Having pointed out that Barclays was one of the least culpable banks in the understatement of Libor at the height of the liquidity crisis, I wondered how it came about that all the banks were lying at once.
I think there's a clue in the submissions data. Look at the charts for UBS, Royal Bank of Canada, and WestLB (ignoring one point that looks like an error). The deviations from Libor are tiny. It's impossible for UBS in particular that this bears any relation to its actual borrowing costs: it had reported massive losses on mortgage derivatives in 2007 and 2008 and it would have had to pay higher interest rates than Barclays. I suspect that it had little interest in borrowing in the interbank market, and wasn't getting quotes at all (or if it was, the people getting them weren't the ones responsible for BBA submissions). In that case, the Libor quotes for BBA would have been generated by phoning a few brokers and asking them where they thought the market was, not specifically for UBS. If several banks did the same thing, they would all generate very similar quotes without any sort of collusion.
My speculation is that many of the banks ignored the precise wording of the BBA question "At what rate could you borrow funds...", and answered instead the question "At what rate could a bank with good credit borrow funds..." And that they did it not as a result of any instruction from on high that they should submit low quotes, but because that was a convenient way to get the numbers. Generally it's considered poor manners to ask for a specific quote if you're not interested in trading, but quite normal to ask for information about the market.
So we could be in a bizarre situation where the banks who submitted quotes closest to the truth are deemed to be the worst liars, because they are the ones who made a conscious decision to distort the data.
Showing posts with label Libor. Show all posts
Showing posts with label Libor. Show all posts
Wednesday, 4 July 2012
The curious case of the high low submissions
One of the two charges against Barclays in the Libor fixing scandal is that during the banking crisis it submitted, on the instructions of senior management, artificially low quotes in order not to stand out as a poor credit risk by comparison with the rest of the Libor panel.
Barclays has today issued nine pages of "supplementary information", starting with a further statement of contrition. The document explains that the instruction to lower the quotes was issued by Jerry del Missier, then President of Barclays Capital, following a telephone call on 29th October 2008 between Bob Diamond and Paul Tucker, the Deputy Governor of the Bank of England. Barclays reports that there was some misunderstanding between Diamond and del Missier about exactly what Tucker had said. (This is all consistent with paragraph 176 of the FSA report.) Both Diamond and del Missier resigned from Barclays today.
Barclays' document includes a chart of its rankings relative to the rest of the panel submitting 3-month dollar Libor quotes during November 2008, at the peak of the liquidity crisis following the failure of Lehman Brothers in September that year. It was almost always the highest quote of the 16-bank panel.
The Guardian has helpfully published an interactive chart of dollar Libor up to the end of 2008. It shows that the spread to the fixing of Barclays' quotes for the 3-month rate more than halved on 30th October, and fell to zero at the beginning of December. Barclays' chart is true but not the whole truth. And James Mackintosh of the FT has this chart of sterling Libor showing a quicker and more dramatic change. (The FSA report says, somewhat opaquely, that "After 6 November 2008, changes in market conditions affected Barclays’ LIBOR submissions such that the instruction became redundant.") Nevertheless, it does seem unfair to give Barclays a kicking for this dishonesty when they were lying less than most of the rest of the panel.
The Bank of England knew in October 2008 that Libor fixings were artificially low, not just from market data but because Barclays (and very possibly other banks) were telling them so. But there's no sign that they did anything much about it. We need to know if and when the BoE took action to tell the banks to tell the truth about interbank rates. If the BoE did nothing, it seems quite reasonable for Barclays and others to suppose that the BoE was more concerned about financial stability than about accurate Libor fixings. There are many situations in life when an untruth is expected and as such not immoral. It's not clear to me that this wasn't one of them.
I repeat however that Barclays' manipulation of Libor submissions for trading advantage was truly scandalous. There's no injustice about the consequences of that.
Barclays has today issued nine pages of "supplementary information", starting with a further statement of contrition. The document explains that the instruction to lower the quotes was issued by Jerry del Missier, then President of Barclays Capital, following a telephone call on 29th October 2008 between Bob Diamond and Paul Tucker, the Deputy Governor of the Bank of England. Barclays reports that there was some misunderstanding between Diamond and del Missier about exactly what Tucker had said. (This is all consistent with paragraph 176 of the FSA report.) Both Diamond and del Missier resigned from Barclays today.
Barclays' document includes a chart of its rankings relative to the rest of the panel submitting 3-month dollar Libor quotes during November 2008, at the peak of the liquidity crisis following the failure of Lehman Brothers in September that year. It was almost always the highest quote of the 16-bank panel.
