Question – what is the difference between:
a bond holder who holds a 90 day commercial note
a saver who holds a 90 day certificate of deposit Because from an accounting viewpoint there is almost no difference – they have both lent money to the bank. I am not saying that equity and bond holders should not get stuffed – they should – just saying you may want a more nuanced line for the bond holders.
During the financial crisis the government bought a huge bunch of distressed securities. When you do that the law of averages says some will go up – and some will go down. Sure, we made a profit on AIG – but we are going to lose money on GM.
IIRC, from a year ago, projections were that TARP was going to lose billions – worse than expected. Hard to tell because most of the stuff left in TARP is illiquid so who knows what the price is – but the prospects are not good.
When you deposit money into a savings account do you consider yourself an investor in the bank? Because in a very real way you are – you are giving them a short term (a.k.a. demand deposit) floating rate loan.
O.K. you say – deposit are covered by FDIC insurance up to 250k – which is not as good as you think. That’s less than most business bi-weekly payroll. And well – you could be unlucky. IIRC during the financial crisis a month had just deposited the life insurance check from her son that had been killed in Afghanistan the day before a bank went bust.
Banks are special. They network the entire economy together. A failure of trust can lead to bank runs and the failure of the whole network. (By the way, I am not saying the owners & investors should get off free – I think they got off to lightly – just saying there is some depth to this conversation.)
And, to put a slightly finer point on this, we are (mostly) not talking about banking but using phone minutes as an alternative currency. As long as you know the other party’s phone number you can transfer minutes – you can be outside the country so you don’t have to worry about exchange rates – neither party needs a bank account, etc.
Define “Hack”. Are not investigative journalist suppose to investigate? Unearth buried and unpleasant truths? Being a “hack” used to be slang for being a journalist. A low class one interested in sensationalist stories, but still...
This is China - the lines between government, party, industry, and politician are a bit blurred. For example, IIRC, the Army reports to the party - not to the government. Elections are limited and managed. etc.
Your missing the point. The fact is that somebody is hacking into the paper to figure out who the journalist's sources are.
So, it's not the average Chinese citizen trying to read the paper – it's about finding who the journalist are, what their sources are, etc – the stuff a government would need to harasses and shut down the people who are leaking the data.
These newspapers have been reporting embarrassing things. Like members of the Communist Party and their family members have vast wealth – implying that this wealth is coming from inside contacts and use (or abuse) of official power. The Communist Party would be interested in who is leaking the details.
Let me throw out an issue – may you have thought about it and can give me some clue.
Western nomenclature is given_name family_name. Eastern is flipped. Having a standard convention helps decode who you are talking to. If Kim is the given name then the probably female. If Kim is the last name then, well, 50/50 chance.
But at least when I pick up the phone I can chose to be formal (using the family name) or informal (using the given name.)
Your proposal breaks that convention so we lose information. Any idea on how to get that back?
I think you might be thinking of “core CPI”. That is CPI striped of food and energy. The theory being that draughts will happen and wars in the Middle East will happen – that the very nature of these commodities are volatile. The idea is to break up CPI to determine what is happening – are we experiencing a supply shock – prices are going up because supply is affect – or are we experiencing monetary inflation – i.e. too much cheap money flowing into the system. Of course, if you exucled too many goods the “core index” becomes worthless.
Also, CPI as a proxy for inflation. That is, you are trying to measure the utility of 2 baskets of goods – which is personal, subjective, and ordinal - separated by time. As such CPI will always overstate inflation – it is why there are adjustments. One of the issues is the substitution effect. Back in the 60s gasoline was a larger part of the CPI basket. With higher prices consumers have substituted other goods. More fuel efficient cars, home entertainment system instead of a cross country car trip, etc. I am not saying there is not an impact, just the some of the impact is mitigated If gas prices increase CPI by 10% all you can say is that inflation is somewhere between 0% and 10%. (in the short run probably close to 10%)
As for the Filet versus t-bone for example – consider the wealth effect. Back in the 60’s the CPI assumed we spent 30% of our income on food. Today it’s closer to 15%. However, we actually spend more today on food, inflation adjusted. What is happening is that people are swapping out Spam (the meat) for steak. Over 40 years the basket of consumer goods has changed.
You are right about the presure. British regulators pressured some British banks to lowball LIBOR making them look stronger than they were. If a bank looks weak that could trigger a bank run, causing the bank to collapse, and requiring a bail out from the British government.
The actual millions in illegal trading profits would have been chump change against the potential billions that could have been lost caused if the bank had collopased - which is why we are coming to different conclusions.
