It's not really news; it's always been clear that:
1. The Bank of England knew about the Libor rigging as it happened
2. And was, at a minimum, very happy with the results (given that it reduced the risk of bank runs imperiling the entire system)
3. And that nobody involved really thought this was a serious issue, much less a crime.
Putting the above together, it would be surprising if there wasn't some pressure from the Bank of England to push Libor down; why wouldn't they be doing that? In the circumstances, it would have practically been remiss of them to do otherwise.
Of course, it looks absolutely horrific now that we've decided that manipulating Libor is a serious issue that people should go to prison for!
> "3. And that nobody involved really thought this was a serious issue, much less a crime."
I'm not sure where that point came from. It's not only a crime, it's an extremely serious crime. What on Earth are you talking about?
LIBOR is a derivative of daily rate data which is shared between banks. It is not rigged centrally.
You can't tell investors that the rate is based on a daily measurement of interbank risk, and then just go ahead and base that rate on something entirely different when it suits you. That's called fraud.
> It's not only a crime, it's an extremely serious crime. What on Earth are you talking about?
Today it is. Back then it wasn't. (Or rather, it wasn't seen as such.) It was, by definition, a number that people made up based on their gut feeling (NOT hard data), and there was no regulation or precedent for what sort of number you could make up.
Notice that in the linked article, the Bank of England carefully doesn't deny putting pressure on banks to keep Libor low, and just says that: ""
Or see the article I linked elsewhere in the thread about Barclay's who was perfectly open with analysts and regulators that they were lying about Libor to improve their share price: http://dealbreaker.com/2012/07/same-old-boring-story/
Yes, we see it as a serious crime now, but it's pretty clear that circa 2007-2008, that was not a common view.
> LIBOR is a derivative of daily rate data which is shared between banks [...] You can't tell investors that the rate is based on a daily measurement of interbank risk
It's neither of those things, and I certainly hope investors weren't being told that, because that would be a lie. It's literally the result of asking some banks, "hey, if you went and borrowed some money...how much do you reckon you'd get charged?". And it turns out that's horribly subjective, not very useful, and prone to manipulation!
That people think LIBOR is some objectively calculated rate is probably an even bigger lie than LIBOR itself. How did that view come about, poor financial reporting?
The calculations are objective, the input values are subjective.
ICE says they ask a particular bunch of people "If _your_ bank wants to borrow money, how much does that cost?" and then they do a particular calculation to turn all those inputs into LIBOR
90 days later we can see all the individual numbers, so we can check if ICE did their job properly, and also we can see if, say, Lloyds have been ridiculously low-balling their numbers every Tuesday.
Because the question is subjective, that's still subject to bias, in particular it makes an unspecified assumption: that the bank asked could in fact secure such a loan because it's available to them if they wanted it. As a result loss of liquidity in parts of the market is not visible through LIBOR even with reforms.
There seems to be a pattern lately of people replying to comments assuming the poster doesn't know anything. It is getting really annoying. Pro tip: many of us here work in finance or related fields. It is like people are just itching to show how much they know.
> I'm not sure where that point came from. It's not only a crime, it's an extremely serious crime. What on Earth are you talking about?
The OP never said it wasn't illegal, just that no one thought it was a serious crime. Kind of like how sodomy is illegal for DoD personnel under UCMJ law, no one gives a damn and no one enforces it.
> You can't tell investors that the rate is based on a daily measurement of interbank risk, and then just go ahead and base that rate on something entirely different when it suits you.
But it's not based on interbank risk, it's based on how much you THINK you can get an interbank loan for. How much you THINK the risk is worth. They base the Libor rate off a lot of thoughts and few facts. The fact that they base it entirely off of thoughts and few facts gives these bank personnel a lot of incentive to lowball, giving whatever number is necessary to get the lowest loan possible and profit the most.
Libor rigging will continue at all levels until they change HOW they get to the Libor rate.
> 3. And that nobody involved really thought this was a serious issue, much less a crime.
TFA: "Mr Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash. "
so it seems like the people involved were well aware of what they were doing.
Also, it's been news to me that the Bank of England was actively pushing for the LIBOR rates to go down, and was not merely "happy" with them going down, and I've pretty much followed this scandal since it first came out.
> Mr Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash.
There's a huge difference between "hey, this form is asking for my home phone number, I can't put cell phone number in!", and "I'm going to go to prison for years for this!". If Johnson had a clue that the behaviour being discussed would lead to prison time (and it has) he'd have made a very different objection.
