{"id":5273,"date":"2012-07-12T06:00:38","date_gmt":"2012-07-12T10:00:38","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5273"},"modified":"2018-09-21T02:04:19","modified_gmt":"2018-09-21T06:04:19","slug":"understanding-the-libor-scandal-recommended-reading","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2012\/07\/12\/understanding-the-libor-scandal-recommended-reading\/","title":{"rendered":"Understanding the LIBOR Scandal: Recommended Reading"},"content":{"rendered":"<p><span style=\"font-size: 16px;\">The scandal surrounding LIBOR, the London Interbank Offered Rate, continues to sweep through global finance\u00a0\u2014 so much information, so little time for investment professionals to assess the facts.\u00a0 Lost in the\u00a0scandal discussion the last several years are the invisible costs of numerous investment professionals that used LIBOR as the basis of their costs of capital and all of the decisions made based on a faked rate.\u00a0 Ouch!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Here are some recommended reads to help you home in on the essentials of this still-unfolding imbroglio concerning the global benchmark:<\/span><\/p>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Penalties<\/strong>:\u00a0<a title=\"EU Fines Financial Institutions Over Fixing Key Benchmarks\" href=\"http:\/\/online.wsj.com\/news\/articles\/SB10001424052702304451904579237570439505400?mod=WSJAsia_hpp_LEFTTopStories\">Fines were finally assessed<\/a> by a\u00a0regulator (EU)\u00a0for LIBOR manipulation to the tune of \u20ac1.71 billion. Not small change, but not proportionate to damages either. Makes me want to holler!<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Rate<\/strong>: In \u201c<a title=\"How LIBOR Affects Rates on Loans | WSJ.com\" href=\"http:\/\/online.wsj.com\/article\/SB10001424052702303684004577506944119336650.html?mod=wsj_share_tweet\">How LIBOR Affects Rates on Loans<\/a>,&#8221; the <em>Wall Street Journal<\/em> provides a good primer on Libor and its role in the global economy.<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Scandal<\/strong>: In \u201c<a title=\"The Rotten Heart of Finance | Economist.com\" href=\"http:\/\/www.economist.com\/node\/21558281\">The Rotten Heart of Finance<\/a>,\u201d the <em>Economist<\/em> provides a foundational overview of the major details of the scandal, its importance to global markets, and a description of possible ramifications.<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Story<\/strong>: If you are to read only one piece about the scandal this <a title=\"Secret Libor Transcripts Expose Trader Rate-Manipulation\" href=\"http:\/\/www.bloomberg.com\/news\/2012-12-13\/rigged-libor-with-police-nearby-shows-flaw-of-light-touch.html\">comprehensive overview of the LIBOR scandal by Bloomberg<\/a> is brilliantly written and very in-depth. Grab your air sickness bag.<!--more--><\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Size<\/strong>: In \u201c<a title=\"The Law Catches Up with Libor | Guardian.co.uk\" href=\"http:\/\/www.guardian.co.uk\/law\/2012\/jul\/04\/regulating-libor-law\">The Law Catches Up with LIBOR<\/a>,\u201d a writer for the <em style=\"padding-bottom: 3%;\">Guardian<\/em> newspaper says that up to $250 trillion of SWAPs use LIBOR as a reference rate.<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Scope<\/strong>: CNBC recently weighed in with its \u201c<a title=\"Rate Fixing Scandal Is International: EU\u2019s Almunia\" href=\"http:\/\/www.cnbc.com\/id\/48068669\/ \">Rate Fixing Scandal is International: EU\u2019s Almunia<\/a>,\u201d in which Joaqu\u00edn Almunia, EU Commissioner for Competition, speculates about the possible scope of the unfolding scandal.<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>Some Alternatives<\/strong>: In \u201c<a title=\"Barclays Rate-Fixing Scandal: Libor Alternatives Analysed\" href=\"http:\/\/www.iflr.com\/Article\/3058468\/Regulatory\/Barclays-rate-fixing-scandal-Libor-alternatives-analysed.html\">Barclays Rate-Fixing Scandal: LIBOR Alternatives Analysed<\/a>,\u201d the <em>International Financial Law Review<\/em> asked lawyers in the United Kingdom, Europe, and the United States about alternatives to Libor. Interestingly, 90% of the attorneys polled by the publication said that the Libor probe should not mark the end for this benchmark rate. As one respondent put it, &#8220;If Boeing and Airbus were found to be colluding on jet aircraft prices, would we abolish jet aircraft?&#8221;<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>What\u2019s Still Missing<\/strong>: When I managed a mutual fund, I used LIBOR as one of my benchmark rates for valuing securities. So in addition to all of the contracts around the world that explicitly use LIBOR in their calculations of value, there are <em>trillions of dollars of decisions<\/em>, essentially hidden from view, that have been made based on a consciously manipulated number. Yikes!