The Guardian has helpfully published an interactive chart of dollar Libor up to the end of 2008. It shows that the spread to the fixing of Barclays' quotes for the 3-month rate more than halved on 30th October, and fell to zero at the beginning of December. Barclays' chart is true but not the whole truth. And James Mackintosh of the FT has this chart of sterling Libor showing a quicker and more dramatic change. (The FSA report says, somewhat opaquely, that "After 6 November 2008, changes in market conditions affected Barclays’ LIBOR submissions such that the instruction became redundant.") Nevertheless, it does seem unfair to give Barclays a kicking for this dishonesty when they were lying less than most of the rest of the panel.
The Bank of England knew in October 2008 that Libor fixings were artificially low, not just from market data but because Barclays (and very possibly other banks) were telling them so. But there's no sign that they did anything much about it. We need to know if and when the BoE took action to tell the banks to tell the truth about interbank rates. If the BoE did nothing, it seems quite reasonable for Barclays and others to suppose that the BoE was more concerned about financial stability than about accurate Libor fixings. There are many situations in life when an untruth is expected and as such not immoral. It's not clear to me that this wasn't one of them.
I repeat however that Barclays' manipulation of Libor submissions for trading advantage was truly scandalous. There's no injustice about the consequences of that.
Saturday, 30 June 2012
Libor Fixing
Barclays has been fined heavily by regulators in the USA and the UK for manipulating Libor fixings, and other banks are under investigation. I've read a fair bit about how shocking the disclosures have been: I'll seek to clarify here what is and what isn't a surprise.
Libor stands for the London Interbank Offered Rate. It is supposed to be "The rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting interbank offers in reasonable market size, just prior to 11.00am London time". It's produced by the BBA (British Bankers' Association) for ten major currencies with fifteen maturities in each, from overnight to one year. It's calculated every business day by asking each member of a panel of banks what rate it could borrow at, eliminating the upper and lower quartiles, and averaging the others. There are currently 18 members of the largest panel (for US dollar rates) and six for the two smallest (for Swedish Krona and Danish Krone), so a bad quote from one member of the panel will have a small but not zero effect on the calculated rate unless both the bad and the true quote fall in the same extreme quartile.
Bob Diamond, the Barclays Chief Executive, who seems to have been relaxing with his money while the wrongs were being done, has written to the chairman of the House of Commons Treasury Select Committee to explain in outline what happened. There were two sorts of manipulation: the first went on between 2005 or earlier (the investigation goes back to 2005) and 2008, and involved Barclays' submissions to the BBA being adjusted to suit the position of the trading book - if the book was a net payer of a particular rate, Barclays would submit a low quote, and vice versa. This is truly shocking, the more so in that the traders involved seemed to have been utterly brazen in the emails they sent about it - there seems to have been no sense that they were doing anything improper. Diamond's excuse is that only relatively junior traders were involved in this abuse, but it's elementary that the BBA submission process should have been entirely isolated from trading considerations, and it's a management failing that this was not the case.
The second manipulation occurred during the banking crisis between 2007 and 2009, when Barclays submitted artificially low quotes in order not to stand out as a poor credit risk. Diamond's excuse is that they did it because the other banks were doing it and they would have looked bad by comparison if they hadn't.
Whatever the truth of the excuse, no one who's been paying attention, and certainly not the British Chancellor of the Exchequer, should be surprised to learn that banks were quoting artificially low rates. The Wall Street Journal published reports to that effect in April and May 2008, following a cautious investigation by the Bank for International Settlements (pp59-72 here) which found "Little evidence of manipulation".
The clearest evidence that Libor rates have been unrealistic comes from cross-currency basis swap spreads. These swaps allow one to synthesize a floating-rate loan in one currency from a floating-rate loan in another currency. If banks could borrow freely at Libor in both currencies, the spreads would be close to zero. But here's a chart I created in 2009 for a conference presentation that touched on the subject:
The red line is the cost of borrowing in Euros at the Euribor rate - a rate similar to Libor but calculated by the European Banking Federation. The green line is the cost of borrowing in dollars and using a basis swap to convert the loan into euros. The separation between the two lines, which appears in August 2007 and spikes in November 2008 tells us that one or both of the rates is wrong - in fact it's the dollar rate which is artificially low. If banks could really have borrowed at dollar Libor they would have done that in preference to borrowing at Euribor, but they couldn't. It may be relevant that the Euribor panel is asked a slightly different question - what rate do they think one bank could borrow from another at, rather than what rate could they themselves borrow at. So it is less embarrassing for them to quote a relatively high rate.
