Sunday, 1 July 2012

To Lie-bor or not to Lie-bor

Right, time to get a few things cleared up.

Since the advent of the latest banking 'scandal' (and I use the term very loosely), I have had a number of conversations/arguments/explanations going on with various people.
Friends, colleagues, family, employees, members of the household cavalry...

Okay, maybe not the last one.

Anyway. What has struck me most is the horror some people (ie Cameron, Miliband, Lord King, the FSA, the tabloid press et al) have expressed that such a practice could even exist, let alone been a modus operandi for some time (read: since forever).

Let's set the record straight then.

As a former investment banker, and one who worked on the corporate sales desk of some major banks in the City for over a decade, this is not news.

It is not even old news.

It is not even newsworthy news.

It is - and let's call a spade a spade here - how the money markets work.
Always have done, always will do.

The whole LIBOR (that's London Inter-Bank Offer Rate for the unfamiliar, or the rate at which banks will lend to each other) rate-setting system is far from complicated. In a nutshell, LIBOR is an average of the middle values submitted by the contributing banks every working day and then published to the market after 11.00am London time.
The rates serve as a benchmark only. The actual rates at which lending takes place between banks continues to vary throughout the day.

Still with me? Good.

So, get this then.

Every morning in the dealing room, around 10.30am, we would check with the money market traders what their underlying positions looked like. In fact, we didn't really have to ask. The rates on offer for our corporate clients were totally dependent on whether the traders were 'long' (ie 'in the money', with funds aplenty) or 'short' (ie 'out of the money', or about to break the piggy bank for some loose change). Subject to these factors, the quotes we would be given for our customers would be totally skewed towards ensuring the bank was (preferably) in a position to profit from its transactions, because - amazing but true - that's what the whole game is about. Making money.

Based on a number of additional factors - economic statistics being released, liquidity, hedging strategies, risk assessment, gut instinct, colour of the tea-lady's hair - the chief money markets dealer (in one bank she was a frightening individual known as The Beast of Bishopsgate: scary but very, very successful and highly respected for running a profitable trading desk) would submit their contribution to the pool of rates used to calculate LIBOR.

The rate was, and is, totally subjective.

There is no hard and fast supervision. There is no 'law' enforcing rules and regulations. There is no clear-cut way of ensuring that the perceived liquidity of the bank submitting its contributory rate reflects reality. Furthermore the notion that LIBOR could be unduly influenced by 'rogue traders' (here we go again) is far-fetched. The whole point of taking the medium average of the submitted rates - some sixteen for sterling - means that the extremes (highest and lowest four) are discarded. So any attempt to massage the rates would already be a fairly moot point.

Want an analogy? Speed dating. The person you are sitting opposite for all of three minutes might have a dazzling smile, bright eyes, nice manners and effusive charm, but how are you to know if he has holes in his socks or has a tendency to fart in bed? Does it matter? Do you really care? Surely at this stage what counts is that they can hold a conversation, look you in the eye and conjugate their verbs properly? If matters progressed further, I could understand.

Although by then you might start to reassess your own unsavoury habits and realise that you too are not beyond reproach.

So, in conclusion, to quote the FT:

"The reality check is that Barclays only admitted it had tried to game Libor rates, not that it had succeeded. So far, no other bank has confessed to anything as damaging. No one has yet reliably estimated the detriment of rate massage, some of which will have been borne by banks implicated in the scandal themselves. These are questions regulators and law enforcement agencies must collaborate to answer as they hunt further scalps."

Oh, and those 'names' in the supposedly incriminating emails? Big boy? Common vocabulary. Along with Flash (as in Gordon), Diamond Geezer, Goldenballs, Hosepipe, Sprinkler, Teflon and Spewy.

All the females were just referred to as 'Doris'.

(c) Scott Adams

Share

Yadda yadda yadda...