> Also, it's been news to me that the Bank of England was actively pushing for the LIBOR rates to go down
Well, it hadn't been proven, but it's been talked about for years. Eg, this:
You have to be the world's biggest idiot to believe anything a huge corporation like that says. They have entire propaganda units to make them look as good as possible.
People speed all the time, no one thinks twice about it. They know they're speeding, they know they're breaking the rules, but the culture they're in doesn't care. I don't know enough about LIBOR rates in banking culture, but it seems possible this is a similar situation.
Well in banking, it's very important that there's trust in the system. Senior staff in UK financial institutions risk being barred from the industry if they're found to have broken rules and there's a reason that kind of penalty is in play.
Libor rates are quite serious as the outcome of trades depends on them. Each trade has a "winner" and a "loser" so if one side can choose the outcome they're essentially cheating the other side out of money.
The equivalent would be going to a casino where they can arbitrarily change the odds of winning to suit them, during the game.
In a nutshell, this is why we're seeing all these financial scandals and stockmarket melt-downs every so many years. Because the perception has become that if you break the rules it is not a serious issue, no matter what level of society you are operating at.
If you start equating speeding with breaking banking rules something is fundamentally wrong (not that speeding is ok, but the impact of say going 10 km over the limit versus wrecking the economy seems to be of a qualitatively different level).
Not all rules & rule violations are created equal — embezzling money is different than deleting an innocuous email. Also, 'rules' don't mean 'legal requirement' necessarily.
Deleting an innocuous email became a rule violation because of all the times a substantive email was deleted under the cover of allegedly being innocuous.
Libor rigging covers two quite different things, which happened at different times for different reasons.
> If it was a good idea for everyone, why not do it explicitly and transparently?
The point was that the entire banking system was seizing up, and for the banks in the biggest trouble, being honest about how much it was costing to borrow money (or worse, the fact that there was no money to be borrowed) would have sent them over the edge and (maybe!) taken the system with them. If your trying to fake it 'til you make it, you can't do that explicitly and transparently.
(The US equivalent was to just force all banks to take government money whether they wanted or needed it or not, because just bailing out the ones who needed it would have made it clear who was in trouble, and again, sent them over the edge. That was, again, done in order to avoid transparency, and neither policy was without moral questions, but both worked in the end. And the UK one was at least cheap.)
> Allowing (or even encouraging) a small group of people to secretly make a lot of money doesn't seem like a fair way to run the economy.
Libor manipulation may be wrong, but it didn't really make anyone a lot of money. And this particular part of the overall scandal certainly didn't. Manipulating rates so that you can borrow money cheaply might be profitable; lying and claiming you can borrow money cheaply when yu actually can't is not to avoid sparking a bank run is not. :)
> The point was that the entire banking system was seizing up, and for the banks in the biggest trouble, being honest about how much it was costing to borrow money (or worse, the fact that there was no money to be borrowed) would have sent them over the edge and (maybe!) taken the system with them.
Anything that can be destroyed by the truth deserves to be destroyed.
Carl Sagan had a great quote about things like this:
"One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken."
Fake it till you make it? You mean cover up gross incompetence/fraud that could have seen them in jail. The UK lost control of the law in finance. A lot of the USA stuff was washed through London because of this.
How they got into the bank run situation was illegal. You have one warped perspective.
I don't believe the idea was to make money at that time. It was to avoid a run on the banks and a repeat of 1929. I am not convinced the economy would have been better off. In those days you had pretty much one major bank failing every week.
Yeah but this was an unrelated event, which happened before the financial crisis, and (as far as we know) didn't involve the senior management of either the banks or the BoE.
Given the level of compliance & audit work required in the UK FS industry (look for example at the sizes of regulatory and operational risk teams) and the nature of career paths in the industry (senior figures tend to come up from the ranks quite often), I'd have to say I'd be really surprised if no-one in the senior management of affected banks was aware that Libor manipulation occurred.
That's not to say that there'll ever be enough evidence to prosecute that awareness, but the idea that they have no idea what goes on at lower levels, and that none of the 2nd/3rd line risk functions or Internal Audit did any work that would have uncovered that activity....
No the development of the swap market is quite recent. At the time when senior managemers were traders or sales people, there was no particular incentive for anyone to push libor submissions one way or another (and libor submission was more of a boring routine, the markets only started focusing on them from 2007).
So your suggestion is that no-one in any of the risk functions or internal audit functions (or the external auditors of the bank) ever thought to look at Libor in the years from it becoming important until the scandal emerged?
And that senior management, who were surely aware that it was now important, never thought about the risk of a rating based on trust being manipulated by people who would profit from that manipulation by receiving increased bonuses?
