September 24, 2008
The Importance of Libor
Libor (London Interbank Offered Rate) is a “is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market.” And, apparently in May of this year, the WSJ was critical of Libor’s worth arguing banks may have been “underreporting” borrowing rates to make the credit crunch sound healthier than it was.
It turns out Libor is only run by two British fellows (via):
The calculation of Libor is co-ordinated by just two people, who work in an unremarkable open-plan office in London’s Docklands. I watched the process, which seemed utterly routine, a couple of years ago. Just after 11 a.m. on every weekday that’s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn’t sent in its estimates, and if the latter seem implausible – typos, for example, are fairly common – they’re checked, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? . . . Bit of a spread on the two month. Everyone else is coming in a good bit under that.’
The above quote’s article is a very worthy read. It gives you a pretty good look into the money market world (I am told), particularly the wildly fascinating culture of interbank brokers:
Brokers in major money-market currencies don’t work as individuals, but in teams of up to a dozen or more, sitting close together in subsections of large, open-plan offices. Good eyesight is useful – trainees still sometimes called ‘board boys’ write unfilled bids to borrow and offers to lend on whiteboards surrounding clusters of brokers’ desks, and you can occasionally see a broker using binoculars to read a distant whiteboard or screen – but a more crucial skill is ‘broker’s ear’: the capacity to monitor what is being said by all the other brokers at nearby desks, despite the noise and while at the same time holding a voicebox conversation with a client. As one broker put it to me: ‘When you’re on the desk you’re expected to hear everyone else’s conversations as well, because they’re all relevant to you, and if you’re on the phone speaking to someone about what’s going on in the market there could be a hot piece of information coming in with one of your colleagues that you would want to tell your clients, so you’ve got to be able to hear it coming in as you’re speaking to the person.’
When you first encounter it, broker’s ear is disconcerting. You’ll be sitting beside a broker at his desk, thinking he’s fully engaged in his conversation with you, when suddenly he’ll respond to a question or comment, from several desks away, that you simply hadn’t registered. It’s an embodied skill that affects the way Libor is calculated. The inputs to the calculation are provided daily by the money-market traders from banks that are on panels established by the British Bankers’ Association.
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