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Lies, Damn Lies and LIBOR (londonbanker.blogspot.co.uk)
208 points by gruseom on July 10, 2012 | hide | past | web | favorite | 135 comments

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.

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?

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.

For those of us who don't know EVE jargon, what's LP?

Loyalty Points but it doesn't really matter as long as it is something freely interchangeable for other goods.

> 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.

Google organizes the worlds information. Facebook does something that lots of people like (I guess). There is a vast difference between those and the banks in question. Banks should be run by accountants, doing boring accounting things, and being paid a fair wage for it. It should not be a license to extract trillions of dollars from taxpayers, without their consent or knowledge.

"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."

You're not grasping the situation or what actions have been taken in this example, and with the crisis and bailouts in the US. These are banks setting the rates at which governments borrow money, and the rates at which banks receive money to lend. Manipulation of those rates is illegal, unethical, and highly profitable. It's been abused on a monumental scale, so much so that it has begun to appear "normal" to the people participating in it. But, despite being the norm, it's fraud on a massive scale, and it destroys wealth and robs taxpayers.

I'm not at all arguing that more government/bank interaction is the solution. But, as long as banks have access to all the levers in our economy, and the ability to borrow money at rates they control and lend it out to governments at market rates (a free money funnel for taxpayer dollars), there needs to be regulation of those banks. If you can convince our government to remove that intimate connection between creating money (not wealth; we're taking about the currency that represents debts) and lending money and the rates at which banks borrow money being introduced into the economy (i.e. end or dramatically rethink the Federal Reserve in the US, and figure out a way to resolve the fraud in LIBOR in the UK, and whatever equivalent there is for the Euro), I'll sign right on for your cause. Independent currencies, like Bitcoin, are something I have high hopes for, but the Bitcoin economy is measured in millions...it'll be decades before we have an alternative economy and an ability to opt out of the horribly broken state currency markets and into a free market currency.

In the short term, laws need to be upheld, in London, in the US, in the world markets. People who have committed fraud worth billions or trillions of dollars need to go to jail. Just because someone is rich, well-educated, and doing what everybody else in their industry is doing, doesn't mean they should get a pass.

I agree with you on most points. Perhaps legalizing the creation and use of alternative currencies would be a step in the right direction.

Alternative currencies are already legal in the US. If I print up a zillion Foobucks and you agree to take them in exchange for goods and services there's nothing illegal about that. But if it's a taxable transaction then taxes will be due in real money.

Alternative currencies are legal but with serious limitations that make it almost impossible to compete with the official currency (see http://www.quora.com/Is-Bitcoin-legal).

So long as they don't look anything like dollars and you don't ever claim them to be legal tender. (Which has a different meaning in the UK.)


Sounds like you're arguing for the elimination of the Federal Reserve and bailouts--which is what moving from $ to Bitcoins would essentially do. The money supply of currencies like that is fixed.

I'm not strongly arguing for or against any particular solution. I'm an amateur on monetary policy and alternative currencies and the Federal Reserve system. I merely know what fraud looks like, and I'm confident it's happened in the past, and continues to happen to this day because no one has been held accountable for past fraud, on a massive scale. So, I don't know what the optimal solution looks like, exactly, but I know it's not what we have today. It may just be that upholding the law, rigorously and blind to wealth (i.e. billionaires can go to jail), would be sufficient to keep fraud in check.

But, I'm highly suspicious of any system that allows the people who loan money to governments to also be the people determining the rates at which they borrow money (usually indirectly, as there is a very high bandwidth revolving door between the Fed and the big banks in the US, but some of the biggest banks actually had people working directly for the Fed while working for the bank, which is an SEC violation; likewise, the banks themselves are determining LIBOR, which determines the rates at which they get and loan money to governments). This is obviously inviting the fox into the hen house and expecting them to help keep the hens warm at night. Turns out that foxes, when invited into hen houses, tend to eat the hens. There's also been bid-rigging on a massive scale in the US, including JP Morgan Chase and Bank of America in their bids for municipal accounts, which studies indicate has cost taxpayers billions.

At one point I might have argued, on principle, that regulation was the cause of all of life's problems, and that market solutions should be sought. I still lean very far libertarian (or market anarchist), but I'm not convinced our society is quite enlightened enough to get there yet--and when politicians do use libertarian rhetoric it's usually a corporatist agenda masquerading as freedom. In the meantime, the bleeding has to be stopped. We can't keep pumping trillions of dollars out of the middle class all over the world and into the hands of a select few billionaire bankers and expect anything good to happen. Freedom for a few to rob the masses is not libertarian.

You're wrong about a few things, but for now I'll just pick on one.

You do realise that the 'IB' in LIBOR stands for 'inter-bank'? The LIBOR rate has no bearing on the cost of a sovereign government's cost of funds - e.g. in US, treasury bills. The spread between them can be quite volatile (http://en.wikipedia.org/wiki/TED_spread). In short - governments don't lend or borrow at LIBOR - that's the point of having LIBOR in the first place.

I understand that (though my understanding of this particular situation is less deep than that of the US banking crisis). It's also my understanding that LIBOR is used to determine rates for municipal bonds, consumer loan rates (including loans insured by government), and other types of debt that do impact taxpayers and consumers. The LIBOR is a baseline...manipulating it manipulates the entire lending market in the UK. That's illegal and unethical and screws a bunch of people over and compromises the integrity of every bank that participates. (At least, that is my understanding of it, but I'd never heard the word LIBOR until two days ago.)

I'd be genuinely curious to know why it fails specifically for banks while it works wonders in other industries such as tech.

Isn't that obvious? Capture of the political and regulatory process. As Senator Durbin said of Congress, banks "frankly own the place". Tech does not.

I think that's a little simplistic.

Whatever capture finance has achieved of Congress is possible largely because nobody truly understands what's happening in hardcore finance.

The very best reporters covering e.g. the credit default swap debacle still have only a surface level understanding of how and why swaps are traded and what their relevance is to the whole market.

