“LIBOR’S DEMISE MEANS NO MORE RIGGING, BUT LESS FLEXIBILITY
“A seminal event occurs at the end of this week: Dollar Libor will finally die. The big question is does its replacement, the Secured Overnight Financing Rate, make the global financial system safer, or just exposed to different risks?
“The London interbank offered rate, set daily by panels of banks, was once dubbed the most important number in finance. It was a suite of borrowing costs, covering a range of maturities for the world’s major currencies. Hundreds of trillions worth of everything was tied to Libor, from floating-rate notes to residential mortgages to auto loans.
“As the stench of price-rigging became overwhelming and as wholesale funding markets between banks dried up, Libor’s demise became inevitable. It had lost all credibility, as mark-to-market became mark-to-made-up.” [Emphasis added.]
Wait. What’s so bad about “mark-to-made-up” again? In the middle of a financial panic, during which market-clearing prices can be counted on to make no sense at all, a rigged benchmark might be just the thing to help restore a bit of sanity. Anyway, I’ll be interested to see how SOFR holds up the next time things go haywire.
The death of Libor isn’t all good, believe it or not
By Thomas K. Brown,
GONE FOR GOOD: Alas, a sad day:
“LIBOR’S DEMISE MEANS NO MORE
RIGGING, BUT LESS FLEXIBILITY
“A seminal event occurs at the end of this week: Dollar Libor will finally die. The big question is does its replacement, the Secured Overnight Financing Rate, make the global financial system safer, or just exposed to different risks?
“The London interbank offered rate, set daily by panels of banks, was once dubbed the most important number in finance. It was a suite of borrowing costs, covering a range of maturities for the world’s major currencies. Hundreds of trillions worth of everything was tied to Libor, from floating-rate notes to residential mortgages to auto loans.
“As the stench of price-rigging became overwhelming and as wholesale funding markets between banks dried up, Libor’s demise became inevitable. It had lost all credibility, as mark-to-market became mark-to-made-up.” [Emphasis added.]
Wait. What’s so bad about “mark-to-made-up” again? In the middle of a financial panic, during which market-clearing prices can be counted on to make no sense at all, a rigged benchmark might be just the thing to help restore a bit of sanity. Anyway, I’ll be interested to see how SOFR holds up the next time things go haywire.