Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1350.8 | -13.6 | -1.00% |
| Eurostoxx Index | 2486.6 | -43.3 | -1.71% |
| Oil (WTI) | 105.36 | -1.4 | -1.27% |
| LIBOR | 0.4746 | 0.000 | 0.00% |
| US Dollar Index (DXY) | 79.749 | 0.449 | 0.57% |
| 10 Year Govt Bond Yield | 1.96% | -0.05% |
Markets are lower on concerns about global economic weakness. The European economy contracted in the 4th quarter, and concerns are mounting regarding China. Bonds and mortgage backed securities are stronger this morning.
Did the S&P 500 just fail at resistance again?
Some 20% of Greece’s private creditors will participate in the debt swap. These are the large European banks – Commerzbank, BNP Paribas, and the big Greek banks. These decisions were undoubtedly heavily influenced by politics, so I am not sure that they are a representative sample of the private creditors.
Greek Finance Minister Evangelos Venizelos said in an interview yesterday that “This is the best offer. This is the best offer because this is the only, the only existing offer.” Note the lack of “best and final” language. If enough holders are reading that statement to mean that Greece is prepared to go forward with a better deal if this one fails, then the 75% participation rate might become an issue. The business press will probably focus on the possibility of a disorderly default and not on the public negotiation between Greece and its creditors, so we could be in for some rough sailing.
Obama will hold a news conference this morning and it is rumored that another mortgage relief plan will be revealed. The plan would allow FHA refis at a reduced fee – from 1.15% to .55%.
No economic data this morning. No MR tomorrow as I will be in the City all day.
Filed under: Uncategorized |
All Things in Moderation 
Meeting today about efforts to change the way LIBOR is calculated. Anybody have an idea what they’re driving at?
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banned:
Trying to find out now.
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banned:
Apparently the meeting took place yesterday, and I can’t find any particular policy proposals under discussion. It seems more like the opening of a discussion about what kinds of proposals might be implemented to avoid the false reporting of individual bank borrowing rates that seems to have occurred during the worst part of the crisis back in 2008.
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banned:
This is all I can find in terms of a public story. Not particularly helpful.
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Thanks anyway, I didn’t get it, and still don’t, so I thought there might be an better explanation somewhere.
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Banned, I think this was meant to address the problem of LIBOR quotation during the financial crisis, where the banks had liabilities pegged to LIBOR and were quoting LIBOR at sub-market rates, but would not actually lend money to anyone at that price. Since banks borrow short and lend long, they are exposed to increases in LIBOR and my guess is that they were protecting their balance sheet by posting rates that they had no intention of honoring.
I don’t know what the fix will be, but my guess is that it will be based on rates the banks actually lend at instead of the rates they quote publicly.
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Brent:
I don’t know what the fix will be, but my guess is that it will be based on rates the banks actually lend at instead of the rates they quote publicly.
Actually, it is based on the rates at which banks borrow from other banks, not where they lend. The distinction is important in the context of what (allegedly, although I don’t doubt it) happened in 2008. Banks which were under distress and facing very high borrowing costs during the crisis did not want to reveal just how much funding stress they were having (which could, in turn, force their costs even higher, in a self-perpetuating spiral), and so they were reporting lower borrowing costs than they were actually facing. In the past, there has been no mechanism for ensuring that the rate they report to the BBA is indeed the rate at which they are actually borrowing. Coming up with a mechanism is presumably what the meeting was about, but I don’t know what specifics were discussed.
For those who don’t already know, LIBOR is the average of inter-bank borrowing rates reported by a panel of banks at 11am London time every day. I’m not sure how many banks are now on the panel (16-18, I think), but the panel generally is protected from distortions of a single bank because the average excludes the two highest and the two lowest reported rates. But during the crisis, when several banks may have been misreporting their borrowing costs, it obviously would have effected the average, and hence anything else that is based off of it, which is why this is a problem that needs to be addressed.
Another, related, problem is any potential influence that traders might have over the treasurers who are tasked with reporting the rate to the BBA. The whole reason LIBOR was developed in the first place was to make trading in certain kinds of instruments, notably interest rate swaps, more standard and liquid. That effort has been a tremendous success, but it also means that anyone who trades those instruments (meaning, in effect, everyone) has a keen interest in where it gets set each day. And that interest, of course, can lead to a desire to manipulate it. Again, generally speaking, the depth of the market and the number of panel members makes it very difficult to manipulate in ordinary times. But under extreme circumstances, as we saw in 2008, it can become not only easier but also more desirable to do so. Hence the efforts by the BBA to establish a better mechanism for ensuring that the rate gets reported accurately.