So you have a situation in which there's two strong ambient forces --- regulate vs. deregulate --- and no comprehension, and so it's very easy to push e.g. pro-business economic- libertarian-leaning into their default position of "let's keep our hands off this stuff".

Yes, that's a product of undue influence by lobbyists and the financial industry, but it works mostly because of ignorance.

You describe the situation well up to the point that it blew up the economy. But what happens after the crisis is a different matter. Anyone with any sense can see that the "it's so complicated none of you can possibly understand it" defense hasn't a leg to stand on after it led to catastrophic failure. Regardless of whether one bought that before, financial engineering forfeited its right to call the shots when disaster struck. Yet there has been no fundamental reform, something that is easily explained by Durbin's remark, so I believe Occam is with me here.

There's close to a consensus among the sources I read (Simon Johnson, Nouriel Roubini, Martin Wolf, William K. Black and other apparently credible experts, as well as the usual muckrakers) that political influence is the reason why, for example, the too-big-to-fail banks are bigger than ever despite the systemic risk. Ron Suskind's book even claims that Obama ordered Geithner to wind down Citi and Geithner just ignored him.

It's not as if there weren't major players advocating for such radical ideas as "bondholders should take losses when an institution fails" (http://www.nytimes.com/2011/07/10/magazine/sheila-bairs-exit...). They just lost politically. No?

So, I'm not defending anybody.

Like most people who actually pay some attention to what happened in finance, I trace much of the problem back to deregulation and poor enforcement.

The parties who successfully rolled back regulation made a grave mistake, and should bear the consequences of their terrible judgement.

Similarly, the people who today suggest that regulation isn't the answer, but rather that we should simply let failed banks fails, those people are making today's grave mistake. The people who argued that systemic vulnerability would prevent any failed bank from actually failing were, as I see it, obviously correct. As it turns out, we can't even let a single auto company crash, let alone a nationwide megabank.

Having said all that:

It does us no good to pretend that the other side of this debate isn't a "side", but rather a bought- and- paid- for theater role occupied by those lucky enough to receive lobbying dollars.

The reality is that it's an animating principle of roughly half the American political establishment that regulation is bad, and that its unintended consequences will tend to harm the economy more than crashes will. A pretty large subset of those people also believe that however painful a megabank failure is, it's survivable, and one or two of them will suffice to teach CEOs not to allow their companies to gamble to the brink of failure.

It's no surprise that this half of the establishment receives truckloads of money from financiers; their principles align with the lobbyist's interests. But attributing those principles to the lobbying contributions is an instance of the post-hoc fallacy, unless you genuinely think that finance subcommittee legislators, Republicans, and pro-business "new Democrats" really don't believe in deregulation.

I can separate the bad principle from the "influence" here, is all I'm saying, and having done so have started to conclude that maybe the influence is a red herring in this case.

Lobbying "influence" is bad for all sorts of other reasons! Most importantly: because it consumes gigantic amounts of time, time that could be spent grooming a staff that could have some hope of understanding the issues they're dealing with.

We seem pretty close on the issues but I am more (or is that less?) skeptical about the corrupting influence of money. There is a ton of evidence that people's beliefs are malleable and that money is just the thing to malleate them. No doubt our massaged beliefs are just as sincere as their predecessors; we're terrible judges of ourselves.

It's a bit tangential but Dan Ariely had a brilliant post the other day about how, in conflict-of-interest situations, disclosure not only isn't a solution but actually makes the problem worse. Outsiders have little idea how to interpret what's being disclosed, and insiders feel that they've fulfilled their entire duty by disclosing and proceed to do as they please.

The fundamental problem is that the FIRE (finance, insurance, and real estate) sector is in aggregate acting as a rentier and — through financial engineering, regulatory manipulation, and outright fraud — sucking up more value than it creates. This is how they manage to concentrate wealth without doing much right.

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


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.

It may be useful to distinguish between:

* The purpose of a business, i.e. what organisations like Google want to do; and

* The purpose of businesses, i.e. why organisations like Google are permitted/encouraged to exist.

The purpose of a business is to do whatever the hell you want to do.

The purpose of a publicly traded business is to make money and thus profit for it's shareholders. Everything else becomes secondary.

There is a huge difference in responsibility between the two.

No, actually, the purpose of a business is to make money. That's why it's created, after all. Now, businesses do bring benefits to society, on the whole, but that's not why they exist.

Business owner here. The purpose of a business is to do whatever the business owners want it to do.

Well, sort of. If you don't actually make money for a few years the IRS can declare it a hobby and disallow deductions.

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.

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.

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....). 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.

It might be just as valid to you, but that does not mean it is necessarily just as valid in a wider sense of the word. In this case we are asking about the ultimate purpose of business, and about whether it is to make money. One easy way to look at this logically is to ask if people would try and do business if money did not exist, is money a defining characteristic of business, or is it just an environmental aspect of the fact the business exists in a monetary society.

You're operating from a premise that misunderstands the nature of money in a market. Money is just a measure of value, a metric of human endeavor, and so it's traded on that basis. Publicly traded for-profit corporations have a fiduciary duty to maximize shareholder value. It only happens that we measure value in, say, Dollars or Yen. We could measure it in ounces of gold or bushels of oranges. For-profit companies transcend currency, and could exist in a barter economy.

So it's not that money (as used to mean currency) is a defining characteristic of for-profit business, it's that value is. If a for-profit business existed to "maximize shareholder value in terms of cows", they would try to maximize shareholder NPV as measured in cows. The reason that for-profit companies exist is because the economics-theoretic ideal point for production in an economy (the point that benefits all consumers the most) is at supply-demand equilibrium, which is where profits are maximized for an individual company. The fact that there are non-profit companies is simply indicative of market inefficiency--in a "perfect" market, all companies would be for-profit. That doesn't mean that nonprofits shouldn't exist right now; in fact, it means that they have to.

