[HN Gopher] Libor, long the most important number in finance, di... ___________________________________________________________________ Libor, long the most important number in finance, dies at 52 Author : prostoalex Score : 178 points Date : 2022-01-19 02:07 UTC (1 days ago) (HTM) web link (www.nytimes.com) (TXT) w3m dump (www.nytimes.com) | ddlatham wrote: | There's a great Planet Money episode explaining the story | | https://www.npr.org/transcripts/1044598674 | [deleted] | Retric wrote: | TLDR; | | "Libor was the interest rate that banks themselves had to pay, so | it offered a convenient base line for the rates they charged | customers who wanted to borrow cash to buy a home or issue a | security to finance a business expansion." | | "Because Libor relied on self-reported estimates, it was possible | for a bank to submit a rate that was artificially high or low, | thus making certain financial holdings more profitable." | | "Libor could no longer be used to calculate new deals as of Dec. | 31 -- more than six years after a former UBS trader was jailed | for his efforts to manipulate it and others were fired, charged | or acquitted." | phaer wrote: | https://archive.is/ujVCY | ptr2voidStar wrote: | r00fus wrote: | The salient info buried at the end: | | "Libor is survived by several successors, each making a claim to | its crown. The Secured Overnight Financing Rate, or SOFR -- a | rate produced by the Federal Reserve Bank of New York that is | based on transaction data, not estimates -- has already been | embraced by many banks in the United States and has the | endorsement of the Fed. Others, like the American Interbank | Offered Rate, or Ameribor, and the Bloomberg Short-Term Bank | Yield Index, or BSBY, have their adherents. In Britain, the | Sterling Overnight Index Average, or SONIA, seeks to inherit | Libor's place as the do-it-all benchmark." | | My only remaining question is, since we used to have a single | reference rate, and now we have multiple reference rates - how | does this impact existing contracts? | mathattack wrote: | The article references that existing contracts will stay on | LIBOR. It's only dead for new deals. | cyanydeez wrote: | after swindling millions for decades | NoboruWataya wrote: | Transitioning from LIBOR has been a huge project in the finance | industry. I would say most banks' in-house legal departments have | been living and breathing this stuff for the last two years. Most | contracts drafted after the scandals broke (when it became clear | that LIBOR's days were numbered) were drafted with fallback | language language built in, so that upon the cessation of LIBOR | the contract would automatically switch to a successor rate. But | there were a lot of longer-dated contracts that required manual | intervention. | | For derivatives, it wasn't so bad because ISDA (the industry | association for derivatives users) published an IBOR fallback | protocol which counterparties could adhere to. All contracts | between two adherents to that protocol were deemed amended so as | to include market-standard fallback language. | | There was no such neat solution for bonds and loans, so banks had | to look at them pretty much one-by-one. The economic and legal | terms of the amendments required to replace LIBOR were mostly | standardised across the market, so they typically didn't involve | any tough negotiation - the issue was more the operational burden | of amending many thousands of contracts. | | In a simple bilateral loan the process is straightforward: bank | reaches out to borrower, borrower and bank sign amendment | agreement, done. But bonds which are widely held through clearing | systems posed a much bigger problem, because material amendments | typically need the consent of at least half (or sometimes two | thirds or three quarters) of bondholders. | | A single bond issuance can be held by thousands of (ultimate) | investors, and ownership can be heavily intermediated: an | investor might hold her bonds in an account with her broker, that | broker might hold the bonds in an account with a custodian, that | custodian holds them in an account with a securities depositary, | etc. The issuer does not know who the ultimate holders are; it | can only send out a consent solicitation through the clearing | systems. Even if that solicitation manages to work its way | through the ownership chain to the end investors, most of them | will probably just ignore it. | | So a lot of consent solicitations fail even for routine, | unobjectionable amendments. When this happens (or is likely to | happen), issuers need to look at other ways to push the | amendments through, like asking the security agent (who basically | represents the bondholders as a class) to consent to the | amendment without first receiving the consent of the underlying | bondholders. Most deal documents allow security agents to do this | where the proposed amendments are not materially prejudicial to | bondholders, but security agents are very reluctant to make that | determination. | epa wrote: | Unfortunately the replacement of SOFR is a collateralized rate | where as LIBOR is non-collateralized. Adoption of SOFR has been | slow because its not 1:1. Plus, LIBOR is not dead yet, still a | lot of contracts that need to go through maturity before the rate | truly dies. | | Interesting history on LIBOR, was created related to an Iran loan | in the 1960s. Doesnt seem that long ago but that is pushing 50 | years