LIBOR

It strikes us that recent reports of interbank rate rigging in London are akin to the occasional falderal over prime rate changes on our shores when inflation heats up, as both rates become base numbers used in calculating arrays of other important interest rates.  Here, each bank sets its own prime rate, even though that percentage always ends up being the same for all the institutions at any one point in time.  When this number changes, who goes first in announcing their update has always been a big deal, and how that’s done, kind of ceremonial.  We remember an era when Fallutin National had the honor all to itself, and also times when Sillybank alternated with them.  God knows what the boys in London have been doing.


Our prime rate, interest banks charge on their safest commercial loans, is set arbitrarily by humans, however the number has to be tied to at least one public market - what those same high-quality corporate bank customers would have to pay if issuing paper to investors instead of borrowing from a financial institution.  When we worked at Fallutin National, the bank’s Senior Lending Committee came up with Fallutin’s prime based on quantitative analysis, and we knew the quant who cranked out the analysis.  We asked him how he went about it inside his actual quantitative analysis think tank one day.


           Didn't seem like much of a think tank, if you want our opinion.  Looked just like the cubicle we sat in, to be honest with you.


Guy was fresh out of the University of Chicago, this shiny new PhD thing propped up atop the quantitative analysis file cabinet, and his job, though a great honor, had turned out to be disappointingly simplistic.  The bank gave him what were basically forms to fill out, pre-printed spreadsheets and graph paper they’d been using for years, and for starters, U of Chicago just tagged current entries onto the historical record running down his columned sheets.  His analysis consisted mostly of spreads – the difference you get subtracting one figure, say the yield on 90 day US Treasury Bills, from another, like the return on a 90 day Fallutin National Certificate of Deposit, as well as spreads of those spreads, and to finish up the quantitative analysis, U of Chicago extended historical charts of spreads by penciling in dots on his bank graph paper.  Each committee member seemed to have a pet stat, and the pack of them drove the harried PhD nuts when everybody had to know what his number was – and right now - in the middle of a trading day.


There were economic entries to be made too, but those things came out weekly, monthly, or quarterly, maybe one or two at a time, so posting them was no big deal, and he took that stuff to be more of a relevant sideline as his market stats were fluid, changing by the minute sometimes, and demanded rapt attention.


U of Chicago followed mostly shorter and intermediate term interest rates over matching maturities on things like treasury bills, commercial paper, banker’s acceptances, certificates of deposit, as well as some longer rates tied to core issues.  It wasn’t all that sophisticated really, just thorough.  Whenever the numbers spoke to him inside his little quantitative analysis think tank, U of Chicago would dash down the corridor with his quantitative analysis briefcases to tell his VP, and VP and him would dash to the corner office to tell their Senior VP, and Senior VP, VP, and him would elevate up many levels to tell their Executive VP to call a committee meeting, which was kind of cool as those committee jocks were the CEO and them, hotshots all.  Otherwise, the committee got together at scheduled intervals to discuss the general interest rate environment and such, and U of Chicago schlepped his quantitative analysis briefcases along for discussion and personal harassment whenever bank politics broke out, which was always.


Occasionally, committee jocks would have to meet several times a day, or even more often than that, staying met all day too sometimes, kind of on permanent conference call alert, when they wanted to pull the trigger but couldn’t quite get up the stones to just go ahead and do it.


Near as we can tell, the main difference between that process and whatever was going on with this Libor thing points us toward the central banker.  That would be the dickhead ringing each financial institution up on the telly, letting everybody know what everybody else was doing, and chasing strays back into the herd.


Why?


That’s the question we’d like answered, and we haven’t run across anything that would help us enlighten you on the matter.  We’ll go out on a limb here, though, and guess it’s the derivatives.  There weren’t any back in the day.  Not in play anyway when we were enwageslaved at Fallutin National and chatting up U of Chicago.


Derivatives.  Stuff’s pure gambling for at least one side of each and every transaction, and both sides of most, though they tell us laying off your bets here somehow isn’t at all like laying off your bets in acknowledged casino bookmaking.


Derivatives.  Tiny little moves get leveraged into great big humongously gigantic winnings.


Derivatives.  It’s the onliest thing we can come up with that explains the need for that darn telly.


Derivatives.  If Libor really was just another derivatives crapshoot, we all know who got ripped off – you, me, and the Icelanders of the world.  So you, me, and the rest of the suckers have got to hope that somebody takes a real close look at the credit default swaps, or whatever that table was called in this one, because …


We gotta be there when that somebody fingers the winning highrollers.