Photo: The Daily Show
The Daily Show’s Jon Stewart took on LIBOR Wednesday night in a hilarious rant.I love Jon Stewart. He’s an idol of mine. I even went to his Rally to Restore Sanity back in 2010.
However his spiel—like much of the general media coverage of LIBOR—failed to properly explain a handful of points about the scandal.
Should bankers be condemned for some of their behaviour? Absolutely. But let’s set the record straight on a handful of points:
Stewart: “LIBOR becomes the benchmark for all money lending on, let’s say, Earth…If you see a number outside a bank placard with balloons tied to it it has been set in some way by LIBOR.”
- LIBOR is not the benchmark rate for Earth. There are other rates that influence money markets, like EURIBOR. Bankers may have tried to influence those, too—at least during the financial crisis—but given that they poll larger numbers of banks, bankers have far less influence to peddle for their own financial gain.
The Daily Show cites a clip in which a guest on a major news station says, “But what we’re now seeing very concrete evidence of is that the banks deliberately and knowingly submitted false data…to benefit themselves.” Stewart goes on to cite a statement from these colluding bankers, in which one promised another a bottle of Bollinger in return for illicit manipulation.
- Manipulations by Barclays traders before the financial crisis pretty much failed. It is unclear that any of the horrific attempts by Barclays traders to distort rates—those conversations about cracking open a bottle of Bollinger for instance—actually succeeded in distorting the LIBOR rate. TF Markets Advisors’ Peter Tchir has a good breakdown of this, but in reality banks were probably all betting back and forth and cancelling each out each others’ manipulations.
- Even if they did work, such rigging (pre-financial crisis) probably had very little effect on anyone but traders. The kinds of contracts were so large—we broke down the effect of an $80 billion bet—that the dispersion of losses between clients would have been significant. What’s more, the majority of these trades were used to hedge other contracts and protect for changes in interest rates, so there was less risk involved in these bets.
Stewart only cites conversations between Barclays traders before the financial crisis to describe the kind of LIBOR manipulation that was going on, which was to help certain traders make more money on their bets. The kind of manipulation that occurred during the financial crisis occurred for completely different reasons, and was actually a consequence of the crisis itself.
- The most drastic LIBOR manipulation occured in the lead up to and during the financial crisis, when banks reported dramatically inaccurate data so that their depositors and lenders wouldn’t suddenly pull out. The crisis credit crunch would likely have taken hold a lot more quickly had banks not misreported rates. Pushing down lending rates kept the most commercial aspects of banks functioning and kept the economy moving, so you could still get a car loan even if a bank didn’t want to give out any money. Is this transparent? No. But at the time it wasn’t exactly a bad thing.
Stewart points to a clip, in which Matt Taibi says, “If they’re monkeying around with LIBOR–I talked to one friend who works on Wall Street, and he said this is like finding out the whole world is built on quicksand.” Stewart concludes, “So an unregulated free market can also apparently create uncertainty.”
- The LIBOR scandal was not what produced uncertainty. The financial crisis produced uncertainty, and LIBOR distortion was a consequence of that. Banks held their LIBOR submissions ultra low not because they felt like it, but because they feared bank runs if they didn’t. That’s evident from a conversation between a Barclays trader and a Federal Reserve analyst in 2007, as well as other data the Fed recently published in relation to the case with Barclays.
- A little quicksand in the financial system is actually not a bad thing. The system that proceeded the Eurodollar futures market (which LIBOR was constructed to govern) was based on certificates of deposit (CDs) and it fell because it was based on real measures of creditworthiness. Essentially, traders found out that one bank that was participating in the CD market was less creditworthy then the rest, and it made traders so scared that the whole system froze up. Had traders really known how bad the financial crisis was going to be—and how deeply their counterparties were embroiled in bad trades—there would have been bank runs and the whole financial system would have collapsed. Looking at the financial system through rose-coloured glasses probably isn’t the worst thing in the world.
Stewart continues: “Oh right. The public sector pensions are underfunded in part because the bonds they own are paying too low a yield thanks to 16 bespoke suited turd-monkeys in London.” He cites a clip that mentions how the City of Baltimore and the Police Union of New Britain had already filed a lawsuit hoping too recoup suspected losses on their investments.
- The City of Baltimore and the Firefighters and Police Union of New Britain probably didn’t lose that much (if any) money—and may have gained more than they lost through other distortions. The yield on bonds is actually based on the supply and demand of those specific securities, not LIBOR. Public sector funds were clients in some interest rate swaps, and indeed could have lost money there, but they also could have won, depending upon which side of the trade they were on. The probable resolution of crisis litigation could actually be the return of money from some public sector clients to others. We think that would be hilarious, and we want to see Stewart rant about it!
Stewart draws a “mythical half-boar half-lion” in jest of what he thinks LIBOR is at the beginning of his segment on the benchmark rate.
- BONUS: LIBOR is really “a mythical half-boar, half-lion!” I saw one yesterday in Central Park! Scary stuff!
This crisis truly does expose some of the evils of the financial system, but manipulations pre-crisis—those abominable Barclays conversations—are really a sideshow, because no one has proved that they were successful. Some probably were, but the bankers were all probably trying to manipulate rates, and none of this produced a huge distortion from the real rate of lending.
The bigger issue is that the flaws of the LIBOR -based lending system have been exposed. It was a great way of conducting business 20 years ago, but the financial world is constantly transforming, and we need to figure out how to fix the holes.
NOW READ: Here’s How Barclays Made Money On LIBOR Manipulation >
If you work with LIBOR and related securities or are involved in any current investigations, please contact Simone Foxman at [email protected] or call +1-646-376-6016 (U.S.).
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