If all that's true, doesn't say a lot for all these very highly paid bank executives does it?
I do not believe Libor was audited or under the supervision of any of the risk and internal audit functions before 2007. And you are right, the controls were insufficient, and have been considerably strengthened since. But this wasn't deemed to be a sensitive activity. And outside of a few swap traders who were sitting on massive libor future positions, the little rounding up or down that the money market desks were doing before the crisis wouldn't really matter to anyone else.
From https://en.wikipedia.org/wiki/Libor_scandal , looks like it was pretty relevant from 2000 onwards at least. The excerpt below seems to strongly indicate manipulation designed to improve banks profits over a long period of time
"Statistical analysis indicated that the Libor rose consistently on the first day of each month between 2000 and 2009 on the day that most adjustable-rate mortgages had as a change date on which new repayment rates would "reset". An email referenced in the lawsuit from the Barclay's settlement, showed a trader asking for a higher Libor rate because "We're getting killed on our three-month resets." During the analysed period, the Libor rate rose on average more than two basis points above the average on the first day of the month, and between 2007 and 2009, the Libor rate rose on average more than seven and one-half basis points above the average on the first day of the month."
"At Barclays, derivatives traders made 257 requests for U.S.-dollar Libor, yen Libor and euro interbank offered rate, or Euribor, submissions from January 2005 to June 2009, "
So whilst it may be true that it became more relevant after 2007, it seems be that there were some elements of this that were longer standing.
So why not make the change explicitly? I'm not against a change in the rate of LIBOR, nor am I against people making profits, as long as it's done fairly.
Again, not profits, collapse of the financial system.
The problem was: how do you combat fear? The LIBOR submissions were pretty transparent and investors were using it as a way to guess which banks would be the next to fail. I guess the BoE either thought they needed a short term solution / didn't have the time or appetite to change the way LIBOR was submitted. Or they thought that if they were hidding individual bank submissions (which they ultimately did), it would only aggravate fear.
The LIBOR rates were constructed by the BBA phoning around the banks, and reporting an average of the numbers they came up with. How would the BoE "explicitly" change that? By telling the BBA to lie? I don't imagine you'd find that "fair".
Like, literally, a Barclay's guy is on record telling a regulator that they were lying about Libor because telling the truth hurt their share price, so they stopped! And then everyone laughed, and that was the end of it, because it was just Libor, and it's not like there was an assumption that it was somehow accurate or objective.
Times change! Same Barclays that bailed itself out by lending to Qatar so they could buy back Barclays shares, which UK regulators signed off so one UK bank could appear solvent. Sant, who signed it off, got a job at Barclays shortly after.
Who are you? Why pages of jocular "boys will be boys" on UK fraud?
You don't think that people on the other ends of trades that depended on Barclay's Libor rate were depending on it being objective or accurate?
So those people on the other end of the trades, literally were aware that Barclays were ripping them off by manipulating the rate and were fine with that??
If so, where can I find these traders who like losing money, so I can make some trades with them.
> You don't think that people on the other ends of trades that depended on Barclay's Libor rate were depending on it being objective or accurate?
I certainly hope that people were not depending on Libor being an objective metric, because that would imply they hadn't the foggiest clue what Libor is or how it's calculated.
(Also, "Barclays was ripping them off" implies Barclay's was on the other end of the trade, but that's not typically what happened. A more representative example might be "hedge fund buys a bunch of mortgage backed securities pegged to Libor + some number; Barclay's lies to try and avoid going under and pushes the Libor rate down a fraction of a hair, meaning a few million homeowners pay slightly less interest than they "should", and the hedge fund makes slightly less money that it "should". Which is, sure, horrible, and people have paid large fines and gone to jail for it. But it's hard to get too outraged over it; compare it to, eg, the banks who knowingly resold bad mortgages.)
"Early estimates are that the rate manipulation scandal cost US states, counties, and local governments at least $6 billion in fraudulent interest payments, above $4 billion that state and local governments have already had to spend to unwind their positions exposed to rate manipulation."
There is no recording of any BoE official asking Libor to be changed, which I had partially expected.
Instead, a Barclay employee is on record saying: "The bottom line is you're going to absolutely hate this... but we've had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower."
This is the equivalent of hearsay evidence, and how Dearlove brought up the BoE only illustratively further distances the BoE.
Also, the manager just says they had pressure for lower BoE rates -- but charitably read, the BoE may have meant through actually lending at lower rates and trusting your fellow banks. After all ensuring trust in the banking system is a core BoE function. Your parents might pressure you to get better grades, but often they don't intend cheating.
