Libor is Dead - Long Live the Next Reality Shift

Widely reported have been a rash of prosecutions brought belatedly against traders for rigging Libor and indeed other benchmark rates.

Some of these prosecutions do not appear to be undeserved: “Oh bullshit, strap on a pair and jack up the [3 months Libor]”.

However, the bigger story must be how the whole financial world, banks, traders, governments and regulators subscribed to what was long termed the rate at which nobody lends, i.e. a completely fictional benchmark for over a decade, Libor “is absolute rubbish” from an exchange between a Barclays employee and the New York Fed on 24 October 2008.

So we have had the position where a vast portion of the world has traded on the basis of a rate fixed explicitly and implicitly by governments, regulators and bankers to be wholly at variance with commercial reality. It does not excuse their conduct but it is not surprising that the traders decided to push it a little bit further.

Some weeks ago Edwin Schooling Latter, Head of Markets Policy at the FCA was reported to be urging banks and other financial institutions to transition to the use of an alternative risk-free benchmark as soon as possible.

This is a decade late and I cannot help wondering what is going to replace Libor and what the present utility of Libor is.

According to Mr Schooling only two transactions take place each day in the underlying market of the six months sterling and Libor – “the most commonly used reference rate in that currency”.

What is coming next? Is the public going to be told what the real rates are at which institutions lend and borrow or is some other fiction going to be inflicted upon the public? Will there be any transparency or will it be a repeat of “nanny knows best”?

From a partially informed lay perspective I feel that I am looking at an episode from the Emperor Has No Clothes.