Who has been damaged by all this? Diamond claims about the first manipulation that "The interventions in question were typically on the short term one and three month rates relevant to the wholesale markets and not the longer term rates used to set, for example, retail mortgages". I suspect that's inaccurate. Only a small proportion of mortgages use Libor contractually to set their rates, but my brief investigation suggests that in the UK the ones there are mostly use three-month Libor. All the same, my guess is that most mortgage holders will have profited overall from the manipulations, since they kept rates artificially low during the banking crisis. On the other side, any institution which was issuing Libor-based mortgages during 2008 should have been aware of the problems with the numbers and ought to have widened their spreads to compensate. Thus the people with a genuine grievance ought for the most part to be the Barclays' market counterparties who lost out when the fixings were manipulated to suit Barclays' trading book. I don't know how eager they'll be to sue, but I'm sure there will be plenty of lawyers with the whiff of money in their nostrils to encourage anyone with any sort of a claim to have a go.
Update: I recommend this post by Frances Coppola, which includes quotes from the FSA report setting out exactly what Barclays was up to.
Libor stands for the London Interbank Offered Rate. It is supposed to be "The rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting interbank offers in reasonable market size, just prior to 11.00am London time". It's produced by the BBA (British Bankers' Association) for ten major currencies with fifteen maturities in each, from overnight to one year. It's calculated every business day by asking each member of a panel of banks what rate it could borrow at, eliminating the upper and lower quartiles, and averaging the others. There are currently 18 members of the largest panel (for US dollar rates) and six for the two smallest (for Swedish Krona and Danish Krone), so a bad quote from one member of the panel will have a small but not zero effect on the calculated rate unless both the bad and the true quote fall in the same extreme quartile.
Bob Diamond, the Barclays Chief Executive, who seems to have been relaxing with his money while the wrongs were being done, has written to the chairman of the House of Commons Treasury Select Committee to explain in outline what happened. There were two sorts of manipulation: the first went on between 2005 or earlier (the investigation goes back to 2005) and 2008, and involved Barclays' submissions to the BBA being adjusted to suit the position of the trading book - if the book was a net payer of a particular rate, Barclays would submit a low quote, and vice versa. This is truly shocking, the more so in that the traders involved seemed to have been utterly brazen in the emails they sent about it - there seems to have been no sense that they were doing anything improper. Diamond's excuse is that only relatively junior traders were involved in this abuse, but it's elementary that the BBA submission process should have been entirely isolated from trading considerations, and it's a management failing that this was not the case.
The second manipulation occurred during the banking crisis between 2007 and 2009, when Barclays submitted artificially low quotes in order not to stand out as a poor credit risk. Diamond's excuse is that they did it because the other banks were doing it and they would have looked bad by comparison if they hadn't.
Whatever the truth of the excuse, no one who's been paying attention, and certainly not the British Chancellor of the Exchequer, should be surprised to learn that banks were quoting artificially low rates. The Wall Street Journal published reports to that effect in April and May 2008, following a cautious investigation by the Bank for International Settlements (pp59-72 here) which found "Little evidence of manipulation".
The clearest evidence that Libor rates have been unrealistic comes from cross-currency basis swap spreads. These swaps allow one to synthesize a floating-rate loan in one currency from a floating-rate loan in another currency. If banks could borrow freely at Libor in both currencies, the spreads would be close to zero. But here's a chart I created in 2009 for a conference presentation that touched on the subject:
The red line is the cost of borrowing in Euros at the Euribor rate - a rate similar to Libor but calculated by the European Banking Federation. The green line is the cost of borrowing in dollars and using a basis swap to convert the loan into euros. The separation between the two lines, which appears in August 2007 and spikes in November 2008 tells us that one or both of the rates is wrong - in fact it's the dollar rate which is artificially low. If banks could really have borrowed at dollar Libor they would have done that in preference to borrowing at Euribor, but they couldn't. It may be relevant that the Euribor panel is asked a slightly different question - what rate do they think one bank could borrow from another at, rather than what rate could they themselves borrow at. So it is less embarrassing for them to quote a relatively high rate.
Who has been damaged by all this? Diamond claims about the first manipulation that "The interventions in question were typically on the short term one and three month rates relevant to the wholesale markets and not the longer term rates used to set, for example, retail mortgages". I suspect that's inaccurate. Only a small proportion of mortgages use Libor contractually to set their rates, but my brief investigation suggests that in the UK the ones there are mostly use three-month Libor. All the same, my guess is that most mortgage holders will have profited overall from the manipulations, since they kept rates artificially low during the banking crisis. On the other side, any institution which was issuing Libor-based mortgages during 2008 should have been aware of the problems with the numbers and ought to have widened their spreads to compensate. Thus the people with a genuine grievance ought for the most part to be the Barclays' market counterparties who lost out when the fixings were manipulated to suit Barclays' trading book. I don't know how eager they'll be to sue, but I'm sure there will be plenty of lawyers with the whiff of money in their nostrils to encourage anyone with any sort of a claim to have a go.
Update: I recommend this post by Frances Coppola, which includes quotes from the FSA report setting out exactly what Barclays was up to.
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