Hypocrisy on Libor Is Massive: Hedge Fund

It’s a free world — especially when it comes to the financial markets. When writing a contract around Libor the two contracting parties tend to be big boys. Retail customers last I checked have most of their contracts priced off the prime rate. When it comes to the market participants who use Libor, they have a myriad of choices when it comes to referencing interest rates: Federal Reserve funds, U.S. treasurys, gilts, Swap rates, the prime rate and a zillion other interest rates and derivatives.


The Libor rate setting process is, or should have been well understood by the contracting parties – if they did not like it, they could choose another interest rate.

In any case, given the myriad of alternatives and arbitrage between them, the idea that traders could have systematically manipulated Libor strikes me as far-fetched: a Libor fixing that was out of line with reality would have generated arbitrage activity by participants in the market who knew the actual banks borrowing costs.

And even if the banks did, on occasion successfully manipulate rates (I doubt it, and the only evidence that I have read is about submissions being out of line – not that these actually resulted in a different Libor fixing), should we be surprised?

Exchanges are there to facilitate exchange and help a market to find a price which can be disseminated. They are regulated as exchanges to ensure that this happens in a fair way. Traders trade, and seek to make a profit. When done right, they seek to gain an edge by playing within the rules set by the exchanges.

It is well understood (at least by this market participant) that there are many markets that are over the counter, i.e. not regulated as an exchange, that are open to potentially massive and persistent manipulation by some or all of the participants. OTC options of all kinds, corporate debt, currency markets are just a few that spring to mind, but I am sure that there are others.

Clearly, if I wanted the protection of a transparent price, I could have used an exchange traded interest rate instrument. And very clearly, nobody, anywhere, was claiming that the libor setting process was an exchange. And if now, the political system and the FSA prefers to regulate the libor process with rules that make it function more like an exchange, then that is a great idea, it should move forward, but please, spare us the political histrionics – as it is irrational and unproductive.

So it seems to me that someone on the political side wanted to get some scalps at the banks – because there are elections on the horizon and banks are singularly unpopular. So the FSA (Financial Services Authority) was directed to go and line up some culprits.

But the idea that the FSA did not know what was going on at the time is not credible. Bob Diamond, however, did not have a choice but to be a fall guy — because in this environment, to have fought back on the merits would have resulted in some sort of punitive penalty imposed by the FSA on Barclays . Hence Bob Diamond’s protestations in front of the select committee as to how much he likes Barclays, and that he was there to save Barclays.

In other words, this seems like a ridiculous witch hunt to me, and there is an atmosphere of “shoot first, ask questions later”, which is unwarranted, and is ultimately highly destructive to London: What better way to dampen Libor, the banks, and the London financial market than to start attaching fines and potential criminal penalties rather than to appropriately regulate, and to keep adjusting and fine tuning the regulation to the extent that it is lacking.

Lastly, I find the hypocrisy to be massive: There are the Bank of England, the Fed and other central banks who, in cahoots with their respective treasuries are massively and successfully manipulating interest rates via quantitative easing — something which comes at very high and real cost to those members of society who were parsimonious spenders, and who saved up money for a rainy day, who are now earning pittance on their savings.

And these most responsible members of society are extremely ill-served by a self-serving and bloated governments – which would rather haul an unpopular banker over the coals for a political gain, than do something to reform their budgets – which would be the appropriate way to remedy the fact that for far too long, they have been living beyond their means and are borrow too much.

Guy Spier is CEO Aquamarine Capital. Since 1997 he has managed Aquamarine Fund, an investment partnership inspired by, and styled after the original 1950s Buffett partnerships.