Tuesday, August 28, 2012

Bloomberg editors call for disclosure of Libor related data

In an editorial, Bloomberg editors call for full public disclosure of each bank's actual borrowing data so that it can be determined exactly who manipulated Libor and by how much.  

In making this call, the Bloomberg editors are also telling the Wheatley Review that full public disclosure of each bank's current actual borrowing data is needed going forward to ensure the integrity of Libor.

Regular readers know that the Bloomberg editors are endorsing the recommendations concerning Libor put forward by your humble blogger.  Naturally, with the support of the Bloomberg editors, I hope these recommendations come to pass.

The global investigation into the manipulation of Libor has so far done a good job of exposing how bankers corrupted one of the world’s most important financial indicators. 
Now authorities need to take a giant step further: Make banks release the data needed to determine how much damage was done and who should bear the most responsibility....
Please re-read the highlighted text as the Bloomberg editors are calling for disclosure.
Investigators are focusing on two kinds of manipulation. In one, bankers submitted false data to push Libor in a direction that would benefit their own traders. In the other, bankers intentionally lowered the reported rates, which are published daily, to make their institutions’ financial positions look better than they really were.... 
How long the lying went on, and how systematic it was, matters a lot. 
If, for example, underreporting caused Libor to be artificially depressed by 0.1 percentage point for only a few months, payments on more than $300 trillion in mortgages, corporate bonds and derivatives tied to the benchmark might have fallen short by about $75 billion or so. If the problem lasted a few years, the shortfall could be close to $1 trillion....
How much Libor was off, then, could be a trillion-dollar question.....  
An article in the Financial Times indicated that manipulation of Libor goes back to the early 1990s.  As a practical matter, the data disclosed should go back to when Libor was first calculated.

Regular readers know that Libor was designed to be opaque and allow bankers to hide bad behavior behind the opacity.  The question is 'when' did this bad behavior in the form of manipulating Libor start.
To give a more complete picture of the misbehavior, and to establish what share of the compensation burden each Libor- reporting bank should bear, researchers need access to better data on actual borrowing costs.   
If they could get records of observable transactions, they could produce an independent estimate of how much the banks’ Libor quotes were off on any given day. 
It is only with all the observable transactions that market participants have the information they need to independently assess what went on.
Such an authoritative benchmark would have many benefits: Plaintiffs, for example, could use it to reach settlements with banks, avoiding legal wrangling that could weigh on the financial sector for years.
Good data, though, are hard to find. 
This observation is true throughout the financial system with its many opaque areas.  The reason that good data are hard to find is because Wall Street's Opacity Protection Team does not want this data to be made available and the regulators have failed to require that this data be made available.

Wall Street profits from opacity.  In the case of Libor, Wall Street increased it profits from manipulating the rate in its favor.  Had current transaction data been available, Wall Street couldn't have engaged in this manipulation.
The Fed hasn’t made information from its wire-transfer system public. 
The Libor panel banks, for their part, closely guard information on the interest rates they pay on actual short-term loans. This is an odd habit, given that they are supposedly publishing their borrowing rates in great detail every day for the purpose of calculating Libor. If they’re not lying, there should be no news in the transactions.
The Bloomberg editors are right that in the case where the banks were not lying there is no news.  However, that case is likely to be shown as the exception rather than the rule.
It’s up to the authorities investigating Libor to break the information blockade. 
In the U.S., for example, the Office of Financial Research, set up by the Dodd-Frank financial reform act, has the subpoena power needed to get the data and the brain power required to crunch the numbers. Ideally, it would also make the data public, so independent academics and journalists could check its work. 
If the data is not made public, there is no reason for market participants to trust the findings of the Office of Financial Research or any other government regulator.

Market participants are fully aware that the financial regulators' analytical ability is questionable.
Shedding light on the extent of Libor manipulation is essential to restoring the market’s integrity. The point of justice, after all, isn’t only to punish the guilty. It’s also to establish the truth, so we can draw the right conclusions, fix what needs fixing and move on.
Hence the reason that current borrowing data needs to be disclosed on an ongoing basis if confidence in the integrity of Libor is to be maintained.

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