Now does is this evidence that the UK government wanted Libor rates lower -- sure. Does it increase the chances the BoE encouraged the manipulation -- probably. But is it a smoking gun where the BoE explicitly instructs manipulation? Far from.
Well they'd have to be pretty stupid to put it in writing, given that it was against the rules.
It seems to me a shame that people lower down the chain, who didn't stand to personally profit from the manipulation are going to be the only ones to take the fall for this. The suggestion that the rate fixer acted independently to manipulate the rates, even though he will have known that he risked prosecution as a result, just isn't credible to me.
It's obvious that general banks + BoE colluded to fix a rate that was meant to be based on the realities of lending, and that they did so either to make more money (in the case of the general banks) or to instill confidence in the banking system (in the case of BoE).
Whilst there may not be enough evidence to prosecute, it seems wishful thinking to say that the BoE didn't know that people might take their wishes and translate them into effectively illegal actions.
The point of Libor was that it was meant to be a reflection of bank's actual rates, so any pressure for lower rates inevitably is pressure to cook the books, and the BoE staff involved will have known that.
"It seems to me a shame that people lower down the chain, who didn't stand to personally profit from the manipulation are going to be the only ones to take the fall for this."
The point is now that its clear that the people who have been arrested are not to blame - what happens next? They rot in jail while years pass while the country and the SFO and the courts debate on who was really to blame!?
This is, broadly speaking, the same story that came out in 2012:
"Barclays Submitters believed mistakenly that they were operating under an instruction from the Bank of England (as conveyed by senior management) to reduce Barclays' LIBOR submissions"
Back in my Econ classes we were taught that Libor was this atomic-clock-like gauge that objectively and impartially measures interest rates with absolute precision. Turns out that isn't exactly the case.
We know that some commercial banks that participated in rigging it - the article mentions about employees of Barclays who and got caught, convicted and jailed for rigging Libor. But if the Bank of England has exerted pressure one way or another on Libor the claim that it is a a 'precise' interest rate gauge determined by the 'free market' are starting to look increasingly more questionable.
Yes, and in high school chemistry you were taught that electrons go round the atomic nucleus in orbitals. The real scandal here is the poor state of undergraduate education in economics.
Back in high school, our chemistry teacher explicitly told us that this is nothing but a model and that all models are approximations. At the same time our economics teacher argued that rational self-interest is the undiluted essence of human behaviour.
Deep end? I tried to illustrate that one teacher made the effort to highlight a model's shortcomings while the other one couldn't see beyond his own ideological biases.
In high school chemistry I was taught that electrons existed as a fuzzy smear near the nucleus and were particularly likely to be found within various oddly-shaped orbitals. Motion of the electron was not discussed nor implied.
That may not be a perfect model, but it's a pretty far cry from "electrons go round the nucleus". My bog-standard high school chemistry textbook showed pictures of s and p orbitals and they are clearly three-dimensional. I think you'd have to go a pretty long way back to find a high school chemistry textbook saying that electrons follow a path.
Not all teachers are equal. There are plenty of places where the current state of chemistry education is still teaching kids the electrons go around the nuclei in perfect little circular orbits and that electrons that are 'shared' do so by making figure 8's.
In England and Wales, the circular orbits simplification is used at GCSE [1] (age 15-16), but the orbitals/probability thing at A-level [2] (age 16-18).
My teacher (the same for all four years) explained that the first model was an oversimplification, but I don't think it's inappropriate to use it.
Which is still a better model[1] than most of economics has, so trying to teach it like physics or chemistry in the undergraduate curriculum is doomed to failure.
The spread between the two that is worth paying attention to, as well. Pre-crisis, the two were pretty much in lock-step with one another and no one cared about it. As the crisis emerged, and beyond, the two diverged significantly.
Is the US the only state whose federal bank (the Fed) controls the inter-bank lending rate (called the federal funds rate in the US)? What are the pros and cons of the Bank of England not setting Libor in the same way?
> Is the US the only state whose federal bank (the Fed) controls the inter-bank lending rate
The Fed does not control the US inter-bank lending rate. It sets a target, and engages in open market operations to try and force the rate to stay close to the target. But it doesn't control the rate.
LIBOR refers to a package or rates of which the US Dollar 3 month Interbank offer rate is the most famous. If the Bank of England wanted to control this rate, they would have to come in with infinite liquidity to control the rate. The Fed effectively has infinite liquidity in USD so it can control the Fed Funds rate. Also, it is worth noting that the fed funds rate is an overnight rate, and 3m LIBOR is for three months, so the capital commitment to control it would be much larger.