Having zero percent inflation implies that raw input costs, productivity, and customer preferences are fixed and do not change. So theoretically impossible. From the practical side (via price controls) it has led to disaster.
Deflation shifts wealth to people who hold bonds and away from productive assets and poor people.
High inflation discourages long term investments and prevents poor people from saving.
So, low consistent inflation does the least harm – and I would argue does some good. Encourages people to put their money to work in productive ways instead of just sitting in the mattress.
But that’s not the case here. If RBoS was providing bad data because they were incompetent, lazy, or they were just guessing because things where in chaos – that is one thing. Deliberately proving false market date to manipulate the market for gain – that is something else and that is what happened here.
Does anyone know estimates of how much they profited monetarily from this in comparison to the fines?
No - not yet and maybe never.
Part of the reason it is really hard to pin down the costs. Calculating the trading desk’s profit is easy – and is the smallest part. A lot of the profit will spill over the banks cost of capital – these secondary effects are harder to calculate.
Secondly, most of the profit / loss were born by 3rd parties who had nothing to do with the RBoS. i.e. Party A and B entered into a contract based on LIBOR and had no interaction with RBoS. Some days RBoS nudge LIBOR up, on other days down.
RBoS was only 1 of 18 people polled so figuring out their contribution is hard. RBoS was not the only bank fixing the numbers. Etc.
Untangling the mess is going to be hard – but don’t worry – there are class action lawyers on the case.
I think you’re wrong. You don’t Mark to (“Book”, ”Market”, ”Model”) these indexes. Unlike the Chicago Soybean index you can’t trade either LIBOR or Prime.
The Prime Rate is calculated by the Wall Street Journal polling 10 large US banks. LIBOR is calculated by British Bankers' Association polling 18 banks. Their asking different people slightly different questions but the construction of both is basically the same.
Mark to (“Book”, ”Market”, ”Model”) are ways to price a financial instrument. You use “Market” when you have good relevant trading information. “Model” is used when you don’t have good information.
Are you trying to say that a many “Mark to Model” models use LIBOR as an input? If so, that’s because LIBOR is considered to be a better index then the Prime.
And I have no idea how or why one would Mark to Market the Prime Index.
Technically it is what the banks can borrow out – not what rate the lend out – and this is important. If the banks can't borrow any money from anybody that is real information that can have a real impact. The TED spread – the difference between LIBOR and the US T-Bill is another index which is used to gauge the health of banks.
If you are sick you don't fudge the numbers to your doctor. I know why the banks lied – they had an incentive to make themselves look better by low balling their LIBOR numbers – but I don't think fraud is the answer.
Not quite true. A lot of consumer loans are written against it.
Lets say I have a 1st mortgage on my house though the local credit union – 30 year variable based on LIBOR. Somebody is a distant land lies, canceling the contract. What happens next? Do I not have to pay my mortgage? Do I have to pay my balance in full?
First, IIRC, housing is about 30% of the CPI numbers and, IIRC, housing prices have been down - so there is that.
Secondly – your right – the Fed's actions has not shown up in the CPI numbers – yet. In normal circumstances all of this extra liquidity would push up inflation. However, everybody is taking their extra cash and paying down their debts – i.e. deleveraging.
So consider this. In real life, not too many cases of this so the science of economics becomes even more murky. Can the Fed make the transition from money pumping to save the banks / economy to shutting off the flow to of cash to inflation fighting when we hit the inflection point?
Central banks have given up on the idea of “fine tuning.” - too much lag time between their action and when inflation shows up in the CPI. Once inflation is baked into people assumptions it's much harder to bring inflation under control.
Heck, listen to Ben Bernanke, chairmen of the Federal Reserve. He admits that this a risk of the current action.
So, let's pick apart LIBOR – and I would love to hear your suggestion.
One of the reasons why people favor LIBOR is that it is the freest of the indexes. T-Bills can have technical issues of how and when the government issues the bonds. The Prime Rate (another self reporting index) can be influenced by Fed and Government policy.
LIBOR, or the London Interbank Offer Rate – and I will emphasis London here – is the rate that international banks – outside of US government regulation – will offer to borrow the US dollar. In terms of liberation terms this is about as close as one can get in the modern banking work to a bond index free of government regulation.
So, we have a contract between two parties - British Bankers' Association and the RBoS. RboS promised to provide accurate information and then intentionally lied – they broke that contract.
Why do you think should happen? What structural changes would you suggest? And have the noticed the lawyers lining up clients as they are going to sue the banks? (which nobody is sure how that is going to work – for every client that was shaved a dollar another picked up a dollar – the RGoS shaved points in both directions on short term contracts – it just a logical bloody mess)
What does this all mean? Is this saying that Danziger persuaded White to submit a higher rate? (using beer and hookers?)