So let's change "money" to "value" to be more specific. And then yes, value is indeed a defining characteristic of business, no matter how you measure it: currency accumulated via industry, children vaccinated, or political points spread. That's because humans tend to take action to maximize what they value most, humanitarian or self-serving, and business is the systematic application of human action.

"Financial innovation" seems to in large part consist of creating private information asymmetries, where the large banks are the only ones with enough data to accurately price the securities they engineer and then make a market for.

Thus it's not at all clear here that financial innovation is a net win, and, further, any comparison with innovation in the tech world is fatuous.

Seems like the "vote with your money" mechanism should solve that: don't buy those securities. Do you claim that this mechanism doesn't work? If so, why is that?

The point is you are being lied to about the nature and. Alice of those instruments, the value of which is manipulated up before you buy and down afterwards. Efficient markets only work when participants have reliable information on which to make buy and sell decisions.

It's like telling someone who bought a car that's had its mileage manipulated that they shouldn't have bought the car. Well duh !

It's not really a lie. It's just that you're getting a bad deal. And it's not in any of the banks' interests to make it easy for you to get a good deal. You see one side of one trade for one security offered by one bank. Your analysis says it's a pretty good deal, but that's based in part on information the banks themselves have provided, and in general is impoverished next to the information the bank has. So you buy the security. Then you find out that you didn't get a good deal on the security. So you go to another bank, and the same things happens again in a completely different way.

Libertarian free-market types love talking about the power of incentives. However, the incentives in the banking industry do not line up with the creation of an efficient market. This much by now should be painfully obvious.

The incentives also don't line up on the buy side. As a buy-side fixed income investor, you can buy a 10-yr US Treasury (AAA) yielding X%, or you can buy a slice of the 10-yr AAA tranche of the Abacus CDO yielding X+0.50% (made-up but representative numbers). You're suspicious of the long-term performance of Abacus (it's 2007 and you're already hearing rumblings about problems in the housing market) but your bonus is based on the quarterly performance of your portfolio. It's pretty clear what most institutional investors did in this scenario.

My point is that you can sue a dealership which sells you a car with manipulated mileage. In addition, a dealership that does this systematically will go out of business relatively quickly (no one will buy cars from them). Why don't those things happen to banks?

They do. It is called a run. Then anything left is bought for next to nothing by a larger bank, and there is then even more opportunity for collusion as there are now less players at the table. It's been going on for a while now and in history seems to be the general trend apart from during those brief times when it is reversed for a while by the invention of new markets and financial technologies.

Albeit, this is only my probably wildly inaccurate and hastily sketched opinion.

Yes, it seems that way, doesn't it.

And yet.

[Edit: imagine two bookies, both of them placing odds on different horses. how, exactly, are you going to figure out which bookie to bet with in order to get the fairest odds?]

> [Edit: imagine two bookies, both of them placing odds on different horses. how, exactly, are you going to figure out which bookie to bet with in order to get the fairest odds?]

Isn't that type of problem solved through arbitrage? Frankly, I'm really not sure I get your point.

Arbitrage generally requires with equivalent commodities traded on different exchanges. It doesn't work when everything is different from everything else.

In other words, arbitrage would only work if the bookies showed odds for the equivalent horses. But in this scenario they don't. (also see my most recently posted comment)

Well to answer your question, I won't bet because I don't like gambling. No one is forced to buy securities from shady banks.

Why is the presumption that "vote with your money" will solve that? Why don't you prove that "vote with your money" will solve that problem?

That is pretty much the equivalent of asking me why capitalism works which is another debate entirely.

"Capitalism works" is a general justification for structuring you economy as capitalist versus say having central planning via a Politburo. It is not a valid general justification for fine grained questions like whether a specific type of financial activity should be regulated or not. That's just hand-waving.

Banks have a primary role in money creation, which is essential for society. This is the justification for regulation. Because left to their own devices, banks and financial entities are very likely to be the locus of various scams, ponzi schemes, and bank runs. When they collapse their is a huge public cost. Therefor, they are providing a "public good." Basic economic theory (not to say I totally believe it) says the "optimal" level of public goods is not provided by a free market mechanism.

So banks are a quasi public institution, and there is tension between their public and private roles. Arguments that banking should just be a totally regulated public "utility" are not uncommon.

On a practical level, it seems obvious to me that the To Big To Fail banks have a major mismatch between the risk/reward trade off. The incentives to take risks when you're managing a company that you know will be bailed out is just too huge to ignore.

This is one of those questions where a rebuttal and an explanation would be extremely long, and would also have to work against your biases/beliefs. I hope someone more eloquent than me comes along.

In short it's a complicated matter, with tough constraints.

For one, yes banks do concentrate wealth a lot more than Facebook and google. HFT/prop desks/Cdo desks and the firms PE and IB arms are extremely well paid. They concentrate wealth very effectively.

They are doing something wrong, and from the emails which have come out its clear that the extent of it is literally unbelievable. As in the wrongdoing is so obvious, that people can't believe it's happening and move on.

I cant offer you too many links, because I don't keep a list of all the evidence the banks churn out, but the recent libor trader emails are a great start. You can follow that up by reading about the magnetar trade, or abacus - where Goldman Sachs sold their customers a CDO all the while shorting it because they knew it sucked. Edit: After that the emails where they forged ownership documents of mortgages would be illuminating.

The mechanisms are failing us, and the financial industry is extremely good at dancing on the edge of the words, but completely outside of the spirit of regulation.

Further regulation has been reduced, most notably glass steagal in 1999. We are actually seeing the crisis because of a proliferation of financial institutions and instruments caused directly by deregulation. Which is exactly what you are asking for. (edit: this also brings us to the edge of what we can discuss in general terms - you could mean deregulating so that we get a 100 bank of America's)

At the same time the regulators have been understaffed and weakened, so malicious actions are easier to get away with.

On top of all this, there is a chasm of understanding between a lay person and the rituals of wall street.

It was news to me that if the sec says its going to take a bank to court, it means the banks usually will settle.