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brent:
Effectively speaking then, moving to a mark to market for LIBOR, interesting.
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And the low-ball LIBOR quotes also masked the distress in the financial system.
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In other news, this from the NYT DealBook:
When the deal was announced, buried at the end of the news release was a list of Wall Street banks that had advised on the deal, including Goldman Sachs. Goldman received a $20 million fee for playing matchmaker for El Paso. The fee, of course, was not disclosed, nor was the Kinder Morgan stake owned by Goldman Sachs’s private equity arm, worth some $4 billion. Nor did the release disclose that the Goldman banker who advised El Paso to accept Kinder Morgan’s bid owned $340,000 worth of Kinder Morgan stock.
Now, however, a court ruling in a shareholder lawsuit has laid bare the truth: Goldman was on every conceivable side of the deal. As a result, El Paso may have unwittingly sold itself far too cheaply.
Brent, I assume G-S is on the receiving end of a ton of lawsuits if they do this on a regular basis.
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Thanks, Brent. That makes sense and, for one, needed the roadmap.
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Mark, how that got past compliance is beyond me…
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OT: for john/banned — i was lurking.
http://seattletimes.nwsource.com/html/localnews/2011099786_hospital17.html
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In the past, there has been no mechanism for ensuring that the rate they report to the BBA is indeed the rate at which they are actually borrowing.
Did they at least have to say “scout’s honor” or something?
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ashot:
Did they at least have to say “scout’s honor” or something?
Something like that. But what you have to understand is that, for most of its existence, under normal market conditions, short term funding for most banks was pretty transparent and in any event there generally wasn’t a huge difference between the short term funding costs of the various panel members. A few basis points here and there. And so if anyone tried to manipulate it by fudging their reported rates significantly, not only would it be obvious but as an outlier it wouldn’t even be included in the average. During the crisis, however, funding costs across the market were soaring and were wildly divergent (by tens or even 100 basis points), often times a function of rumors about quickly deteriorating credit quality. The fact that this was happening not with just one or two banks, but across the whole market, made false reporting both easier and more useful than it otherwise had been prior to the crisis.
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And so if anyone tried to manipulate it by fudging their reported rates significantly, not only would it be obvious but as an outlier it wouldn’t even be included in the average.
Given that, was there any incentive to fudge the rates? It seems like it would have been counter-productive.
The fact that this was happening not with just one or two banks, but across the whole market, made false reporting both easier and more useful than it otherwise had been prior to the crisis.
So the incentive to lie was highest at the moment that these lies were the most damaging? Thanks for the background information it was interesting and heplful.
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Yes, Scott, that was an an insight for an outsider. I join Ashot in appreciating it. One of these days you bankers will have finally educated the lawyers here, about the finer points of high finance. This was not in my finance course in 1963, btw [or if it was, I forgot it in 1964]. Not everything stays the same.
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mark:
This was not in my finance course in 1963, btw [or if it was, I forgot it in 1964].
Your memory is not that bad. LIBOR was created in 1985.
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ashot:
Given that, was there any incentive to fudge the rates?
Not under normal circumstances**, but during the crisis the incentive was not so much manipulation of the average, as it was window dressing for anyone looking at the constituent parts of the average trying to make judgments about the liquidity of individual banks.
So the incentive to lie was highest at the moment that these lies were the most damaging?
Well, I’m not sure I would say most damaging. It is not entirely clear to me what actual damage was done by the (alleged!) false reporting. But yes, the incentive to report false rates was highest at a time when the false reporting was least likely to be obvious. Although I have to say that even in the midst of the crisis there were lots of rumors flying around that some banks were not reporting their funding costs honestly, so its not as though it went unknown or unremarked upon even then.
**Because LIBOR is used as a periodic rate setting on all kinds of transactions (loans, swaps, forward rate agreements, even exchange traded futures contracts), there is always an incentive for traders in these products with rate set risk to manipulate the rate, if he can. But in a market with the size, breadth and depth of the US rate market, doing so is very difficult, to the point of near impossibility, not least because for every trader that has reset risk going one way and might want to push the rate in one direction on a given day, another trader has reset risk going the other and would want to push the rate in the opposite direction. And under normal circumstances, even if he were able to push the rate advantageously, we’re talking about fractions of a basis point, not multiple basis points. Just look back at Brent’s Morning Report over time and watch the daily moves in LIBOR. It is very rare to see a multiple basis point move from one day to the next, and those are indicative of big, market moving events. Even something as big as the Greek credit crisis caused LIBOR to move from about 25 bps to over 50 bps over the course of several weeks, not a couple of days.
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