More likely for a lower rate - but yeah -
In a normal situation at the bank, Who usually gave Mr White the rate for submission to libor... the ghost of Christmas past?
The question that Mr. White is supposed to answer is this: "If RoBS where to borrow money overnight from another bank, what would the rate be?". This is something banks do routinely as part of their cash management so Mr. White should have recent examples of RoBS doing exactly that.
Paul White was supposed to give an unbiased opinion – LIBOR only works if it is an unbiased opinion. There should have been a thick china wall between him and Neil Danziger.
In short, White provided the market with false data (i.e. knowingly lied) to manipulate the market for Danziger gain. That's fraud, insider trading, etc.
LIBOR is the rate that banks are supposed lend to each other, As a bond market index it is one of the biggest. This has replaced the old “prime rate” index that was published in the Wall Street Journal. Most floating interest rates are tied to this index.
The index is calculated by a person calling up the banks and asking them what rate they could borrow money.
On the plus side, because it is an opinion poll, it is not distorted by temporary technical issues that can affect the price of U.S. Treasuries.
On the down side, it is an opinion poll and people can lie though their teeth, which is what was done here.
Some of the lying was reporting a lower rate, making the bank look stronger then it was. Some of the lying was to nudge the rate slightly up/down so option contracts would end up in/out of the money. A small difference (less then.1%) could cause an option contract to be worth millions or nothing.
The British regulators encouraged the Bank of Scotland to lowball it's LIBOR figures. That made the bank look stronger then it was, preventing a run. That was a sad, sad day.
The Fed has been given a tough job and they have been doing an honest job in an open fashion. We may debate their wisdom or their goals but I have not hear a case where they are trying to line their own pockets.
The Libor situation - that just greedy basters manipulating the market for their own pocket book. I am sadden so few people went to jail in the last crisis. I hope that is rectified here.
How come so called "activists" such as anonymous or wiki-leaks don't target North Korea?
What do you target? You have a paranoid leadership who cuts off access to the outside world coupled with one of the tightest set of economic sanctions. Cut off from within and without.
IIRC, (posted on Slashdot about 2 years ago?) even their official country level domain hosting was being done in Spain.
Slashdot Mirror
The bond holders get *nothing*.
Question – what is the difference between:
a bond holder who holds a 90 day commercial note
a saver who holds a 90 day certificate of deposit
Because from an accounting viewpoint there is almost no difference – they have both lent money to the bank. I am not saying that equity and bond holders should not get stuffed – they should – just saying you may want a more nuanced line for the bond holders.
Because, TARP as a whole is going to lose money.
During the financial crisis the government bought a huge bunch of distressed securities. When you do that the law of averages says some will go up – and some will go down. Sure, we made a profit on AIG – but we are going to lose money on GM.
IIRC, from a year ago, projections were that TARP was going to lose billions – worse than expected. Hard to tell because most of the stuff left in TARP is illiquid so who knows what the price is – but the prospects are not good.
When you deposit money into a savings account do you consider yourself an investor in the bank? Because in a very real way you are – you are giving them a short term (a.k.a. demand deposit) floating rate loan.
O.K. you say – deposit are covered by FDIC insurance up to 250k – which is not as good as you think. That’s less than most business bi-weekly payroll. And well – you could be unlucky. IIRC during the financial crisis a month had just deposited the life insurance check from her son that had been killed in Afghanistan the day before a bank went bust.
Banks are special. They network the entire economy together. A failure of trust can lead to bank runs and the failure of the whole network. (By the way, I am not saying the owners & investors should get off free – I think they got off to lightly – just saying there is some depth to this conversation.)
Mod Trepidity up.
And, to put a slightly finer point on this, we are (mostly) not talking about banking but using phone minutes as an alternative currency. As long as you know the other party’s phone number you can transfer minutes – you can be outside the country so you don’t have to worry about exchange rates – neither party needs a bank account, etc.
Define “Hack”. Are not investigative journalist suppose to investigate? Unearth buried and unpleasant truths? Being a “hack” used to be slang for being a journalist. A low class one interested in sensationalist stories, but still...
This is China - the lines between government, party, industry, and politician are a bit blurred. For example, IIRC, the Army reports to the party - not to the government. Elections are limited and managed. etc.
Your missing the point. The fact is that somebody is hacking into the paper to figure out who the journalist's sources are.
So, it's not the average Chinese citizen trying to read the paper – it's about finding who the journalist are, what their sources are, etc – the stuff a government would need to harasses and shut down the people who are leaking the data.