now. Imagine apple told you that mouse will no longer be | supported on OSX, please everyone switch to touch screen -- the | adoption would be slow at best. | gadders wrote: | The other difference is that LIBOR is a forward-looking rate, | whereas SOFR (unless you have Term SOFR) is a backward looking | rate (i.e. that is for LIBOR you know at the start of the month | what rate you will pay for the following month, whereas with | SOFR you don't know the rate until the end of the interest | period [or 5 days before in the case of lookback]) | JackFr wrote: | And the SOFR is _only_ an overnight rate. There is no | official Term SOFR. The CME has forward SOFR contracts for 1, | 3, 6 and 12 months -- which are not really the same thing, | but if you squint hard you can treat them kind of like | forward looking term rates. | divbzero wrote: | Past HN discussions on the LIBOR scandal -- | | [2012]: https://news.ycombinator.com/item?id=4224873 "Lies, Damn | Lies and LIBOR" | | [2015]: https://news.ycombinator.com/item?id=9426247 "Deutsche | Bank to Pay Record $2.5B to Resolve Libor" | | [2017]: https://news.ycombinator.com/item?id=13497578 "Libor: the | bankers who fixed the world's most important number" | | [2017]: https://news.ycombinator.com/item?id=14075230 "Libor: | Bank of England implicated in secret recording" | | [2017]: https://news.ycombinator.com/item?id=14994122 "Is LIBOR, | Benchmark for Trillions of Dollars in Transactions, a Lie?" | | [2018]: https://news.ycombinator.com/item?id=16418629 "The | brazenness of the LIBOR scam" | yob22 wrote: | tomc1985 wrote: | Man I'm glad I don't work for a fintech right now, there's a lot | of very complicated code with LIBOR as an input | gadders wrote: | Or an actual real bank... | NoboruWataya wrote: | Most banks are relatively okay _now_ , as by now they have | already spent thousands of man-hours to migrate their trades. | The transition has been a major talking point for the last | two years. | NovemberWhiskey wrote: | The smart money already moved away from LIBOR discounting | for pricing and risk models straight after 2008, and has | been on Fed Fund OIS discounting for a long time; so SOFR | OIS is actually going to be the second move. | tomc1985 wrote: | Hey now, fintech is a real banc! | marginalia_nu wrote: | Having worked in fintech, I assume everyone ignored all signs | toward this coming, assumed it would be postponed forever, and | then collectively burst into a choir of "LIBOR gone? | Inconceivable!" | twic wrote: | How did you get access to my commit logs?! | tomc1985 wrote: | Yup! I remember hearing murmurs of LIBOR's unsuitability but | didn't see much of a reaction. Wonder how things are now | wsc981 wrote: | Think about all the job security. You'll be set for many years! | toomuchtodo wrote: | Chaos is a ladder. Run towards it to prosper. | queuebert wrote: | They should start a club with the COBOL maintainers. | pessimizer wrote: | They've had years. | unixhero wrote: | The vestiges of the Bretton Woods system. | jayflux wrote: | https://www.theguardian.com/business/2017/jan/18/libor-scand... | is a good read about what went on about it. | fanzhang wrote: | When I first heard about LIBOR in 2002, I was surprised that the | number is just based on a survey of bankers. Surely there would | be accuracy issues with that? | | But at that time I was young and had no finance experience, so | though that the adults in the room knew best. Turns out not! | | I don't think the base problem is that people shaded their | numbers one way or another, it's that the system is designed | wrong. | kaesar14 wrote: | This was also my impression learning about it as I was starting | to learn about global finance in high school. Even them it | seemed ridiculous. I wonder how many more systems currently in | place are based on such foolish promises and easily exploited | foundations of trust. | boringg wrote: | Fiat currency is based on trust - so was the gold standard to | a degree. Trust is an important part of society. We rip trust | away in our societal institutions and we are left in a | terrible existence. | | If you boil everything down - trust a critical function. Your | day is filled with trust of functioning. Without it you would | live in pure chaos. I find these arguments facile. | cardiffspaceman wrote: | Pre-SoundScan record sales numbers? | NoboruWataya wrote: | Trust is central to the financial system, for better or | worse. The whole thing is based on trust - whether it's trust | in the person on the other end of the phone, trust in the | big-name bank that person works for, or trust in that bank's | regulator. | | This seems stupid to some tech people, who try to disrupt it | by creating trustless systems such as distributed ledgers. | But trust keeps on creeping back into the system. There are | crypto custodians, crypto brokers, crypto exchanges, all of | whom you have to trust to some extent. There is crypto | lending. I wouldn't be surprised if we eventually have the | Bitcoin Interexchange Offered Rate decided by a handful of | the biggest exchanges. | SkyMarshal wrote: | The more I've learned of the banking system, the more examples | of this I see. It seems that much of the banking system was | designed by bottom-line-oriented, non-systems-thinkers, who | just wanted an immediate, good-enough solution to a problem. | Accuracy, reproducibility, scalability, systemic integrity, and | similar concerns often weren't a factor. | tlb