Libor, long the most important number in finance, dies at 52

https://www.nytimes.com/2022/01/12/business/libor-finance.html

by lxm • 5 years ago

228 173 5 years ago

nytimes.com

akmarinov• 5 years ago

Paywalled

Retric• 5 years ago

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• 5 years ago

https://archive.is/ujVCY

unixhero• 5 years ago

The vestiges of the Bretton Woods system.

hardtke2• 5 years ago

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.

gadders4• 5 years ago

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.

codebolt3• 5 years ago

What about SONIA, isn't that the dollar based equivalent?

EugeneG• 5 years ago

Yeah there will be a spread, won’t go from LIBOR+0 to SOFR+0, but to SOFR+0.20% for example

javajosh• 5 years ago

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.)

stanleydrew2• 5 years ago

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.

yufeng66• 5 years ago

legally the new definition of 3 month Libor is sofr + 26.161bps

xtracto• 5 years ago

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.

hardtke2• 5 years ago

I'm tied to the 1 year LIBOR -- do you know what that will be?

swedishturnip• 5 years ago

Absolutely not true, don't know where you got that idea.

codebolt3• 5 years ago

I know they will use a fallback spread to convert 3 month Libor to SOFR. But is the spread really a constant?

sethbc• 5 years ago

Not quite - legally it's whatever is in the agreement and those have been (and still will be) subject to negotiation. In credit agreements without replacement language (e.g., pre 2018 agreements), a Borrower may very well be forced to borrower in prime, for instance.

What you're talking about is the credit spread adjustments from the ARRC formulation of the LIBOR replacement language (11.448 bps for 1 month, 26.161 bps for 3 months and 42.826 bps for 6 months) [0]. In reality, the credit spread adjustments for Term SOFR are still moving and the market has been all over the place - I've seen 10/15/25 bps at 1mo/3mo/6mo tenors (the most common formulation in the leveraged space right now) or a 10 bps flat adjustment (generally viewed as aggressive).

[0] https://www.newyorkfed.org/medialibrary/Microsites/arrc/file...

rwmj• 5 years ago

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!

stanleydrew2• 5 years ago

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.

codebolt3• 5 years ago

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.

riskneutral3• 5 years ago

CME Term SOFR contracts exist to address this. 1M, 3M, 6M, and 1Y Term SOFR rates are published [1]. A typical 3M LIBOR contract can just substitute it with 3M SOFR without impacting the basic mechanisms, like knowing in advance how much interest you will owe over the next period.

[1] https://www.cmegroup.com/market-data/cme-group-benchmark-adm...

bzbarsky• 5 years ago

That's not how mortgages work, at least in the US.

There's a limit to how often the rate changes, etc.

Just looking at one now, and it's set up as follows:

1. Rate is allowed to change only on the 1st day of every 6th month (after the initial flat-rate period ends).

2. On that day, the new rate is set to a spread + the max of 0 and the value of the 30-day Average SOFR Index (as published by the NY Fed) as of 45 days before the day when the rate is changing.

Nothing being applied on the daily basis here.

JaggerFoo• 5 years ago

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• 5 years ago

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.

csdvrx2• 5 years ago

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.

siliconlotus• 5 years ago

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• 5 years ago

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• 5 years ago

Bankers' consensus of what the overnight interest rate should be for a well-capitalized, creditworthy bank.

tomc19855• 5 years ago

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

JackFr4• 5 years ago

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.)

lmm5• 5 years ago

It measured the consensus for what LIBOR should be, a rate that the banks as a whole were happy to use. Your question is a bit like asking what dollars are actually worth how that we've left the gold standard.

neom• 5 years ago

What Is Libor And Why Is It Being Abandoned? - https://www.forbes.com/advisor/investing/what-is-libor/

nerdponx2• 5 years ago

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• 5 years ago

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!

JackFr4• 5 years ago

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.

lmm5• 5 years ago

Banks took both sides of LIBOR contracts. So it wasn't really about manipulation so much as just having a standard to follow. Do you read about clubs of Silicon Valley browser makers meeting up to come up with a new HTML standard and assume that this is some nefarious plot? I imagine your London banker counterpart does.

nerdponx2• 5 years ago

Yes, the same level of skepticism is definitely warranted when it comes to proposals by big tech companies. That doesn't mean all proposals are bad.

TameAntelope• 5 years ago

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...

ddlatham• 5 years ago

There's a great Planet Money episode explaining the story

https://www.npr.org/transcripts/1044598674

epa• 5 years ago

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.

gadders4• 5 years ago

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])

JackFr4• 5 years ago

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• 5 years ago

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"

tomc19855• 5 years ago

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

wsc981• 5 years ago

Think about all the job security. You'll be set for many years!

toomuchtodo• 5 years ago

Chaos is a ladder. Run towards it to prosper.

queuebert2• 5 years ago

They should start a club with the COBOL maintainers.

pessimizer2• 5 years ago

They've had years.

marginalia_nu• 5 years ago

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!"

tomc19855• 5 years ago

Yup! I remember hearing murmurs of LIBOR's unsuitability but didn't see much of a reaction. Wonder how things are now

twic3• 5 years ago

How did you get access to my commit logs?!

gadders4• 5 years ago

Or an actual real bank...

tomc19855• 5 years ago

Hey now, fintech is a real banc!

NoboruWataya5• 5 years ago

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.

decafninja5• 5 years ago

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.

citizenpaul3• 5 years ago

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.

decafninja5• 5 years ago

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.

skrebbel• 5 years ago

Don't assume, you know nothing about the parent's situation.

jacquesm• 5 years ago

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'.

throwmeaway666• 5 years ago

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.

decafninja5• 5 years ago

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.

santoshalper• 5 years ago

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.

rr8083• 5 years ago

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.

madaxe_again• 5 years ago

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.

vsuaoqmdn• 5 years ago

Let me guess. Now you think that the pinnacle of a SWE career is working at Google it Facebook, right?

colordrops• 5 years ago

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?