The sec has few resources, so they choose cases where they know they can make an impact and not waste effort/respirces. when they do tell someone they are in their cross hairs, it's enough for people to realize "ok, we better dial it down". If they say they will take you to court, it translates as "the sec knows they have evidence against you, likely sufficient to get a judgement"

To this most banks immediately plea bargain so that they pay a fine, take measures to correct it, and importantly - don't have to publicly admit to wrongdoing.

Banks work very hard to make sure they don't have to say they broke the law.

Only Goldman recently was arrogant enough to fight the sec and they lost. It was one of th largest fines in the sec's history, and yet it was a drop in the ocean for GS.

This matters because wall street is treated and reported in the main stream press using normal language. The reality of what's going on if translated better is hair raising.

As people are commenting "anyone with a Bloomberg terminal in 2006, knew that libor was being manipulated"

Edit: honestly once you talk to a few traders or just keep up to date with finance news it starts becoming revolting. Many things are open secrets but are artfully reasoned away each day.

Also, banks is a huge term for what they do.

Full disclosure: I worked on a Magnetar trade; not the one that was in the press, but another deal basically identical. And I bought, sold and analyzed Abacus.

All of these transactions are explicitly caveat emptor. My grandma couldn't go out and buy a piece of ABACUS 2007-ACA; sales are restricted to "qualified investors".

Of course we all know that's basically meaningless, at least the assumption that "qualified investors" always understand what they're doing. I know from experience that "qualified investors" in this kind of deal mostly don't do any serious due diligence. [On Abacus, it was practically impossible anyway. There were O(1,000,000) loans underlying the deal and there is no way you'd have been able to get the loan details for even a significant fraction.]

But I wonder whether we're expecting more from GS/MS/etc. than we expect from our local car dealer, and whether the remedy should be any different. That is, everyone is told to be suspicious of used car dealers, so you poke around, kick the tires, look for leaks, get a mechanic to look it over, read the repair records, etc. before you buy. If it still turns out to be a lemon, and you discover the dealer told you something explicitly false about the car, you have a legal remedy; otherwise (IANAL) I don't think you do. But you have a social/market remedy, i.e. don't buy from that dealer again and tell your friends not to buy from that dealer again. Likewise, if you find a dealer who always tells it straight and prices it fair, you go back to that dealer the next time and tell your friends about him.

Why isn't that the right remedy for these CDO deals as well? Sure, if GS said something provably false about the deal, there's a fraud case. But if (as I suspect is more accurate) they just sold it for what it was (namely an extraordinarly complex and impossible-to-price derivative financial instrument, offering an attractively high risk-weighted rate of return), and the buyers didn't bother (or have the computational resources, as almost none of them did) to do their own pricing analysis, is that the fault of GS? If you buy a CDO and lose your shirt, well, don't buy CDOs again and maybe don't buy from GS if you didn't like how they sold it.

For the most part I completely agree with your analysis here - really well done.

But at some point, does a product like this become such a toxic POS that it is obvious it shouldn't be in the market? We don't let people create and market, for instance, a phone that happens to explode on contact with air. We don't allow cars that, say, don't have brakes. Should there be some regulatory structure in place that looks at new offerings like this and a least provides an opinion to the validity of the product? Now, naturally, this would be very difficult - both because the SEC and CFTC both suffer from lack of funding, not being staffed by appropriate experts and being (depending on how you view it) captured. But it just strikes me that these things should never have been allowed on the market in the first place - especially given, as you rightly point out, that most buyers are not going to have the ability to actually perform the appropriate level of due-diligence.

And while you're right that grandma can't go out and buy Abacus, her pension fund could, and therefore it does effect her.

I do love the idea of comparing GS to a local car dealer - but I can't remember another business I've ever seen that is so willing to throw their own customers/clients under the bus to make a buck. So I'd actually put them below the local car dealer. :)

You can definitely make some kind of self-igniting phone as long as you warn the buyer. In fact it sounds like a completely reasonable piece of modern art. And you can make a car without brakes but you can't take it on the road. Maybe that could be an analogy for a financial instrument that you couldn't sell as a stock.

There are few things that you can't sell with proper warning labels. And even these toxic packages of bad loans had some value. They didn't pay out anywhere near expectations but they paid out something.

Well using the art bucket to sell it is really really stretching the analogy to try and make the point, and the weakness does show.

An art product isn't going to sell or be sold as widely as a commodity or even a CDO.

And even under the auspices of art people won't let you sell toxic waste.

And Some of those toxic products made 0 money. You may have had some interest roll in from a tranche, but if it lost its value even before it reached market (some CDOs lost value between inception/assembly and final release on the market.)

The money that rolls in is irrelevant, since the net effect is wealth destruction.

Well I was only using art to explain why it might be bought, not why it is possible to sell. Toxic waste is only restricted because it can leak out and harm the area. A bad bond is merely useless. You could sell broken blenders for scrap, for example.

Edit: wait, how is wealth destroyed? I don't see how selling bad bonds would inherently destroy wealth, such as if they cost a fair price of pennies, nor do I understand how overcharging would destroy wealth as opposed to taking wealth. Am I missing something?

What I was saying is that the people who held the bonds may have received some interest but then the bonds went south and they made a net loss.

Also when a bond fails, wealth is destroyed - a bond is a promise of payment, upon which other things are built. If it defaults wealth is destroyed. Which is why having working rating agencies for bonds was and is a big deal.

I ageee and am not saying selling bad bonds Is inherently wealth destructive.

Anyway- I understand you are describing a way these things could be sold, is all.

My overall point is that a product like this should probably be reviewed by some agency before being allowed on the market.

Well said. I'm an ex-quant, and one thing that is supremely irritating about discussions of Abacus is the inability of people to distinguish between acting as a fiduciary and acting as a market maker.

When a counterparty calls GS up for a quote on the JPY/USD cross, they don't care one iota what GS's internal positioning is, or where GS thinks the JPY/USD will be in 3mths time, or any other number of things. These are sophisticated counterparties (as you pointed out) who

1) know that GS doesn't owe them a fiduciary duty, and 2) don't expect it to.

