Monday, July 9, 2012

Does Rigging the Libor Matter – Very Doubtful

There has been no end of song and dance coupled with the predictable “told ya so” stuff from the hate bankers brigade over the so called rigging of the Libor. Jobs have been lost, mud has been flung, and prejudices confirmed.

The unimaginative hypotheses that “there are crooks in every business” and when the stakes are bigger the supply of crooks increases, have not been rejected.

But does it matter? Has any damage been done? If so who or what has suffered?

As with most economic issues, when analysing “rigging” two things are worth bearing in mind. First it pays to think beyond “round one” (rigging went on from at least 2005 till 2009) and, secondly, many apparent windfall gains or losses turn out to be zero sum games.

Market rigging is a competitive sport. As we have seen from the disclosures there was plenty of it, it was reasonably frequent and it is a safe assumption that more than a couple of the “riggers” knew there were other “riggers” who would be next up with the rigging.

One could – along with one’s bank – find oneself in the role of rigger or riggee.

Result? Because there might be money to be made with up or down rigging and there was competition it is difficult to see how sustained, systematic misallocation could occur. That may be why there was never sufficient evidence of systematic distortion as to uncover and confirm until various emails surfaced.

For sure the rules were trampled all over in the hope of systematic gain, and the assertions regarding objective benchmarking can be shown to be so much piffle but systematic material misallocation seems unlikely  - especially over any length of time.

So much for efficiency effects then. What about equity effects? Again over time it seems unlikely because of the competitive nature of the markets involved and the potential to gain and lose either through over or under specification of the rate.

Could specific instances of damage be identified? Absolutely – but users of Libor benchmarks are consistent and persistent investors and traders thus long run average outcomes  are what counts.

The key protection for the economy then is simply that some days you’re the windscreen and some days you’re the fly.

My colleague the Cactus has done a fine job analysing the (now) former Barclay’s CE trial by summons. His testimony is neither that of a crook nor a pimp.

All well and good then – but should we tolerate this type of behaviour and the types who persist in it? The answers are banal and ought not to carry too strong a whiff of the presbytery.

Breach of trust and good faith almost always leads to undesirable outcomes  and in this case the erosion of confidence, the fuelling of doubt and the betrayal of fellow professionals – and that in these most difficult of times – is unpardonable.

More interestingly there are better ways to have the function performed. A random number drawn from a published band would – given the efficiency of markets described above – serve better as well as being transparent and low cost.

This is one situation where it might be difficult to be “fooled by randomness” – to set Taleb’s book title to a different purpose.

Brent

2 comments:

  1. Good comment. No question there has been some "frigging in the rigging" but the whole concept of Libor as set by the behaviour of a small club is pretty odd in these times.

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  2. yes 'there is nothing good or bad only thinking makes it so'...of course its logical to assume that in NZ and Aust ,Govt bond tenders are rigged too.!

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