There were two big news over the past two days in the financial world. One was the EU Summit which yet again calmed the market for only the gypsies (Gypsies, get it? GIPSI? Maybe not) know how long. Another was the official fallout of Barclays’ rigging of LIBOR.
The rigging of LIBOR has been an on-going case but this is the first time it exploded in the open. Barclays is unlikely to be the only one guilty here. Everybody is likely to have some kind of involvement in rigging the LIBOR. It appears even the regulators in the UK are in it.
There are several issues with the LIBOR fiasco but the one I find most interesting is the understatement of cost of funds. This was the initial concern when the Wall Street Journal first reported of it in 2008. Banks were suspected of understating their cost of funds during the then credit crunch, hence falsely presenting themselves to the market as relatively healthier than they actually were.
While the wilful misreporting is regrettable, I cannot help but wonder would it be better at that time to report the truth? Would reporting the truthful higher rates have helped everybody in the market, especially in an environment where Blackrock and Lehman Brothers just went under? I could easily imaging contributing to further loss of confidence would not be the wisest thing to do then.
The underreporting of LIBOR might have provided some needed liquidity to the banks than truthful reporting otherwise would. That would relieve some stress off the banking system. In that way, the underreporting was the better way of doing things. It is not only better for the banks, it is good for the so-called main street. What the crisis of the past few years have shown, a sound banking system is terribly important to the short-run stability of the whole economy. That is sad, but it remains a fact.
Because of how lower rates might have helped with liquidity in the market, however unreflective it were to reality of the banks’ situation, I am a little sympathetic of banks found guilty of committing that.
The same sympathy however cannot be extended to the rate setters whom collaborated with the traders, granting those traders with the unfair advantage of inside information. Those are just, plainly wrong.