It seems like theres a whole population of people out there who think that GS is playing some sort of trusted financial advisor role in OTC derivative trades, when in fact it's in a bidding war between 4 other banks to get you the lowest rate.

That's the case in Abacus as well, AFAICT. If you don't want to trade thinly traded opaque credit derivatives, don't trade them. No-one is forcing you to. But if you don't understand your risks, you trade, and your position moves against you, don't blame your counterparty. Blame yourself.

The OP did point out that even the "qualified investors" had no clue what they were doing. Just to make sure we both read it the same way.

Also, and correct me If I am wrong - you've moved to discussing a quote from GS for a product (JPY/USD cross to be specific), and not CDOs in particular.

This is in order to point out that:

GS has no fiduciary duties to the buyer

This point is reiterated in your last line as well - no one is to blame if you made a bad trade, other than yourself.

So in essence, you are arguing caveat emptor - correct?

I'm agreeing with svdad, who emphasized the role of caveat emptor in OTC derivative transactions.

There's no significant distinction (IMO) between a trade on a 3m butterfly on the JPY/USD vs. a the 3%-7% tranche of Abacus - both are derivative transactions with well-defined risk/rewards, and you do your own research and come to your own conclusions on the value of the product. Sure, one is more liquid, more transparent, etc. but that's a factor to be taken into account when buying, not a reason for complaining when MTM moves against you.

Well the similarities between the two are sufficient for a caveat emptor argument.

But the distinctions are also important. With a CDO, you have the ability to stuff it with bad debt, which is what banks did.

When bankers are intentionally creating debt instruments which are going to explode, then it's different from just calling a bank to get their quote.

And at that juncture we can also ask, if a situation where mortgage payout =x, but banks are aiming for 30x by betting that the owner defaults - aren't the incentives off?

Also, when the bank is shorting the instrument and doesn't disclose it... Well generally that at the very least sounds like something most people here would want to disrupt, because it's well, not what regular people consider to be fair business.

The standard cabeat emptor defense also stands because we believe in the qualified investor aspect of the equation. And right now, not most investors are qualified for it. As svdad said - most investors aren't doing their diligence, and couldn't do it even if they tried. So perhaps that needs to be fixed, or we need a stronger regulator to gate entry.

(And reaching a situation where our regulators are not powered enough to grok the derivative, is just something we want the system to move away from over time.)

Edit: above is opinion, I'm open to listening, I do have a pretty firm idea, but work actively to dislodge it. Standard boiler plate. As I said before, I'm not the most eloquent.

Hey ! Nice to run into someone who actually worked on Magnetar.

At this point I've spent a lot(!) of time trying to express my thoughts, but it keeps over expanding once I start discussing or thinking about social proof and the Salesman analogy -

Let me see if I can create a framework, or at least tease a few distinct strands apart.

1) Qualified Investors: I tend to agree, it seems not many investors know whats going on in the things/CDOs they expose themselves to. Its a word which carries a legacy meaning that I think needs to be updated, or at least "Qualified Investor" should stop meaning "Patsy".

2) The Car Salesman analogy. If it is describing an ideal of where we should reach, then I think we agree - yes buyers should have genuine ability to decipher the complexity/accurately asses the security. They should have genuine choice between them and other banks. They should not suffer information asymmetries.

This means that we have, at the very least, working rating agencies, strong regulators to enforce rules and break up abuse, among many other prereqs.

3) Social proof - I am not satisfied with my arguments/ability to put it across but here is a rough draft -

Social proof should be working but its not. There are probably a constellation of reasons for this likely - Lack of choice/competitors in major banks, network and reputation effects enjoyed by the big banks, talent asymmetry, information asymmetry, regulatory capture/weakening.

Social proof, for that people have to have a choice between trustworthy and less trust worthy banks. If all banks are tarnished, then the choice is irrelevant. You end up choosing between different levels of competence and equal levels of avarice. All the car salesman are out to get you, maybe go for a scooter.

There are honestly far too many ways to approach this analogy/point and I would love to get away from it.

4) Finally in your last para you are essentially saying "Caveat emptor".

Come now.

Caveat emptor right now ends up ignoring wall street attitudes, obvious and even proven(! "can you imagine the idiots got caught") malfeasance, industry acceptance of morally agnostic standards, constant and now expected abuse of information/talent/power asymmetries.

I think you will also agree that the letter of the law is seen often as an obstacle course that people have to find the shortest path through. Heck the sheer artistry and creativity in the financial instruments being created is impressive. How many times have you come across a structure and said - wow, nice way to get out of that restriction.

I liken wall streeters to hackers - they like finding imaginative ways they can make their bets. They just don't see it in a moral sense. Its about optimum paths and optimum outcomes. If you plan wrong, you suffer. Your punitive lessons are your losses. The strong survive.

Ok I need a break, I really am hesitant to put this out there, because I can see a few angles of attack, which are arising from an overlap between different portions of finance and because I've generalized/glossed over details in some places. This was done in the interest of not getting too focused/bogged down. Probably needs to be addressed though.

> '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.

That's a completely ridiculous statement. The barriers to entry in banking are coming up with huge amounts of capital. Silicon Valley is the complete opposite. You can build Facebooks and Googles with very little capital up front.

There's little to no comparison b/t the Silicon Valley model and current banking system model. In the banking system, risk is systemic, in the Silicon Valley model, risk is localized. The two models are the inverse of each other.

In SV, many relatively small investments are spread over lots of startups, with the expectation that something like ~90% will fail, ~9% will just break even, 0.99% will do well, and 0.01% will become the next Microsoft, Google, or Facebook.

The small number of successes more than compensate for the huge number of failures, and the failures are not systemic and pose no risk to the greater economy. There is no apparent way for systemic risk or systemic fraud to undermine the system and put the entire global economy at risk.