wrote: | It evolved from a small system where the people all knew each | other and went to the same few public schools where | everything also ran on the honor system. It wasn't a bad | design for its original scale & context. | | Those dumb bankers. We computer scientists would never design | something that failed to scale through 5 decades. | rr808 wrote: | > good-enough solution to a problem | | That's pretty much everyone everywhere in every industry. | LIBOR really was good enough which is why it lasted. | rr808 wrote: | > When I first heard about LIBOR in 2002, I was surprised that | the number is just based on a survey of bankers. Surely there | would be accuracy issues with that? | | Traditionally the banking community of London was super close | and built on reputation. People do huge deals based on people's | word and people were expected to be honorable. That might sound | naieve in the 21st century when global trade is much bigger but | it worked for hundreds of years. | | Secondly LIBOR really was pretty accurate, people talk a lot | about how it could have been manipulated but the evidence is | isn't so solid. Yes in aggregate a few bps adds up to a lot of | money but for individual parties it doesn't really make a | difference. | cromulent wrote: | The Corruption Index is similar - it's based on how corrupt | people think a nation is. Nothing to do with how much actual | corruption exists. | sokoloff wrote: | It seems overwhelmingly likely that "how corrupt people think | a nation is" does have "[something] to do with how much | actual corruption exists". | CraigJPerry wrote: | >> I was surprised that the number is just based on a survey of | bankers | | The numbers that LIBOR is measuring ultimately represent a | human's opinion. Well, it's the opinions of several humans then | the highest and lowest opinions get discarded and the rest | averaged. | | It's not measuring a value derived deterministically from some | inputs, so how else could you capture it? | hardtke wrote: | I have an adjustable rate mortgage based on LIBOR and the lender | still has not said what they plan to do. The presumed replacement | rate (SOFR) seems to be pegged near 0% which would be good. | javajosh wrote: | Why is this purely up to the lender? And if it is, _of course_ | they 'll add something. You can't have _individuals_ borrowing | money interest free now, can we? (Institutions...that 's more | than fine, its expected.) | stanleydrew wrote: | It's not "purely up to the lender." It's agreed upon in a | mortgage contract, which the borrower signed. Both parties | decided that it was a good idea, otherwise there wouldn't | have been an agreement. | postalrat wrote: | How do you know all mortgage contracts have a clause for if | libor isn't available? | EugeneG wrote: | Yeah there will be a spread, won't go from LIBOR+0 to SOFR+0, | but to SOFR+0.20% for example | yufeng66 wrote: | legally the new definition of 3 month Libor is sofr + 26.161bps | codebolt wrote: | I know they will use a fallback spread to convert 3 month | Libor to SOFR. But is the spread really a constant? | swedishturnip wrote: | Absolutely not true, don't know where you got that idea. | xtracto wrote: | Completely tangentially related: I love basis points. Up | until I started working in the FinTech I could not grasp the | need for it... but after much repeating "x% plus 3%" and then | having to clarify that is 300 basis points and not x*1.03, it | got my eyes opened. | catothedev wrote: | It's also useful for negotiating rates. Saying you want a | rate to be .2% lower is awkward and wordy. Saying 'can we | take it down 20 bips?' sounds much more pro ;). | WanderPanda wrote: | Your expressions are not equivalent | hardtke wrote: | I'm tied to the 1 year LIBOR -- do you know what that will | be? | twic wrote: | 0.71513% | | https://assets.bbhub.io/professional/sites/10/IBOR- | Fallbacks... | stanleydrew wrote: | If you read your mortgage contract I'm pretty sure you'll find | a clause related to what your rate is based on if LIBOR is no | longer available. | gadders wrote: | If you're in the US and the mortgage is dollar-based I would | expect you to be transitioned to a SOFR-based loan, possibly | with a credit adjustment spread. | codebolt wrote: | What about SONIA, isn't that the dollar based equivalent? | NoboruWataya wrote: | SONIA is the Sterling Overnight Index Average, an overnight | rate for pound sterling. | rwmj wrote: | In my previous job we sold LIBOR (and Euribor) mortgages, so I | have been wondering what the lender would do about those, since | as I understand it the LIBOR element was written into the 25+ | year mortgage contracts. I guess I found out - nothing! | codebolt wrote: | Note that when SOFR starts to fluctuate, you wont know your | actual interest payment before the end of each payment period, | since these rates are applied on a daily basis, in arrears. | sneak wrote: | > _It turned out that bankers had been coordinating with one | another to manipulate the rate, pronounced "LIE-bore," by skewing | the number higher or lower for their banks' gain._ | | It's rare to see shade thrown so overtly in the Times, because | it's so rare it can be done this deniably, and always makes me | chuckle when it does. | neil_s wrote: | OMG, I was wondering why they waited so far down in the article | to describe the pronunciation. Only after seeing your comment | did it click! | akmarinov wrote: | Paywalled | decafninja