Libor in the LRB
September 23, 2008 9:45 AM   Subscribe

"The calculation of Libor is co-ordinated by just two people, who work in an unremarkable open-plan office in London’s Docklands .. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn’t sent in its estimates, and if the latter seem implausible – typos, for example, are fairly common – they’re checked, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? . . . Bit of a spread on the two month. Everyone else is coming in a good bit under that.’" Calculating the Libor and how London became the center of the international money markets, from the LBR.
posted by geoff. (12 comments total) 10 users marked this as a favorite
Interesting stuff. LIBOR previously.
posted by exogenous at 9:57 AM on September 23, 2008

Could multi-tasking be blamed for the financial collapse?
Or maybe I am just not good with business listening.
Or do I just wish my boss would stop with that mantra?
posted by coachfortner at 10:59 AM on September 23, 2008

Do people call the LRB the LBR? Of course spelling out "The London review of books" might be helpful given the similarity of their acronym with their subjects.
posted by delmoi at 11:11 AM on September 23, 2008

"Typos, for example, are fairly common – they’re checked, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? . . . Bit of a spread on the two month. Everyone else is coming in a good bit under that.’"

And with that, I just fell out of my chair.

My faith that Big Important Things are handled with computer-like precision has been shattered.

I'll be down here, under the desk, sucking my thumb.

OK, it's not that surprising. But still. You want there to be more, like, science fiction involved. Like the time I toured a nuclear submarine. I'm expecting Star Trek. Instead, I got a cramped, dingy boat with linoleum floors. Oh, and nuclear missiles.
posted by Cool Papa Bell at 11:15 AM on September 23, 2008 [1 favorite]

Cool Papa Bell - it's often the way.

I used to work for the UK government, and worked during a couple of crises at the Government's emergency co-ordination facility, which goes by the James Bond acronym COBRA.

It's actually a beige-wallpaper room with a big meeting table, standard-issue desks and computer monitors, stuck in a Whitehall basement down the corridor from the canteen. And the Bond-like acronym? It stands for Cabinet Office Briefing Room A.
posted by athenian at 11:32 AM on September 23, 2008

BBA really has to get their act together with LIBOR.

We had all that mess last summer but over a year later you still hear folks complaining about LIBOR. People are gonna start to trade around it, all it will take is a string of high profile deals written to reference something other than LIBOR and then its a slow twilight decline for this index.

And there are other indicies with the credibility; The Fed under Bernanke uses one month OIS rates to set TAF rates (the TAF, or Term Auction Facility being but one of the new tools deployed to inject liquidity into the markets).

About the only thing that's indisputable with LIBOR is legacy - their marketing literature mentions the "unbroken history since 1985". Great guys, but if the index is suspect then continuity doesn't figure high on the list.

These concerns about LIBOR aren't new by any stretch; The Bank for International Settlements (BIS) has published lots of research raising issues with LIBOR. In fact BBA should take note of a quote from a March 2008 BIS publication [ .pdf ] -- "Benchmark status is gained through competition; it is not conferred. Therefore, it can also be lost. Persistent pricing anomalies limit the usefulness of a benchmark as a hedging or positioning vehicle. This may result in a switch to an alternative reference rate. Each participant who switches subtracts liquidity from the established benchmark and adds liquidity to its competitor. In the self-reinforcing process whereby liquid markets become more liquid, this makes it more attractive for others to do likewise."

And that wasn't the first time BIS has expressed concern about LIBOR; as far back as March 2000 questions were being raised about this index [ .pdf ] - specifically, and leveraging off academic work by Peek and Rosengren (1998) BIS wrote -- "during 1995 and 1996 LIBOR quotes for major Japanese banks for eurodollar and euroyen borrowing rarely differed by more than a few basis points, even though there were substantial differences in their credit ratings provided by the major rating agencies."

So they were sorta flying under the radar until last summer, and they still haven't started to address these issues. It will be interesting to see if BBA finally start to take the criticism seriously. But I'm not sure if they will.

But if we have to switch from LIBOR to something else, it's happened before. Until the late 80's everyone used 3M T-Bills as the reference for short term rates. Only once derivatives with underlyings based on European lending rates began to appear in large quantities did banks find LIBOR more representative of their "true" cost of capital and began to swtich.

Contributing to these pricing discrepancies, the US Treasury Market was undergoing significant stress to T-Bill based pricing swung wildly. Because of volatility in the United States folks started writing deals referencing LIBOR and the rest is history. So, as BIS pointed out, the convention could again easily change.

Great article - many thanks for posting!
posted by Mutant at 12:39 PM on September 23, 2008 [1 favorite]

"Benchmark status is gained through competition; it is not conferred."

That's really the main point. People who are serious about their gambling don't rely on a single data point - especially if it is believed or even rumored to be unreliable. Finance guys take risks, not leaps of faith.
posted by three blind mice at 1:22 PM on September 23, 2008

This was interesting. Thanks for posting.
posted by grounded at 1:33 PM on September 23, 2008

Cool Papa Bell: When I read this article, my first thought was, "Blimey! It's The Machine That Won The War!" (PDF, HTMLised version).
posted by WPW at 2:02 PM on September 23, 2008

Doubts over Libor persist. ~ September 24, 2008 WSJ
posted by SeizeTheDay at 7:25 PM on September 23, 2008

Absolutely riveting.
posted by 31d1 at 9:31 PM on September 23, 2008

Whoa - and you beat mutant to the post! Great post!
posted by TomSophieIvy at 9:14 AM on September 24, 2008

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