The banking system on the other hand is the definition of systemic risk. Every company in every industry depends on it, for short-term cash needs to long-term investment loans. If the banking system fails for some unrelated reason (say, too much bad mortgage debt used as collateral for too much prop-trading leverage, the financial crisis in a nutshell), then every company in every other industry is at risk of failure as well.

Look at the history of banking and you see the same bubble-crisis-collapse played out over and over, to varying degrees of severity. From 1800 to 1929 there's a banking crisis literally almost every 10 years, with a few 15-20yr gaps. Read up on the history of banking crises [1] [2] and you can see it's endemic to the system.

But that is clearly not the case with the startup ecosystem, because the risk model is the inverse of the banking system risk model.

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.

The banking system of late is really creating and concentrating debt, not wealth. They create assets like mortgage-backed instruments of various sorts, get them AAA-rated, then use them as ostensibly high-quality collateral on which to borrow even more.

But when the cash flows on that collateral began to collapse in 2007/2008, it became apparent it wasn't AAA after all, and that it could not support so much leverage, and suddenly the entire system was at risk of insolvency and needed a government bailout, massive central bank support, and economic stimulus to prevent total collapse and all the collateral damage to other industries that entailed.

Conversely, Silicon Valley concentrates equity and cash-flow-generating businesses, rather than debt, and high failure rates are expected and built into the financing model. Risk is limited to the risk-takers, and not the broader economy or government.

1. http://en.wikipedia.org/wiki/Banking_crisis

2. http://www.economics.harvard.edu/files/faculty/51_This_Time_...

I don't understand your comparison. You're looking at individual startups failing vs. the entire banking system failing. If a small bank goes out of business nobody is going to care. If the tech industry went out of business we have to deal with the economic consequences of losing the entire Internet.

What, other than scale, is different when you look at the collapse of a single company? Think of the havoc that would be caused if Amazon or Google disappeared.

Can you think of systemic risks or circumstances that would cause a significant portion of the tech industry to fail simultaneously? I'm not saying they don't exist, but I can't think of a good example.

That is clearly not the case for the banking system.

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).

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).

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.

This is a wonderful piece of waffle, but I'm trying very hard to find any abstract or even remotely concrete idea that it would describe that doesn't in some way model our existing markets, which already exist in almost every conceivable formulation, with and without regulation, with and without every kind of fee/commission/rebate/order structure imaginable.

You get back to some very deep concepts in economics and finance.

Value is defined based on trust and faith. I accept dollars for goods I produce because I believe that I can then turn around and give the dollars to get other goods. It's a trust issue throughout the economy.

Many of the problems associated with the economy hinge on the very usage of the dollar or renminbi or whatever currency you use. You need to replace that currency. As we saw with BTC, it's not a simple task to replace a currency and maintain a trust structure throughout critical infrastructure. We are willing to lend trust to the sovereign but your task would be to establish faith in this other entity.

Unfortunately, you will need to establish a new currency to accomplish your goals. This is far beyond the scale of a YC startup.

Do note that given the depth, breadth and complexiy of wall street, this is like asking someone to come up with ways to kill the tech industry. And I suspect that the financial sector is the more complex of the two.

Not saying that it shouldn't be attempted - but that instead of targeting wall street, target a specific function they provide and disrupting that.

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.

One reason is that the London Interbank Offered Rates (LIBOR) are just not as relevant as they used to be:

"...the scandal has shed light on an inconvenient truth about these interbank rates which are used to determine the price of so many hundreds of trillions of dollars worth of global financial contracts.

That inconvenient truth is that even when London Interbank Offered Rates are not "fixed", they may still not bear very much relation to reality - because banks are not actually offering much unsecured money to each other at all."

See: Inconvenient truths about Libor http://www.bbc.co.uk/news/business-your-money-18701623

There are hundreds of trillions of dollars of derivates tied to the LIBOR. If the LIBOR moves 0.01% it translates to shifts in billions of dollars around the globe.

Fixing the LIBOR is one of the (if not the) biggest thefts in history.

Free-market capitalism is a joke. Deregulation and corporate socialism has led to a dysfunctional society ruled by a kleptocratic elite.

> Fixing the LIBOR is one of the (if not the) biggest thefts in history.

Except they've basically stolen from themselves. The vast majority of libor fixing was downwards. Loans they've made that pay libor-linked rates thus pay lower - so the bank earns less interest. The lowballing of libor doesn't (or didn't) affect the actual rate at which banks could fund/borrow, so net the banks lose.

Libor was low-balled to paint a better picture of the health of the market. It was a survival tactic, not an attempt to deliberately rip people off. It's quite possible that if real rates had been posted the markets would have got spooked and banks would have gone bust. I'm not saying it's right, just let's have a little perspective here. Banks haven't "stolen" from anyone. And frankly if you were out trading eurodollar futures or something then you should have known something about the libor market.

> Free-market capitalism is a joke.

To paraphrase Churchill: It has been said that free-market capitalism is the worst economic model except all the others that have been tried.

You use the word "deregulation", yet thousands of pages of new regulations are churned out each year by the Federal government... when 1 or 2 pages are repealed, we hear "They're deregulating!". Any look at the regulations being emitted from the Federal Government will numerically prove that deregulation isn't our problem.

It seems more apparent to me that the problem is that the Government has created really poor regulations and way too many of them at that. They created the regulatory mix that their corporate partners wanted them to in order to protect the business models of those corporate partners.

Maybe if the Government tried to do a lot less and just did what it does well, we could keep better track of it and hold it accountable? Instead, the trend seems to be to hand over more power and authority to the Government in hopes that the people in it are somehow more ethical and wiser than the citizenry. That hope would seem to have been misplaced.

With deregulation I don't mean the lack of regulatory laws. It's not about the quantity here, it's about the QUALITY of the regulatory framework.

What good are thousands of pages of "regulatory" law when they are filled with loop holes? In fact these monstrous laws are perfect for the big corporations, their lobbyists and lawyers. These people live for this. Heck, they even often write the laws themselves!

