Libor, long the biggest number in finance, dies at 52

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The London Interbank Offered Rate, a number that has spent decades as a central force in international finance and has been used to set interest rates on everything from mortgages to student loans, is dead after a long battle with regulators. He was 52.

Known as Libor, the benchmark interest rate index once underwent more than $ 300 trillion in financial contracts, but was canceled after a multi-year market-rigging scandal erupted in 2008. It turned out that the bankers had coordinated to manipulate the rate, pronounced “LIE-bore”, by skewing the number up or down for the gain of their banks.

Libor could no longer be used to calculate new trades as of December 31 – more than six years after a former UBS trader was jailed for his efforts to manipulate him and others were fired, charged or acquitted . Global banks including Barclays, UBS and Royal Bank of Scotland ultimately paid more than $ 9 billion in fines for setting the rate to their own benefit.

Randal Quarles, then Federal Reserve Vice Chairman for Oversight, gave scathing praise in early October, saying Libor “was not what it claimed to be.”

“It purported to be a measure of the cost of bank funding in London money markets, but over time it became more of an arbitrary and sometimes self-serving announcement of what the banks just wished to charge,” Mr Quarles said.

While regulators and central bankers were relieved by his departure, Libor will be mourned by many bankers who have used it to determine interest rates on all kinds of financial products, from various types of mortgages to bonds. .

“There aren’t many corners of the financial market that Libor hasn’t hit,” said Sonali Theisen, head of fixed income e-commerce and market structure at Bank of America. Even so, she said, getting rid of it was “a necessary surgical removal of a vital organ.”

Libor was born in 1969 to Minos Zombanakis, a Greek banker. The Shah of Iran, Mohammed Reza Pahlavi, wanted an $ 80 million loan, and Mr. Zombanakis was prepared to give it. But the question of the rate of interest to be applied to a sovereign was a delicate one. So he looked at the rate that other well-heeled borrowers – the London banks – would pay to borrow from each other.

In its early years, Libor was a growing but still adolescent rate, used for a steadily increasing number of contracts. In 1986, at the age of 17, he struck the big blow: Libor was taken over by the British Bankers Association, a business group later described by the New York Times as a “gentleman bankers club.”

In fact, they made it the basis of almost everything they did. Libor was the rate of interest that the banks themselves had to pay, so it provided a convenient basis for the rates they charged customers who wished to borrow money to buy a house or issue a security to finance the debt. expansion of a business.

Libor has become a figure built into almost all calculations involving financial products, from the smallest to the most exotic. UK banks have used it to set loan rates across the industry, whether denominated in dollars, pounds sterling, euros or Japanese yen. Never before had there been such a benchmark, and the daily movements of Libor were the very heart of international finance.

But as Libor approached middle age, troubling health issues began to emerge.

In 2008, regulators in the United States and Britain began to receive reports that the banks’ rate reports were in error. Since Libor relied on self-reported estimates, it was possible for a bank to charge an artificially high or low rate, thereby making certain financial holdings more profitable.

Soon, media reports cast doubt on Libor’s integrity, and investigators finally uncovered a glaring fault in the tariff-setting process. In an email published by regulators in 2012 as part of a Barclays investigation, a trader thanked a banker at another firm for setting a lower rate, saying, “Dude, I owe you a lot! Come a day after work and I open a bottle of Bollinger ”- a reference to the Champagne producer.

The scandal made international headlines, from the Financial Times to the Wall Street Journal to the New York Times. Before long, Libor was the butt of jokes on “The Daily Show”.

Global regulators have called for an end to Libor, saying it is potentially inaccurate and vulnerable to manipulation. Andrew Bailey, then managing director of a major UK banking regulator, the Financial Conduct Authority, sounded the death knell in 2017 when he said it was time to “seriously start planning the transition to alternative benchmarks “.

The banking industry – which for decades built trading systems around Libor – has clung to it, despite the grim prognosis. Many bankers dragged their feet to make the necessary changes as Libor was thus widely used in the financial system, prompting exasperated speeches from officials tasked with removing the rate completely.

“Deniers and laggards engage in magical thinking,” Quarles said in June. “The Libor is over”.

Not exactly, however. Libor was still viable until the end of the year, and some bankers continued to use it to secure leveraged loan deals until its dying hours. These and other existing contracts mean that Libor will exist in some sort of zombie state until they too come to an end.

Mr Quarles, perhaps reluctant to speak ill of the dead, said on Tuesday that Libor problems were not necessarily insurmountable. “You hit the people who did the manipulation and say, ‘Don’t do it again’ and then you move on,” he said. “You don’t need to rebuild the highway if people are accelerating. “

Even so, he said, the days of Libor are over, “and luckily the market has moved on. “

The Libor is survived by several successors, each claiming their crown.

The Secure Overnight Funding Rate, or SOFR – a rate produced by the Federal Reserve Bank of New York that is based on transaction data, not estimates – has already been adopted by many banks in the United States. United and backed by the Fed. Others, like the American Interbank Offered Rate, or Ameribor, and the Bloomberg Short-Term Bank Yield Index, or BSBY, have their followers. In Britain, the Sterling Overnight Index Average, or SONIA, seeks to inherit the Libor place as a benchmark to do everything.

J. Christopher Giancarlo, a board member of the American Financial Exchange, which calculates Ameribor, said Libor was once a “giant”. It was, he said in an interview, the foundation of a system that gave everyone in the financial hierarchy a way to take their part.

“The problem with Mr. Libor is, for a while, that he had it all,” said Mr. Giancarlo, the former chairman of the US Commodity Futures Trading Commission. Libor was once “on top of the world”, he said, but has grown into an “unsavory, faltering old geezer in the end.”

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