wrote: | I was working at an investment bank (as a developer) when this | scandal hit. My entire department was laid off as a result. Not | because we were involved or complicit in the scandal, but because | the scandal indirectly caused a big financial hit to the bank and | we were part of the cost cutting measures. | | It was a traumatic and tragic moment for me at the time. But in | hindsight it was the event that lead to my eyes being opened to | the world of Silicon Valley tech companies. Until then, I had | naively thought that working as a developer in the IT departments | of Wall Street investment banks and hedge funds* was the pinnacle | of a SWE career. | | * Not referring to places like Citadel or Jane Street or Two | Sigma, etc. | throwmeaway666 wrote: | >we were part of the cost cutting measures. >the event that | lead to my eyes being opened to the world of Silicon Valley | tech companies | | I found that being aware of whether you will be part of the | cost center or profit center in a company is very useful when | deciding where you should work. | decafninja wrote: | Agree with this 100%. I now make it a point to avoid any | companies where tech is an unrespected cost center, which | unfortunately does rule out the overwhelming majority of | companies out there. | | That said, even companies where SWEs and tech are the profit | center are certainly capable of laying you off, so profit vs | cost center isn't really any insurance to avoid that sort of | fate. Even at the banks I've worked at the traders (profit | center) would face the axe before us lowly peasants in the | tech departments. | | Rather, it's more an issue of respect...and relative | compensation. | willcipriano wrote: | I have one primary question that I'm trying to figure out | during job interviews. "Will my boss understand what I | produce and the difficulty involved in producing it?" if | the answer is no, the job is going to suck. | decafninja wrote: | It's not just one level though. You can ask the same | about whether your boss's boss will understand, and so on | and so forth up the food chain. | | The problem with many tech-as-a-cost-center companies is | that you will quickly run into a person on that hierarchy | who doesn't (often at or near the intersection between | tech departments and the profit center business | departments). | grahamm wrote: | And if your company wants to "flatten the structure" | running into that person is more likely and you will run | in to them. | | I also have a problem with ex-developers who work their | way up the structure with time. Generally they drift away | from the tech and what tech takes and end up serving | their higher masters. So you end up with someone who | thinks they know what it takes but hasn't actually done | it for many years. Literally had this again the other day | when I gave an estimate for a piece of work one of the | devs had done a decent bit of investigation on. Bluntly | told that was too much time from someone who had really | no much more info than the subject line of the bug | report. Of course who had the weight to get their | estimate across.....(not me) | willcipriano wrote: | I like the rule whoever estimates lowest gets to do it. | If you aren't in the running to do it, your estimate | doesn't count. It's easy to armchair quarterback if | someone else is on the line. | santoshalper wrote: | This one really hit me personally. When I was young, my | father advised me that in my career I should stay "close to | the money". It made a lot of sense, and I tried, but I ended | up moving increasingly into financial services technology. | | Now, 25+ years later, I am the head of technology (C-Level) | for a large financial services firm (Fortune 200). I report | to the CEO, I lead thousands, I am handsomely compensated, | but I am professionally lonely. | | Over the years, I have become very, very good at explaining | technology concepts to non-tech peers (I think it was an | intrinsic skill that got me here), but honestly, I am | exhausted. I don't think I have it in me to explain technical | debt, or the importance of investing in our platform, or how | to run a build/buy process or why having an engineering | culture is so important. I long to work at a company where my | work is intrinsically respected. My peers are polite, but | treat the work my team does like magic. It felt deferential | at first, but now it feels condescending. I think I've done a | great job of creating a real technology culture, but in the | last year I realized I am never going to turn us into a | technology company, no matter how hard I try. | | The lesson is - if you want to work at a technology company | (revenue is directly generated through licensing or SaaS | fees), then don't compromise. You won't be able to change the | nature of your employer no matter how high up the ladder you | climb. | | My litmus test is this: If you couldn't imagine a company | installing a former engineer as their CEO, don't consider it | a tech company no matter what the leadership claims. | [deleted] | DwnVoteHoneyPot wrote: | > my father advised me that in my career I should stay | "close to the money" | | I got the same advice from my father, but it meant | something different. I was told if I went into computer | science or any engineering, I'd always be a servant to | management and my job would be outsourced to India. I would | be easily replaceable. Best to be "close to the