Have a look at the deregulation of California's energy system. These are not small laws. However, this is an example of clear deregulation, and was not a regulatory effort.

In fact Enron was able to pull off completely immoral, but often at many times legal, shenanigans. I mean they shut down half of the power plants because their energy traders could make a profit from the rising prices. Holy shit. In the mean time they cried wolf and said that regulation was killing them. BULL SHIT. It was the exact opposite.

People actually died from these power outages. Again, holy shit.

With big so-called regulatory and "deregulatory" frameworks filled with loop holes, small business owners are basically shut out of the market because they don't have the resources necessary to even begin to understand the matter.

In the mean time, big corporations can fully exploit these custom-made laws, profit from them and then later, call for "more deregulation".

I hope you do realize that this is a vicious cycle.

Nah, I don't disagree with anything you said.

I guess what I don't understand is your connection between "Free Market Capitalism is a joke" and the true statements above. A bunch of companies writing laws isn't Capitalism. It's Cronyism and Corporatism.

It's a direct result of investing too much power in the government to control things since there are no real protections to keep the government from being corrupted by anyone with some money.

It's one thing to have a powerful corporation that dominates a marketplace. That can make it uncomfortable when you're looking for an alternative product or service. It's quite another thing when powerful corporations write the laws. In that case, we're screwed since the guys with the tanks no longer allow us any choices but to fall in line.

What deregulation? The financial industry is the most heavily regulated industry save medicine. The problem is there are too many regulations - banking regulations are so complex only the bankers understand them, which is the basis of the revolving door between banks and government regulating agencies.

Too much regulation gives companies as much freedom as too little.

Since you are getting downvoted, a quick point - the reduction of regulations was what helped create the crisis - removal of glass steagal in 1999 in particular.

I hear people say that, but I don't believe it's true. The roots of the financial crisis were elsewhere, and it would have been just as bad either way.

belief? I mean ... Ok, what is your belief?

The collapse was the result of a real estate bubble. Changes to the law in 1999 had no effect on something that was already underway at the time. The focus on Glass-Steagal is political and a distraction from actual causes.

There are a few things that could have been done to puncture the bubble before it got truly out of hand, but bubbles are a function of peoples' expectations more than any government policy, so we were in for a bad recession no matter what. And there's no way politicians are going to get blamed for a bad recession if someone else can be blamed for a worse one.

At this point the best thing that could happen is regulations simplified and streamlined to the point that Congressional aides (the people who actually write the laws when they're not just passing along something from a lobbyist) can understand them. Also, the GSEs should be recognized as a bad experiment and dealt with accordingly.

Alright. The re bubble was not big enough to create the crisis - firstly.

It's was the cdo industry which leveraged those mortgages, and the other derivatives which made the whole crisis exponentially larger and exponentially more complex.

An issue during the crisis was not that people were broke, but that they didn't even know what their exposure was.

Now if, like under glass steagal, the investment banks were the only ones holding onto the CDOs, they would only be the ones exposed, and the ones who may need recapitalization / bankruptcy.

It would also have limited the size of the final leverage being taken on the bubble.

Also it's not political, my dyed in the wool republican finance teacher/boss spoke about how glass steagal was grudgingly useful, before the crisis hit. It isn't a theory propagated during the crisis, it's a theory substantiated by the crisis.

>Alright. The re bubble was not big enough to create the crisis - firstly.

The hell it wasn't. All that debt would have been held by somebody. It may not have been bundled up in CDOs, but look what happened to Countrywide - they went under (or, I guess, technically force onto BofA by the government) because they held on to their own paper. Even still the bulk of the writedowns have yet to occur, and the taxpayers will end up picking up the tab for all that garbage the GSEs hoovered up.

>Also it's not political, my dyed in the wool republican finance teacher/boss spoke about how glass steagal was grudgingly useful, before the crisis hit. It isn't a theory propagated during the crisis, it's a theory substantiated by the crisis.

He has no way of knowing that. The problem with economics is it isn't in any way a science. For nearly every position you can take on an issue you'll find respected economists on both sides looking at the same data and drawing different conclusions.

I'm not saying there's no logic in that position, just that the idea the whole problem was Glass-Steagal is only getting a lot of play in the media because it dovetails nicely with "those ebil greedy banksters" talking points on the left.

Your steps to the Crisis are off a bit. You see the re bubble was and is still being deflated. That would have only hit American banks primarily, and it would have been a slowdown only - if that was all that happened.

What you are forgetting ignoring, is that the mortgages were only fuel for the CDO market. That market was powers bigger, completely levered and so the smallest misstep meant outsized failures.

On top of this you had yet more instruments piled on, where people made just plain betson market outcomes.

Oh yeah, the swaps were also insuring far more than what the underlings were worth too.

So the real estate bubble wasn't big enough to create a crisis - for that we needed CDOs and CDSs to lever the bubble.

And a lot of those write downs have happened, the banks has their PE ratios and the rest crushed in 08. They took most of their hits.

All they have now is shadow inventory, which they can't afford to let onto the market because it would depress housing prices further.

This when some Americans are too broke to live in tents :)

For the glass steagal bit, sorry but right now your aim to be above the debate is making you take a stand based on what you think is a talking point.

It's your perception that it's a talking point, but in that case why my example was someone who was on the other side of the evil banker discussion, who was saying that glass steagal was good.

And this was even before the predicted outcome - rapacious irresponsibility, was proven. While you may want to be above the debate, it's not a talking point. It's more like a strongly substantiated theory.

>For the glass steagal bit, sorry but right now your aim to be above the debate is making you take a stand based on what you think is a talking point.

Either I've been unclear or you seem to have misinterpreted what I said. When you say "It isn't a theory propagated during the crisis, it's a theory substantiated by the crisis," I can see why you think that. It doesn't mean I don't think you're wrong. I do. And I do think it's a talking point - you write as if this was all settled, and it's not.

