What if a sizable portion of global economic activity rests on magical thinking?
By Matt Taibbi and cross-posted from Rolling Stone.
Two summers ago, the head of Britain’s Financial Conduct Authority, Andrew Bailey, made news when he announced that LIBOR – the leading benchmark for setting global interest rates – had a “sustainability” issue. The rate is supposed to measure the rate at which banks borrow from each other, but Bailey said it wasn’t based on real borrowing.
“The absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks,” he said. “If an active market does not exist, how can even the best run benchmark measure it?”
These comments by a senior British regulator were draped in enough jargon that they barely reached non-financial audiences. Still, it was jarring.
LIBOR, the London Interbank Offered Rate, helps set rates for hundreds of trillions of dollars worth of financial instruments, including swaps, annuities, credit cards, mortgages and other products. If Bailey was right, it meant a sizable portion of global economic activity rested on magical thinking.
A secondary concern involved manipulation. If banks were inventing numbers to submit to the LIBOR committee, could they not also be manipulating rates to line pockets? Bailey didn’t delve in that direction, but the possibility certainly seemed to exist that the world’s major investors – including localities and pension funds – were being systematically ripped off
At the time, I joked Bailey’s comments might inspire a pan-civilization lawsuit called Earth v. Banks. It hasn’t come to that did, but a class of investors and retirement funds including Putnam Bank and the Hawaii Sheet Metal Workers Pension Fund did recently bring an antitrust suit alleging just such a scheme. The July 1 complaint is an amended version of a class action suit originally filed earlier this year….