is astounding to me. I wish all this kind of
information was layed out in a single place more clearly for public
conspumption.

~~~
fitchjo
One other clarification for you, many floating-rate lending agreements
actually allow for the borrower to select between the Fed rate and LIBOR
throughout the term of the agreement. As I understand, the prevalence of LIBOR
in US contracts at least somewhat coincided with the increased globalization
of US business as, from a risk management perspective, sometimes you may want
the interest rate on your borrowings to reflect a different economic sentiment
than just the US. Clearly, once LIBOR started being manipulated by the
bankers, it no longer accurately reflected the market it was supposed to
represent, but its not always about having the most "accurate" rate, but
aligning/managing your risk appropriately.