money" | instead... that was management. Also, to make "real money", | I'd have to move up from engineering to management and | wouldn't be programming anyway. | | So I went to business school. Might as well optimize and | skip the engineering step and go straight into managment. | And to be _even closer_ to the money: finance degree. | | 15+ years later, while finance has been fine, I just really | like programming. I have a real aptitude for it. Had to | teach myself to code, started side hustle online business | (finance is still day job). I might get the same salary as | a FAANG software engineer (without the skyrocketing stock), | but I always wonder what if I did comp sci instead. | | Then, on HN I see comments like yours. Many here hate | management, or in your case, moved up to the top of IT | management and still seem unsatisfied. | | Now, I figure grass is greener on there side... Management | says they are treated like a cost center and engineering is | "closer to the money" as in profit center. Engineers, even | in the profit center, gripe at those MBAs who are "closer | to the money" as in directing the business plan, budget and | timelines. | | In my next life, I'll just do what I enjoy and am good at. | toss1 wrote: | THIS^^ So much this. | | If the executives from the CEO on down fail to understand | technology as the source of a serious competitive | advantage, then you will be seen merely as a glorified | janitor, or maybe plumber. They do absolutely essential | work, but nobody respects them. | | And one guarantee, if your company (or one you are | considering) looks at technology as a cost center, then I | can guarantee that they do NOT and WILL NOT see technology | as the source of any competitive advantage. You'll be | nothing more than a plumber on a team of plumbers who will | be ignored, until a pipe breaks, then you'll be blamed for | it happening even if they congratulate you for fixing it to | your face. Good luck with that. | [deleted] | rr808 wrote: | > I found that being aware of whether you will be part of the | cost center or profit center in a company is very useful when | deciding where you should work. | | The problem with most tech companies these days is they dont | make profits. | vsuaoqmdn wrote: | Let me guess. Now you think that the pinnacle of a SWE career | is working at Google it Facebook, right? | [deleted] | citizenpaul wrote: | >part of the cost cutting measures. | | Not sure why you would believe this. It is much harder for | regulators to interview employees about their activities when | they are no longer centrally located for convenient | discussions. | | Its the same tactic they use in bury investigators with | paperwork but for people. | skrebbel wrote: | Don't assume, you know nothing about the parent's situation. | citizenpaul wrote: | I'm not assuming anything. Lying is part of business. The | reason he was told was almost certainly not the actual | reason. | decafninja wrote: | My department was very far removed from the issues in the | scandal. I doubt investigators would have had much interest | in us or found anything of use from interviewing any of us. | citizenpaul wrote: | I believe that it was separated and 100% not involved. Do | you think your company is above laying off an entire | department to keep investigators off the trail of the real | problem department? | colordrops wrote: | > I had naively thought that working as a developer in the IT | departments of Wall Street investment banks and hedge funds* | was the pinnacle of a SWE career. | | What was the reasoning behind this thinking? While finance | often does have some pretty advanced tech behind it, you can | find more cutting edge and complex work at purely technical | companies. Or are you speaking of compensation? | Jenk wrote: | I'm not GP but in the 90s I was taught that bigger = better, | and to some degree that was true, if you were into old (ergo, | very expensive) tech. | | In the days before the internet, technology was niche (as was | the knowledge to develop and operate it) and super expensive, | so only mega corps had decent tech to work with. | | This reputation persisted for sometime into the new | millennium until we started to see more of these scruffy | younguns starting to make noise in the business, and techno, | spheres. | madaxe_again wrote: | I had a similar nudge into going starting my own thing - I'd | been at Refco (a now defunct brokerage) in '05 when everything | went pop, because they'd been hiding half a billion of bad debt | - I saw which way the wind was blowing and scurried away like a | rat from a sinking ship. | jacquesm wrote: | Fair chance that they exaggerated the financial impact and just | used it as an excuse to push through a lay-off they were | planning anyway. 