Wednesday, November 30, 2016

Coase would agree

 Libor is the inter bank lending rate, but it is self computed by the landing banks, in aggregate.  Ripe for rigging?  Sure, but the rigging was a traded variable, it was priced, because each party engaged in rigging with a similar smooth measuring tool. A tool that can estimate the total amount of price rigging. Hence, we get Pit.boss = Coase.  The pit boss is a price fixer, but all the Bid/Ask singletons are prepared after fair scanning of the order book.

Matt Levine on the Libor 'fix'

One contrarian thing that I sometimes think about the big Libor scandal is that you can analyze it as a weird market. Some traders at some banks had interest-rate swaps that would profit if Libor was higher, so they pressured their Libor submitters to make up a higher Libor. Other traders at other banks had the other sides of those swaps, so they pressured their submitters to make up a lower Libor. The Libor rate that was ultimately set represented sort of a phantom clearing price for interest-rate derivatives; it may not have been a fair representation of banks' borrowing costs, but it was an imperfect approximate result of market forces. 

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