These newspapers have been reporting embarrassing things. Like members of the Communist Party and their family members have vast wealth – implying that this wealth is coming from inside contacts and use (or abuse) of official power. The Communist Party would be interested in who is leaking the details.
Let me throw out an issue – may you have thought about it and can give me some clue.
Western nomenclature is given_name family_name. Eastern is flipped. Having a standard convention helps decode who you are talking to. If Kim is the given name then the probably female. If Kim is the last name then, well, 50/50 chance.
But at least when I pick up the phone I can chose to be formal (using the family name) or informal (using the given name.)
Your proposal breaks that convention so we lose information. Any idea on how to get that back?
I think you might be thinking of “core CPI”. That is CPI striped of food and energy. The theory being that draughts will happen and wars in the Middle East will happen – that the very nature of these commodities are volatile. The idea is to break up CPI to determine what is happening – are we experiencing a supply shock – prices are going up because supply is affect – or are we experiencing monetary inflation – i.e. too much cheap money flowing into the system. Of course, if you exucled too many goods the “core index” becomes worthless.
Also, CPI as a proxy for inflation. That is, you are trying to measure the utility of 2 baskets of goods – which is personal, subjective, and ordinal - separated by time. As such CPI will always overstate inflation – it is why there are adjustments. One of the issues is the substitution effect. Back in the 60s gasoline was a larger part of the CPI basket. With higher prices consumers have substituted other goods. More fuel efficient cars, home entertainment system instead of a cross country car trip, etc. I am not saying there is not an impact, just the some of the impact is mitigated If gas prices increase CPI by 10% all you can say is that inflation is somewhere between 0% and 10%. (in the short run probably close to 10%)
As for the Filet versus t-bone for example – consider the wealth effect. Back in the 60’s the CPI assumed we spent 30% of our income on food. Today it’s closer to 15%. However, we actually spend more today on food, inflation adjusted. What is happening is that people are swapping out Spam (the meat) for steak. Over 40 years the basket of consumer goods has changed.
You are right about the presure. British regulators pressured some British banks to lowball LIBOR making them look stronger than they were. If a bank looks weak that could trigger a bank run, causing the bank to collapse, and requiring a bail out from the British government.
The actual millions in illegal trading profits would have been chump change against the potential billions that could have been lost caused if the bank had collopased - which is why we are coming to different conclusions.
http://xkcd.com/558/
Well, what would you suggest?
Having zero percent inflation implies that raw input costs, productivity, and customer preferences are fixed and do not change. So theoretically impossible. From the practical side (via price controls) it has led to disaster.
Deflation shifts wealth to people who hold bonds and away from productive assets and poor people.
High inflation discourages long term investments and prevents poor people from saving.
So, low consistent inflation does the least harm – and I would argue does some good. Encourages people to put their money to work in productive ways instead of just sitting in the mattress.
But that’s not the case here. If RBoS was providing bad data because they were incompetent, lazy, or they were just guessing because things where in chaos – that is one thing. Deliberately proving false market date to manipulate the market for gain – that is something else and that is what happened here.
Does anyone know estimates of how much they profited monetarily from this in comparison to the fines?
No - not yet and maybe never.
Part of the reason it is really hard to pin down the costs. Calculating the trading desk’s profit is easy – and is the smallest part. A lot of the profit will spill over the banks cost of capital – these secondary effects are harder to calculate.
Secondly, most of the profit / loss were born by 3rd parties who had nothing to do with the RBoS. i.e. Party A and B entered into a contract based on LIBOR and had no interaction with RBoS. Some days RBoS nudge LIBOR up, on other days down.
RBoS was only 1 of 18 people polled so figuring out their contribution is hard. RBoS was not the only bank fixing the numbers. Etc.
Untangling the mess is going to be hard – but don’t worry – there are class action lawyers on the case.
I think you’re wrong. You don’t Mark to (“Book”, ”Market”, ”Model”) these indexes. Unlike the Chicago Soybean index you can’t trade either LIBOR or Prime.
The Prime Rate is calculated by the Wall Street Journal polling 10 large US banks. LIBOR is calculated by British Bankers' Association polling 18 banks. Their asking different people slightly different questions but the construction of both is basically the same.
Mark to (“Book”, ”Market”, ”Model”) are ways to price a financial instrument. You use “Market” when you have good relevant trading information. “Model” is used when you don’t have good information.
Are you trying to say that a many “Mark to Model” models use LIBOR as an input? If so, that’s because LIBOR is considered to be a better index then the Prime.
And I have no idea how or why one would Mark to Market the Prime Index.
Technically it is what the banks can borrow out – not what rate the lend out – and this is important. If the banks can't borrow any money from anybody that is real information that can have a real impact. The TED spread – the difference between LIBOR and the US T-Bill is another index which is used to gauge the health of banks.