'Never let a good crisis go to waste'. | pessimizer wrote: | Quote from earlier linked article explaining why it took so long | after the scandal to do this: | | > The transition to a post-Libor world would not be painless. | Remember those $190 trillion of Libor-linked derivatives? Hardly | any of those instruments -- essentially contracts between two | parties -- provide a workable option for what to do if Libor were | to vanish. | | > In a worst-case scenario, banks and their customers would | effectively have to negotiate how to end Libor-based contracts | over the phone, said Darrell Duffie, a Stanford University | finance professor. For a sense of what is at stake, Lehman | Brothers was a party to more than 900,000 derivatives contracts | when it went bankrupt in 2008, according to research published by | the Federal Reserve Bank of New York. | | > "It'll be really nasty in terms of costly, difficult workouts," | he said. | | https://archive.fo/LKI4J | | _The Most Important Number in Finance Is Going Away. Wall St. | Isn't Prepared._ | JaggerFoo wrote: | Mainly was LIBOR used in the EuroDollar market? | | Anyways, it seems like there is a need for a system that is | transparent, immutable, and accessible to everyone... Crypto? | Matt Damon is calling. | | Cheers | Hjfrf wrote: | I worked at a European bank ten years ago, and libor was at | least one leg of effectively every product offered. | | Interest rate swaps, credit, loans, fixed income, exotic | derivatives, CDO, whatever. | | You have to hedge the interest rate risk somewhere or get stuck | with huge collateral requirements/XVA. | | Cryptocurrencies don't solve the problem since they're largely | traded on opaque exchanges and other l2 solutions even less | trustworthy than the libor cartel. | csdvrx wrote: | I think the parent poster meant that the actual going prices | on multiple exchanges could be used for data inference. | | While there are rumors of wash tradings on some exchanges, | the price at which such trades would be going will be | constrained by the larger network, and the risk of triangular | trade will limit the possible divergences to a larger spread | (instead of going one direction only) | | Add enough data, and you may get something that would be | almost impossible to trick, simply due to the sheer number of | exchanges, and bots that would gladly take the money of those | who would try to rig the game. | erosenbe0 wrote: | Ummm the whole point is that it is a measure of relatively | unregulated dollar for dollar transactions not subject to | any clearinghouse, exchange, or blockchain regulation or | visibility. LIBOR is supposed to be the benchmark of | dollars anywhere, so to speak. So you're talking about | apples and oranges | csdvrx wrote: | Well, you do with what you have (and the prices of apples | may be correlated enough with the price of oranges to act | as a proxy if you can't get the price of oranges), and | the pros of "resilient to rigging" might be worth more | than the cons. | siliconlotus wrote: | When I worked in investment banking, all our debt models were | pegged to LIBOR. Rest In Peace! God bless the IB analysts | scrambling to plug their models with replacement rates and weird | hardcodes! | HarryHirsch wrote: | So - considering that LIBOR was not an observed number, but a | made-up number that was nonetheless useful, what did the LIBOR | actually measure? | dmurray wrote: | Bankers' consensus of what the overnight interest rate should | be for a well-capitalized, creditworthy bank. | [deleted] | tomc1985 wrote: | LIBOR is often part of the formula for calculating loan | interest rates. Last time I saw such code it looked something | like: | | LIBOR + bank's minimum interest rate + a rate based on | creditworthiness = your offered interest rate | | Planet Money recently had a really good episode on how some | banks are deciding on a replacement rate: | https://www.npr.org/2021/10/08/1044598674/libor-pains | fennecfoxen wrote: | That's not what it's measuring, that's how it's used. | ChrisLomont wrote: | That's also what it measures, as measured by the people | doing the estimation of creditworthiness, who are the | experts in understand how to measure that value. | | If anyone else was more accurate at this measurement, | then they had arbitrage against those using the measure, | giving those doing the initial measurement incentive to | get it as right as is humanly possible, since they | usually worked at places that use LIBOR to price things. | | Since LIBOR underlied hundreds of trillions in assets, | there are ample papers on all aspects of LIBOR, including | those trying to see how well it was computed versus post | outcomes. | | It holds up well. https://scholar.google.com/scholar?hl=e | n&as_sdt=0%2C14&q=LIB... | tomc1985 wrote: | It measures the backroom sensitivities of the cabal of | bankers that set it, judging by recent news releases | JackFr wrote: | It measures the answer to the hypothetical question "If a | another bank with good credit came to you right now to borrow | (overnight/1W/1M/3M) in (USD/EUR/GBP/CHF/JPY) what rate would | you offer them?" Which is a proxy for the banks' willingless | to lend. (It had a less quoted counterpart, LIBID the London | Interbank Bid Rate, where would you borrow at.) | tula wrote: | No, LIBOR is your borrowing cost, the rate at which you'd | be _able_ to borrow (ie the rate that others would offer to | you to lend you money). | | LIBID is the rate at which you'd be _willing_ to borrow. So | the difference between the two is like bid vs ask. | erichocean wrote: | ELI5 Why not simply measure the actual trading activity for | exactly those activities the previous day? | twic wrote: | Good question. I suspect this was because when the rate | was defined in the 1980s, collecting that data would have | been difficult. | | After the LIBOR scandal, the EU brought the benchmarks | regulation (BMR) which says that interest rate indexes | have to be based on actual transactions, just as you say. | Euribor, the equivalent of LIBOR for lending in euros, | was reformed to be based on transactions: | | https://www.emmi- | benchmarks.eu/benchmarks/euribor/reforms/ | | The administrator of LIBOR proposed doing the same: | | https://www.clarusft.com/rfrs-libor-is-changing/ | | But in the end, US and UK regulators decided just to | abolish it, in favour of overnight indexes based on real | transactions (SONIA for pounds, which already existed, | and SOFR for dollars, which was created for this | purpose). | | I believe this divergence happened because of differences | in the lending markets. In the euro area, there is still | a lot of unsecured term lending, which is what Euribor | measures. But in the UK and US, this kind of lending has | largely dried up, but there is a lot of overnight | lending, so they chose rates which measure that. I don't | know why the euro area is different to the US and UK | here. It's possible that the euro market will evolve to | be more like the US and UK, in which case Euribor will | stop being credible, and the euro will also move over to | its overnight rate, ESTR. | | Another fun quirk is that SONIA and ESTR measure | unsecured overnight lending, whereas SOFR measures | "repo", which is essentially lending secured with | government bonds as collateral. There is a sterling | overnight repo rate, RONIA, but i don't think it's used | much. I think repo volumes are higher than unsecured | lending volumes; if that difference gets stark enough, | perhaps sterling and euro regulators will force another | switch, to the repo indexes. | JackFr wrote: | 1) easier said than done - in general these are often OTC | markets without clearing houses - that being said not | insurmountable difficulties but not zero-cost either. 2) | the previous days trades are backward looking, not | forward looking. What's the big deal you say, it's just a | day? We'll think about driving by using your rear view | mirror -- you do fine until to hit a turn then things get | a little sketchy, and a sharp turn can kill you. | pjc50 wrote: | That's a day old. And the market may not be very active. | Besides, I don't think they are centrally cleared? (Or | perhaps in the early days they weren't, it was certainly | pre-digitization) | | The market - interbank rates - is quite small in terms of | participants. I think the problem is the number was | incredibly _useful_ even if it wasn 't accurate. | neom wrote: | What Is Libor And Why Is It Being Abandoned? - | https://www.forbes.com/advisor/investing/what-is-libor/ | jcuenod wrote: | If you're a neophyte like me, take a look at the Odd Lots | podcast: | https://www.listennotes.com/search/?ocid=c1a7b213882c4e32964... | | There's a ton of good info in there on what Libor is, why it | needed to live, why it needed to die, and some attempts to | replace it. | throwthere wrote: | 52 years-- it's amazing how easy it was to cook Libor and how | long it lasted. | | And it was mostly fine before the world started drowning in | derivatives and derivatives of derivatives. | nerdponx wrote: | > In 1986, at age 17, it hit the big time: Libor was taken in by | the British Bankers Association, a trade group described later by | The New York Times as a "club of gentlemen bankers." | | What are the chances that this "club of gentlemen bankers" | _always_ intended to manipulate Libor to some extent? | | I know finance and banking is very complicated; maybe someone | will come along who happens to have been a banker in London in | 1986 and will set me straight. Otherwise I find it hard to limit | my cynicism when enormous amounts of money are involved. | MR4D wrote: | > Otherwise I find it hard to limit my cynicism when enormous | amounts of money are involved. | | You should _always_ be cynical when large amounts of money are | involved. It helps you avoid large losses. | | Side note - one of the best questions to ask in any deal is | "how are you making money on this". If the other party doesn't | tell you, then they probably know something that they don't | want you to know. If you doesn't get a straight answer, walk | away [0]. | | [0] - I work in finance and never do business with someone who | is not transparent about this. Been doing it a long time and it | serves me well. I learned it from an old hand, and cringes the | first few times he asked it. Then, I got the nerve to ask why | he asked such a cringeworthy question. Glad I did! | JackFr wrote: | LIBOR grew out of the same ecosystem that created Eurodollars. | Originally a Eurodollar was simply a dollar held in a non-US | domiciled bank, in particular a bank outside of the Federal | Reserve System. The story, at least partly true, is that the | Soviet Union was making a ton of money selling oil. Thanks to | OPEC, the market for oil is denominated in dollars. Soviet oil | companies didn't mind the dollars, but they didn't want money | in US banks, and so the Eurodollar was created. In the USD | money market (the interbank lending market for terms < 12 | months) the most riskfree rate is the Fed Funds rate -- that is | the rate which banks lend to ach other within the Fed system. | In the money market for USD, everything was quoted in terms of | Fed Funds, e.g. Fed Funds + 50 etc. Banks with EuroDollar | deposits couldn't partake in the Fed system, but they needed | something similar, and so LIBOR was created. | | Well, then it grew. US banks got involved in EuroDollars and | foreign banks got US subsidiaries and everything kind of | ballooned. | | But the big change was the invention of interest rate swaps. | Interest rate swaps create a