“Each year, the Great Pumpkin rises out of the pumpkin patch that he thinks is the most sincere. He’s gotta pick this one. He’s got to. I don’t see how a pumpkin patch can be more sincere than this one. You can look around and there’s not a sign of hypocrisy. Nothing but sincerity as far as the eye can see.” – Linus Van Pelt, It’s the Great Pumpkin Charlie Brown!
Way back in the summer of 2017, nearly four years to the day of this writing, Andrew Bailey, Chief Executive of the U.K. Financial Conduct Authority delivered a speech that shocked the financial world. Mr. Bailey, who is now Governor of the Bank of England, told us that the most important financial benchmark, Libor, was a made-up rate. Mr. Bailey informed the planet that the transactions that were supposed to feed the panel bank submissions did not exist, and not just in 2017, but were pretty much non-existent since the 2008 Financial Crisis.
Every day, the 18-panel banks were to submit a rate for U.S. Dollar, Libor, that reflected where they could borrow from another bank for reasonable market size on an unsecured basis from overnight to 12 months. This was not supposed to be a forum where the panel banks gave their daily guess on where they could borrow unsecured from another bank. It was supposed to be based on real transactions. What the world learned in the summer of 2017 was, for approximately nine years, the panel banks were simply giving their “expert opinion” because they were no longer lending unsecured to one another. Moreover, they never bothered to tell anyone.
The question that very few have asked is just what exactly the panel banks were doing to formulate their daily “expert judgments”. Since they have never really been asked what they were doing the last nine years, they have remained silent. In 2014, reacting to the scandal that involved swap traders buying lunch for the funding desk in order to entice them to increase or decrease their daily Libor submission back before the 2008 Financial Crisis, a new administrator was named, the Intercontinental Exchange or ICE. With a new sheriff in town, the submission process was improved, except for the little issue of panel banks issuing submissions every day that were based on fiction.
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