If you are sick you don't fudge the numbers to your doctor. I know why the banks lied – they had an incentive to make themselves look better by low balling their LIBOR numbers – but I don't think fraud is the answer.
For regular folk, it doesn't mean anything...
Not quite true. A lot of consumer loans are written against it.
Lets say I have a 1st mortgage on my house though the local credit union – 30 year variable based on LIBOR. Somebody is a distant land lies, canceling the contract. What happens next? Do I not have to pay my mortgage? Do I have to pay my balance in full?
First, IIRC, housing is about 30% of the CPI numbers and, IIRC, housing prices have been down - so there is that.
Secondly – your right – the Fed's actions has not shown up in the CPI numbers – yet. In normal circumstances all of this extra liquidity would push up inflation. However, everybody is taking their extra cash and paying down their debts – i.e. deleveraging.
So consider this. In real life, not too many cases of this so the science of economics becomes even more murky. Can the Fed make the transition from money pumping to save the banks / economy to shutting off the flow to of cash to inflation fighting when we hit the inflection point?
Central banks have given up on the idea of “fine tuning.” - too much lag time between their action and when inflation shows up in the CPI. Once inflation is baked into people assumptions it's much harder to bring inflation under control.
Heck, listen to Ben Bernanke, chairmen of the Federal Reserve. He admits that this a risk of the current action.
So, let's pick apart LIBOR – and I would love to hear your suggestion.
One of the reasons why people favor LIBOR is that it is the freest of the indexes. T-Bills can have technical issues of how and when the government issues the bonds. The Prime Rate (another self reporting index) can be influenced by Fed and Government policy.
LIBOR, or the London Interbank Offer Rate – and I will emphasis London here – is the rate that international banks – outside of US government regulation – will offer to borrow the US dollar. In terms of liberation terms this is about as close as one can get in the modern banking work to a bond index free of government regulation.
So, we have a contract between two parties - British Bankers' Association and the RBoS. RboS promised to provide accurate information and then intentionally lied – they broke that contract.
Why do you think should happen? What structural changes would you suggest? And have the noticed the lawyers lining up clients as they are going to sue the banks? (which nobody is sure how that is going to work – for every client that was shaved a dollar another picked up a dollar – the RGoS shaved points in both directions on short term contracts – it just a logical bloody mess)
What does this all mean? Is this saying that Danziger persuaded White to submit a higher rate? (using beer and hookers?)
More likely for a lower rate - but yeah -
In a normal situation at the bank, Who usually gave Mr White the rate for submission to libor... the ghost of Christmas past?
The question that Mr. White is supposed to answer is this: "If RoBS where to borrow money overnight from another bank, what would the rate be?". This is something banks do routinely as part of their cash management so Mr. White should have recent examples of RoBS doing exactly that.
Paul White was supposed to give an unbiased opinion – LIBOR only works if it is an unbiased opinion. There should have been a thick china wall between him and Neil Danziger.
In short, White provided the market with false data (i.e. knowingly lied) to manipulate the market for Danziger gain. That's fraud, insider trading, etc.
LIBOR is the rate that banks are supposed lend to each other, As a bond market index it is one of the biggest. This has replaced the old “prime rate” index that was published in the Wall Street Journal. Most floating interest rates are tied to this index.
The index is calculated by a person calling up the banks and asking them what rate they could borrow money.
On the plus side, because it is an opinion poll, it is not distorted by temporary technical issues that can affect the price of U.S. Treasuries.
On the down side, it is an opinion poll and people can lie though their teeth, which is what was done here.
Some of the lying was reporting a lower rate, making the bank look stronger then it was. Some of the lying was to nudge the rate slightly up/down so option contracts would end up in/out of the money. A small difference (less then .1%) could cause an option contract to be worth millions or nothing.
The British regulators encouraged the Bank of Scotland to lowball it's LIBOR figures. That made the bank look stronger then it was, preventing a run. That was a sad, sad day.
Yes it is.
The Fed has been given a tough job and they have been doing an honest job in an open fashion. We may debate their wisdom or their goals but I have not hear a case where they are trying to line their own pockets.
The Libor situation - that just greedy basters manipulating the market for their own pocket book. I am sadden so few people went to jail in the last crisis. I hope that is rectified here.
How come so called "activists" such as anonymous or wiki-leaks don't target North Korea?
What do you target? You have a paranoid leadership who cuts off access to the outside world coupled with one of the tightest set of economic sanctions. Cut off from within and without.
IIRC, (posted on Slashdot about 2 years ago?) even their official country level domain hosting was being done in Spain.