linkage between the Money Market | (terms < 12 months) and the Capital Market (terms > 12 months). | There are a bunch of economic explanations as to why interest | rate swaps exist and some of them have to be true, but they're | irrelevant to the LIBOR story. A vanilla fixed-floating swap | needs a floating rate, and that's LIBOR. A couple of trillion | dollars (notional) worth of derivatives later, instead of | simply being a pragmatic way to quote rates in the money | market, it then drove P&L of derivatives desks. | | I think everyone knew the potential for manipulation was always | possible, but for a long time I think, until the tail started | wagging the dog, it worked. But there's no going back now. | panoramas4good wrote: | Would highly recommend the book, The Spider Network, which gives | an in-depth view (perhaps slightly dramatised) of how one trader | manipulated Libor. | erwincoumans wrote: | From the title it seems like Mr. or Dr. Libor died. For a | paragraph, it is cute to have Libor personified. Doing it until | the end of the story feels a bit artificial to me. | svnpenn wrote: | Yeah this just screams clickbait. "Let's create a title that | makes no sense, followed by an entire article with a strained | metaphor". | mhh__ wrote: | How is it clickbait? LIBOR is omnipresent in finance and it | _is_ being killed. Sterling LIBOR is already dead for | example. | svnpenn wrote: | Well: | | 1. Its LIBOR, not Libor | | 2. LIBOR is not a number, its a rate. Thats literally what | the "R" stands for | | 3. LIBOR cant die, as its not a person | | Its just an awful title because it calls LIBOR a number, | which its not, then goes on to treat it as a human, which | its also not. | carnitine wrote: | LIBOR is not a rate, it's a series of rates across | different currencies. Rates are numbers though so I'm not | sure what distinction you are trying to draw. | recursive wrote: | I don't know anything about LIBOR, but I know a few | things about rates. Every rate I've ever heard of is a | number. How can a rate not be a number? | danielmarkbruce wrote: | It's a tongue in cheek article in the NY Times. NY has a | lot of finance folks. To a lot of finance folks, libor | has been a meaningful number for a long time and a | million contracts are based on it. | | As for "treating it as a human", the financial industry | has long used the term "mr market". Ie it's sort of an | inside joke. | | To the target audience it is not an awful title, nor an | awful article. | | As for the semantics of numbers v rates - the rate is | specified in numbers. And LIBOR v Libor - the number was | used so extensively for so long many people didn't even | know what the acronym meant. It's like correcting someone | for calling a tissue a kleenex. | outside1234 wrote: | It is a literary device to make a very boring topic interesting | for mainstream readers. | whatshisface wrote: | A giant London banking scam touching on something that may | even have been involved in the reader's mortgage contract, is | not exactly a boring topic. | NoboruWataya wrote: | At a high level "there was a huge scam" sounds pretty | interesting, but try to explain the detail and most | people's eyes will glaze over. | r00fus wrote: | There's concern fatigue these days, plus LIBOR scandal was | old news even years ago. The fact that LIBOR now dead is | not really surprising. | WJW wrote: | > may even have been involved in the reader's mortgage | contract | | I personally find finance pretty interesting, but mortgage | contracts are pretty much the definition of boring for many | people. | WillEngler wrote: | I enjoyed the framing but to each their own. | queuebert wrote: | The NYT has a very high opinion of their obituaries. | ambrozk wrote: | I enjoyed it, and I'm happy when writers practice their craft | with a bit of humor. | fourseventy wrote: | It was confusing to me because I had no context on what/who | Libor was. | dang wrote: | It did seem odd for NYT, and a bit of an annoying distraction | in an important story. On the other hand, I'm surprised they | let someone experiment like that. | TameAntelope wrote: | > It turned out that bankers had been coordinating with one | another to manipulate the rate, pronounced "LIE-bore," by skewing | the number higher or lower for their banks' gain. | | The authors must be very pleased with themselves about this | one... | lordnacho wrote: | I traded LIBOR instruments that were probably manipulated, and | there was suspicion at the time. Same with FX, there was a cartel | manipulating that as well, and people in my firm also wondered at | times why things were moving around at the exact wrong time. | | It's probably best that the LIBOR system goes in favor of | something more transparent. But I have a friend who is involved | in the transition at a bank, and it's incredibly complex to move | over such a huge mass of contracts to this new thing. Definitely | a lot of work for a lot of people. | splittingTimes wrote: | The Libor - interest rates scandal is only one in a long list | of documented manipulations in the last 5-10 years | | ISDAfix - swaps | | Platts - oil prices | | WM/Reuters - FX | | High-Frequency Trading - equities | | Commodities - Gold, Silver Stock indices | | Are all rigged. With that history, how can we give that new | system the benefit of a doubt. It will be gamed as well. ___________________________________________________________________ (page generated 2022-01-20 23:00 UTC)