Jenk2• 5 years ago

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.

lostmsu• 4 years ago

Just wait until Citadel, Jane Street, and Two Sigma all sink.

They are already behind some big tech in total comp, so brain drain is inevitable.

pessimizer2• 5 years ago

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.

erwincoumans• 5 years ago

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.

svnpenn2• 5 years ago

Yeah this just screams clickbait. "Let's create a title that makes no sense, followed by an entire article with a strained metaphor".

mhh__• 5 years ago

How is it clickbait? LIBOR is omnipresent in finance and it is being killed. Sterling LIBOR is already dead for example.

WillEngler• 5 years ago

I enjoyed the framing but to each their own.

queuebert2• 5 years ago

The NYT has a very high opinion of their obituaries.

outside1234• 5 years ago

It is a literary device to make a very boring topic interesting for mainstream readers.

whatshisface• 5 years ago

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.

ambrozk• 5 years ago

I enjoyed it, and I'm happy when writers practice their craft with a bit of humor.

fourseventy• 5 years ago

It was confusing to me because I had no context on what/who Libor was.

dang• 5 years ago

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.

lordnacho• 5 years ago

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• 5 years ago

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.

whimsicalism• 5 years ago

High-Frequency Trading - equities
Commodities - Gold, Silver Stock indices

It doesn't help for FX that it is effectively unregulated.

fanzhang• 5 years ago

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.

kaesar142• 5 years ago

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• 5 years ago

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• 5 years ago

Pre-SoundScan record sales numbers?

NoboruWataya5• 5 years ago

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• 5 years ago

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• 5 years ago

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.

rr8083• 5 years ago

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.

jrochkind1• 5 years ago

bottom-line-oriented bankers?!? Well, I never!

refurb2• 5 years ago

That’s pretty much the entire economy.

derefr3• 5 years ago

Accuracy, reproducibility, scalability, systemic integrity, and similar concerns often weren't a factor.

Kind of funny, then, that banking was also the origin of the CQRS/ES paradigm.

The systems thinking is there — just not evenly distributed.

cromulent• 5 years ago

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• 5 years ago

It seems overwhelmingly likely that "how corrupt people think a nation is" does have "[something] to do with how much actual corruption exists".

CraigJPerry2• 5 years ago

> 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?

DwnVoteHoneyPot2• 5 years ago

It's being replaced by historical market transaction data. Like stocks prices are based on last price.

rr8083• 5 years ago

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.

aksss• 5 years ago

The big secret you learn about central banking pretty early in adulthood is that “we” (society) is still figuring it out, tweaking it, and making it up as we go, and it’s not so old as to have this huge body of proven method that we’re all led to think it does. The systems are brittle, prone to manipulation, and every once in a while we manage to avert a crisis and keep from going completely off the rails. It’s not a bad endeavor, but it’s nowhere near the level of perfection and stability that like to imagine.

jhbadger• 5 years ago

Apparently a lot of the "university rankings" that you see are based a similar method -- faculty/staff at various universities are asked to rank (other) universities and their results summarized. So, for example Harvard is the #1 US university because many people at other universities think it is! There are other attempts at rankings that try to be more objective (such as number of papers published, number of Nobel Laureates on faculty, etc.) but those of course focus more on the research output of the university rather than teaching.

throwthere• 5 years ago

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.

panoramas4good• 5 years ago

Would highly recommend the book, The Spider Network, which gives an in-depth view (perhaps slightly dramatised) of how one trader manipulated Libor.

r00fus2• 5 years ago

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• 5 years ago

The article references that existing contracts will stay on LIBOR. It’s only dead for new deals.

Havoc• 5 years ago

For any new lending the contracts get replaced with new ones referencing Sonia. Even existing debt facilities that get drawn down - the banks don’t want more lending under libor.

It’s a pretty painless substitution though

riskneutral3• 5 years ago

how does this impact existing contracts?

This has kept lawyers busy for past the few years. The "LIBOR fallback language" was created and then inserted into existing contracts, to address this question. It's like a pull request for a patch. Most of the legacy contracts out there have been "patched" with the "fallback language" at this point, and as of Jan 1, 2022, no new LIBOR contracts are allowed.

NoboruWataya5• 5 years ago

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.

jayflux• 5 years ago

https://www.theguardian.com/business/2017/jan/18/libor-scand... is a good read about what went on about it.

sneak2• 5 years ago

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• 5 years ago

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!

sneak2• 5 years ago

The Grey Lady maintains plausible deniability at (in?) all times. :)

jcuenod• 5 years ago

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.

cyanydeez• 5 years ago

after swindling millions for decades

RocketOne• 5 years ago

The Libor scandal ripped off just about every person who held any kind of debt. And yet it's STILL barely known. When I got my mortgage I asked my banker agent what she thought about it. She had no clue what Libor was, let alone the scandal.

lmm5• 5 years ago

The scandal mostly meant that mortgage rates were lower than they should have been, so it's hard to get regular people angry about it.

aidenn0• 5 years ago

I don't know where you are, but at least in the US, the banks that make the loans don't hold the debt; they sell it off almost immediately.

Dylan168073• 5 years ago

Did it? Wasn't the scandal part about manipulating it up or down very slightly on a per-day basis? Shouldn't that have basically no effect on a normal person?

jhgb• 5 years ago

That is a very confusing headline, coming from a country where Libor is fairly common personal name. Why not spell it LIBOR instead?

Libor, long the most important number in finance, dies at 52

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