<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>Assessing Damages:<\/strong> Not surprisingly, market participants (and their lawyers) have quickly turned their attention to quantifying the value in the form of damages. In &#8220;<a title=\"Wall Street Bank Investors in Dark on Libor Liability | Bloomberg.com\" href=\"http:\/\/www.bloomberg.com\/news\/2012-07-05\/wall-street-bank-investors-in-dark-on-libor-liability.html\">Wall Street Bank Investors in Dark on LIBOR Liability<\/a>,&#8221; Bloomberg interviews several attorneys, including one who contends that Barclays&#8217;s liabilities alone could range from the &#8220;hundreds of millions into the billions.&#8221; Another attorney says that bank industry liabilities on the whole could well run into the tens or hundreds of billions of dollars if lenders are found liable. For more particulars on the lawsuits, and the challenge of proving damages, read <em>Dealbook<\/em>&#8216;s &#8220;<a title=\"Rate Scandal Stirs Scramble for Damages | Dealbook.NYTimes.com\" href=\"http:\/\/dealbook.nytimes.com\/2012\/07\/10\/libor-rate-rigging-scandal-sets-off-legal-fights-for-restitution\/\">Rate Scandal Stirs Scramble for Damages<\/a>.&#8221;<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Still Unfolding Aftermath:<\/strong> A <a title=\"Fast LIBOR reform 'risks causing chaos'\" href=\"http:\/\/www.ft.com\/intl\/cms\/s\/0\/b805fa0a-fb40-11e1-a983-00144feabdc0.html#axzz26Mu6mMBF\"><em>Financial Times<\/em> piece quotes numerous investment community sources that feel reforming LIBOR too quickly may do more harm than good<\/a>. Among those questioned, most felt that LIBOR needed reform, not replacement, because retooling $300 trillion worth of contracts would be too disruptive to the global financial system.<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Proposal for Change:<\/strong> The person in charge of reforming Libor, Martin Wheatley, announces <a title=\"Dual-Track Libor Replacement Lined Up | Financial Times\" href=\"http:\/\/www.ft.com\/intl\/cms\/s\/0\/27c4a71a-b892-11e2-a6ae-00144feabdc0.html#axzz2TB2jYzdZ\">the likely successor to the old Libor method<\/a>.<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>The Consequences:<\/strong> US and British <a title=\"Criminal Cases Loom in Rate Rigging | Wall Street Journal\" href=\"http:\/\/online.wsj.com\/article\/SB10001424127887324069104578529090178698664.html?mod=WSJ_hp_LEFTWhatsNewsCollection\">regulators bring charges against employees of Barclays<\/a>. Are more prosecutions to follow?<\/span><\/li>\n<\/ul>\n<ul style=\"margin-left: 5%;\">\n<li><span style=\"font-size: 16px;\"><strong>CFA Institute Members&#8217; Feelings<\/strong>: In <a title=\"CFA Institute LIBOR Survey Report (PDF)\" href=\"http:\/\/www.cfainstitute.org\/Survey\/libor_survey_report_final.pdf\">a poll of CFA Institute members about LIBOR<\/a>, 70% felt that the submission process should become a regulated activity. Additionally, 56% felt that LIBOR should be determined by an objective, market-based system rather than by a subjective consensus of estimates made by individual banks.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span style=\"font-size: 16px;\"><a href=\"http:\/\/www.cfainstitute.org\/Survey\/libor_survey_report_final.pdf\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-large wp-image-8225\" title=\"Survey: Which one of the following options do you believe to be the most appropriate methodology for the setting of LIBOR?\" src=\"http:\/\/blogs.cfainstitute.org\/investor\/files\/2012\/07\/Libor-survey-1024x626.png\" alt=\"Survey: Which one of the following options do you believe to be the most appropriate methodology for the setting of LIBOR?\" width=\"584\" height=\"357\" \/><\/a><\/span><\/p>\n<p style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\"><em><strong>Note:<\/strong> This piece originally ran 12 July 2012 but is frequently updated to reflect events still unfolding. Last updated 4 December 2013.<\/em><\/span><\/p>\n<p style=\"font-size: smaller;\"><span style=\"font-size: 16px;\">Photo credit: \u00a9iStockphoto.com\/hatman12<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-size: 16px;\"><em>Originally published on CFA Institute\u2019s \u00a0<a href=\"https:\/\/blogs.cfainstitute.org\/investor\/\">Enterprising Investor<\/a>.<\/em><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The scandal surrounding LIBOR, the London Interbank Offered Rate, continues to sweep through global finance\u00a0\u2014 so much information, so little time for investment professionals to assess the facts.\u00a0 Lost in the\u00a0scandal discussion the last several years are the invisible costs of numerous investment professionals that used LIBOR as the basis of their costs of capital [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":5274,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[96,141,142,143],"class_list":["post-5273","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-the-blog","tag-banking","tag-libor","tag-scandals","tag-trading"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5273","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=5273"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5273\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media\/5274"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=5273"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=5273"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=5273"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}