There has been an awful lot of fluff written about the LIBOR fixing stuff in the past week or so. Which is why I looked forward to my friday afternoon at home reading the Economist – in a brief patch of sunshine even – and getting a more considered opinion, and perhaps even some facts. They seem to take it all very seriously, whereas it seems to me there is an element of moral panic in the air (hey, you’re here because you want my opinions – if you want informed opinion, go read an economist).
First, a throwaway thought: Barclays is suffering from having “come out” of the closet first. This looks to me like a bad miscalculation on their part: they thought they would get credit for cooperating and coming clean. Instead, they are taking all the flak. Others, I’m sure, will learn the lesson from this and start dragging their feet: who would want to be number 2? Far safer to be number 10.
..two types of bad behaviour. The first was designed to manipulate LIBOR to bolster traders’ profits. Barclays traders pushed their own money-market desks to doctor submissions for LIBOR (and for EURIBOR, a euro-based interest rate put together in Brussels). They were also colluding with counterparts at other banks, making and receiving requests to pass on to their respective submitters… This bit of the LIBOR scandal looks less like rogue trading, more like a cartel… The second type of LIBOR-rigging, which started in 2007 with the onset of the credit crunch, could also lead to litigation, but is ethically more complicated, because there was a “public good” of sorts involved. During the crisis, a high LIBOR submission was widely seen as a sign of financial weakness. Barclays lowered its submissions so that it could drop back into the pack of panel banks; it has released evidence that can be interpreted as an implicit nod from the Bank of England (and Whitehall mandarins) to do so. The central bank denies this, but at the time governments were rightly desperate to bolster confidence in banks and keep credit flowing. The suspicion is that at least some banks were submitting low LIBOR estimates with tacit permission from their regulators.
That isn’t a new distinction, of course, just what is obvious to anyone who has thought about it.
Start at the end
Lets look at the second bit first. Here is a nice graph I ripped off from them:
Now you need to know another Killer Fact: LIBOR is a trimmed average: they take quotes, throw away the top and bottom quartile, and average the remainder. Which means: if you’re the top quote, and you reduce your quote down to being just above the 4th-top, then… nothing changes. And it looks to me like that holds true for Barclays up till, say, early December 2008. After that its hard to say: you’d need to do a more careful analysis to see (but the Economist says In its settlement with regulators, Barclays owned up to massaging down its own LIBOR submissions so that they were more or less in line with those of their rivals. It instructed its money-markets team to submit numbers that were high enough to be in the top four, and thus discarded from the calculation, but not so high as to draw attention to the bank (see chart 1). “I would sort of express us maybe as not clean, but clean in principle,” one Barclays manager apparently said in a call to the FSA at the time.). And as the Economist points out, there were several other banks during that period producing far far dodgier submissions.
The other factoid about those times, of course, is that it was during the Great Panic, and no-one wanted banks to collapse if it could possibly be avoided. Having to pay a high interest rate was a bad sign, which is where the contacts with the BoE come into play:
Mr Tucker stated the level of the calls he was receiving from Whitehall were “senior” and that while he was certain that we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.
Apparently Tucker (deputy BoE chair) insists that he wasn’t asking Barclays to massage its quotes down, oh no indeed not at all who could possibly think such a thing, and the Economist gamely tries to believe him, but… no. At such a time, that’s a bit of a heavy hint, isn’t it? I think its clear how you’d interpret it. So the regulators were complicit, and indeed this was “ethically more complicated” because it may actually have been good, not bad. We all tell little white lies on occasion.
LIBOR fixing of the first kind
Which brings us back to the bit I ducked, the first round of LIBOR fixing, where the traders and the quote-givers were collaborating. No-one has a good word to say for this, and even Diamond says this was “reprehensible”.
Who ya gonna sue?
The worst aspect of this is probably the vast quantities of pork that will be thrown at corporate lawyers and a variety of injured, possibly injured, and not-at-all-injured-but-doing-their-best-to-throw-a-foul folk line up to see what they can get (bloody Radio 4 wasn’t immune to this, the fools). Almost inevitably some people will have lost and some gained; those who’ve lost will want recompense but those who’ve gained won’t want to hand anything back. Perhaps happily, it will be in many cases quite unclear who has been affected.
There is a whole load of pap about reestablishing trust, which I’m not sure I believe (its just like making laws or sausages). For LIBOR, the obvious fix is to move to actual rates used rather than guesses, since those are verifiable and much harder to game (yes there is a problem with various currencies and maturities, but with actual rates to pin the structure the guesses for the holes matter much less).
But there is one ray of hope: apparently its a political fight to the death so there may be a few fewer pols around.
[Update: oh yes, I forget the disclosure: I own shares in Barclays]
Update: Tucker: “I’m clueless”
As expected, Tucker appeared before MPs and said he was clueless about the manipulation, and oh no indeed not at all did he ever suggest or even imply that any manipulation would be a good idea, good gracious how could you possibly suggest such a thing?
According to his memo, Mr Diamond explained to Mr Tucker that “not all banks were providing [LIBOR] quotes at the level that represented real transactions.” Mr Tucker told the committee that he took this to mean that other banks, which had submitted LIBOR quotes, but did not need to raise cash, had under-estimated their likely borrowing costs. He did not interpret Mr Diamond’s remarks as blowing the whistle on the misreporting of LIBOR, Mr Tucker said—and that he wasn’t aware of any allegations that banks were deliberately “low-balling” LIBOR rates until very recently.
which is incoherent. Barclays told him that people were lowballing estimates, Tucker understood that people were lowballing quotes, but he wasn’t aware of any allegations that people were lowballing quotes. Tucker had a hard line to try to hold: he was innocent, obviously, and hadn’t a clue that Bad Things were going on (obviously, or he’d have done something about it, obviously). But there is no way to reconcile that with actually having a clue and being competent, and it doesn’t seem that he tried to do that last bit. The Economist are still being very easy on Tucker; I can’t see that being from shiny motives.
* There are some interesting graphs but (IMHO) some dodgy conclusions at The Aleph Blog. This one makes more sense, though.
* Timmy reports the Torygraph.
* Balls is a vampire, says Osborne