And my point about economics as a pseudo science was really a long winded way of saying your assertion that "my dyed in the wool republican finance teacher/boss spoke about how glass steagal was grudgingly useful, before the crisis hit" carries the same intellectual weight as "The guy who runs the local sandwich shop has a sister whose brick-layer husband think glass steagal is useful"

Back in 2008 my ARM's rate was tied to LIBOR. I doubt I Was alone.

But the the manipulation was as likely in your favor as it was against you.

Edit: I take it back. Looking at the data, Barclays was definitely cheating against you.

Rates were low-balled by the majority of banks. Barclays was high in comparison because for much of the time they were posting accurate rates. This was the reason for calls from the Bank of England (why are you guys so high?).

The fact is anyone with a libor-linked mortgage will have benefitted from this.

A really important point to add is that at this juncture, LIBOR was also no longer the rate at which Barclays wa being loaned money.

Banks would be giving them cash at rates higher than libor.

Search for "LIBOR has become dislocated from itself " a beautifully finance speak way of saying "it's bullshit/it's being manipulated and it doesn't matter"

Edit: found it! http://www.telegraph.co.uk/finance/newsbysector/banksandfina...

Every time I read one of these I think that the reporting/commenting/story is over the top, and then something else blows by in a few months which makes it look like child's play.

I think we overestimate what the media can really do. The public always wants them to lead the charge, but traditionally, they've rarely done so. They've always trailed behind activists, politicians, and social movements.

And to some extent it makes sense; things really become "stories" when there's a nonzero possibility things might change. And that doesn't happen unless there are champions, pointing the way to some other possible future. In the USA, both parties favor hushing up financial scandal, so it's really hard to break through.

There's this great fantasy show on HBO right now, The Newsroom, where one news show decides to lead the public rather than following them.

Because people don't understand it or don't care, and that doesn't garner eyeballs like the story about Tom and Katie's split.

I heard about "LIBOR fixing" but this was the most detail I found on it so far. (To be fair I've been busy and haven't gone proactively digging for information on it.)

The always interesting Matt tabibi - http://www.rollingstone.com/politics/blogs/taibblog/why-is-n...

The always good ft/alphaville


You can read the trader emails which were part of the initial explosion http://www.thedailybeast.com/articles/2012/07/05/barclays-se...

I thought this was a great line "One trader had a few choice words of advice for another: “This is the way you pull off deals like this chicken, don’t talk about it too much … the trick is you must not do this alone …  this is between you and me but really don’t tell ANYBODY.” "

I'll dig up more if I can. Do note that the big picture blog would also probably be talking about this, and there was an economist article on hacker news a day or two ago.

It's very big news in the UK.

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.

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.

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.

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.

What should probably get your goat though, is that this method completely destroys price discovery and was a clear case of the market not working because of collusion.

The other things that should strike you is the scale of the fiasco and the collateral damage -

Lets see... I would likely be using LIBOr for financial models, at the very least those focused on bond pricing and hence any shorts/longs made on that - all of those are off.

LIBOR does get used to set variable rate mortgages, Switzerland uses it for national projections for a few other things.

In essence those few terms I've mentioned are already fast approaching nearly a trillion dollars in affected securities and financial instruments.

> they are not the targets of the fraud...

Not being the target means little if you are still collateral damage. Heck the collateral damage was higher, since all the financiers were away the game was rigged by 2006. "LIBOR has become dislocated from itself".

Losers who weren't direct targets would be someone making a deposit - they were getting lower interest rates than they should have.

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?

Savings account underperforming and adjustable rate mortgage being LESS expensive.

I'd say it's only big news because we're still in the "bash bankers, everything is their fault" climate sadly.

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


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.

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.

That didnt quite happen that way.

Emails from the brokers in wall street clearly show that people from within the bank, not the govt, were asking for low ball rates. It was the bank serving its own interest here.

These are the infamous "when I write a book, I'll mention you" / "I hope this never gets written" lines.

Regarding your statement about instructions from on high -you are alluding to the comments by Bob Diamond, head of Barclays, about Tucker, the deputy governor of the bank of England. The full,emails have been released and they show little compelling evidence of instructions, but more of paying attention to the Barclays high borrowing costs, implying lack of confidence.

The rest is fine.

Source: Bbc http://www.bbc.co.uk/news/business-18759479

Trader emails http://www.thedailybeast.com/articles/2012/07/05/barclays-se...

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


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.

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.

The story of Thomas Becket is relevant here http://www.bbc.co.uk/history/british/middle_ages/becket_01.s...

"Who will rid me of this turbulent rate?"

I think the scandal is that it doesn't matter what the banks wanted, they should have been reporting what rate they were actually giving out at.

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.

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?!

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).

The benefits would be worth discussing, if only things weren't so far gone. Just in the last 15 years we've had two bubbles, rampant commodity speculation, tax-payer bailouts, more reckless investing by too-big-to-fail banks (Chase), and then there's LIBOR. All of this has had global consequences.

It's not a matter of discussing the merits of regulation anymore, it's a matter of dealing with the notion that these institutions just don't care. They've successfully infiltrated our government, and that's pretty much where we're at. We're going to sit here and discuss what?

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?

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.

> 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.

The debt/GDP ratios of nearly every sovereign country exploded when the financial crisis happened, as countries spent to keep the economy moving along. You can't cordon off the sovereign debt issue and call it a problem by itself, it's inextricably tied to the operation of the financial sector.

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.

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

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.

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.

  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

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.

> 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.

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


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" ....

A little touchy, aren't we?

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

> 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.

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.

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.


>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.

Don't think that one is true of agriculture, at least not since the invention of the tractor, or possibly even the horse drawn plough. As for the others, you may have a point in some areas of medicine in the US, but in transport and utilities I don't think it is a rise in wage costs that are the problem. Also, aren't the rising wage costs in this case largely driven by keeping up professional standing when socialising with people in industries that are behaving unfairly, like some areas of the legal and financial world, who are for fairly obvious reasons able to renumerate their staff to a level far in excess of the work they are actually doing.

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