The equivalent of the Fed's fund in th UK is SONIA, not LIBOR. SONIA is for overnight interbank lending, and I believe is "controlled" (with the BoE pushing the rate where it wants by using its unlimited supply of funding to manipulate supply and demand) in the same way as in the US.
But these days pretty much the whole term structure of the yield curve is manipulated by central banks (see Operation Twist for instance).
These two rates serve different purposes. The Fed Funds rate is the rate at which banks earn interest on money held there (so keeping it low encourages banks to not keep it there, raising it does the opposite).
LIBOR (and there are different LIBORs for different currencies and maturities, the main one is USD 3-month) is the rate that banks lend each other on an unsecured basis. Technically, each bank determined their own LIBOR based on how they see the market and what they believe they can borrow at (hence our problems).
The important thing about LIBOR is that many trillions in notional of derivatives use it as a reference, so changing it has very real impact for all market participants (including pension funds, etc.). Even floating rate loans are often based on LIBOR.
I think you may be confusing Fed Funds with Interest on Reserves.
Fed Funds are unsecured overnight loans between banks. In the aftermath of 2008, banks have a lot of reserves and trading volume in the Fed Funds market has decreased significantly. It's arguably not an important rate to pay attention to anymore, but the Fed still claims to be targeting it (indirectly through open market operations)
Interest on Reserves is interest paid by the Fed to banks for holding reserves at the Fed. This is a new thing that was implemented in the wake of the 2008 crisis and quantitative easing.
> I would be surprised if the Euro didn't have something that was closer to the federal funds rate than libor.
I used to work for a small, independent East-European mortgage-broker back when the financial crisis started and pretty much all the banks active on my country's market were using LIBOR as a reference rate when issuing mortgages, this is actually the first time when I hear about EONIA. I remember my boss telling me at some point to write a script that would parse the daily LIBOR rates from the Internet, and me being very surprised that one of few places from where I could get those values reliably was a crappy geocities-like page hidden inside a major bank's website.
The Fed and the central banks of other major economies use mechanisms to implement monetary policy that are more or less similar at a high level but which differ in the details. Giving a meaningful answer to your question requires looking at some of those details.
First, the Fed doesn't directly control the rates at which banks borrow and lend among themselves. Nominally, the Fed does offer funding to commercial banks, through it's so-called discount window, but it discourages banks from borrowing from it directly by offering those funds at a rate (called the discount rate) that is higher than prevailing market rates. As a result, no one uses the discount window unless they must, which further reinforces banks' avoidance of it—everybody knows that something has gone terribly wrong if a bank must borrow from the discount window.
Ordinarily commercial banks in the United States instead borrow and lend among themselves at a market rate (called the federal funds rate) that the Fed influences by buying and selling treasuries, making less or more cash available for lending in the commercial banking sector.
More precisely, the Fed establishes a target federal funds rate—which is now actually a range, not a single number—and then undertakes asset purchases and sales to coax the actual rate into that target range. But the actual rate at which banks borrow and lends among themselves, which is typically called the effective federal funds rate to distinguish it from the target rate, varies from day to day [0]. The difference between the target and effective rates says something about liquidity in the commercial banking sector as well as something about the effectiveness of the Fed's implementation of its monetary policy.
In Britain, the Bank of England implements its monetary policy somewhat differently, through a scheme that involves targeting a rate it calls Bank Rate (and which others typically call official bank rate or the base rate) and then paying that rate on the reserves of commercial banks that it holds on deposit, or charging them a penalty rate if they deposit too much [1]. Commercial banks manage their day-to-day reserve levels by borrowing and lending among themselves, and that's what sterling LIBOR purports to measure.
Dollar LIBOR purports to measure the rates at which off-shore banks borrow and lend dollars among themselves. Since the substantial dollar holdings of banks outside of US jurisdiction are typically subject to minimal regulation, and in particular are not subject to the Fed's reserve requirements, this rate is somewhat different from the effective federal funds rate.
1. The Bank of England knew about the Libor rigging as it happened
2. And was, at a minimum, very happy with the results (given that it reduced the risk of bank runs imperiling the entire system)
3. And that nobody involved really thought this was a serious issue, much less a crime.
Putting the above together, it would be surprising if there wasn't some pressure from the Bank of England to push Libor down; why wouldn't they be doing that? In the circumstances, it would have practically been remiss of them to do otherwise.
Of course, it looks absolutely horrific now that we've decided that manipulating Libor is a serious issue that people should go to prison for!