Over the past 48 hours, two significant posts crossed my desk. The first was the news that 4 of the 6 cabal members charged in the LIBOR manipulation scandal were found not guilty. These were brokers who were on trial for a specific charge of working in agreement with Tom Hayes. The case was poorly constructed and the verdicts fell. The public story that Mr. Hayes was responsible for, or the lead agent in, the largest financial scandal in history is a dummed-down version of reality. The truth is, for those of us that were there, the entire market was a ramp up of a change in the reporting set that regulators were too inane to understand, The "OR" in LIBOR stands for "offered rate." The original set was based on the reporting and averaging of submissions of the rate at which one was offered money. As bid/ask spreads collapsed and the rate structure became the benchmark (remember that term) for the global financial system, the cabal asked for-and was granted - the right to submit the rate at which they would borrow money. The difference between "would" and "could" went from minimal to unavailable as the crisis unfolded.
Yesterday, the brilliant mortgage specialist Harley Bassman, now at a small west coast FI firm called PIMCO, penned an excellent piece on the global financial system "benchmark rate." And the winner was?? You guessed it, the sullied reputation. now rarely mentioned rate at which banks don't borrow from one another, LIBOR. Its a great piece and takes pains to differentiate between "risk free" and "benchmark" and open your mind to a possibility. Go read it,
The irony of these 2 stories crossing my stream on consecutive days is not lost on a semi-reclusive former player in the above mentioned mud. Beside the court's inability to prosecute a known crime successfully is the post-crisis understanding that pulling the curtain back on systemic fraud brings scary and systemic litigations. However, I am pleased to see a respected player posit the notion that the rate remains - with all its tarnish - the proper global benchmark to calibrate by. In fact, I have calibrated my concept of the neutral FF rate by it for decades. Sovereign, GSE and corporate risk can be better understood through this "cartel formed" rate, Negative swap spreads are not as difficult a phenomenon to grasp.
Here's my take: The global financial system is benchmarked to a myth. A ghost rate. A rate that exists only in the minds of the participants that in their most private moments know they could not fund at. A rate that were it to quake governments from developed and mercantilist nations would jump to stabilize. The global term structure of rates is based on a sanctioned fraud. But somehow it works.