Why was LIBOR rigged?

This blog post dovetails a BBC documentary dated April 2017 which I had Tweeted about.

There seems to have been two motives for LIBOR rigging. One was financial stability and the other was profit.

Motive #1

Here's what happened. Banks agreed to lend to one another at lower than fair market interest rates, something called "low-balling."

For example, a LIBOR trader who knew that borrowing banks out there were riskier than perceived would bid a lower interest rate at which he was willing to lend out his own bank's capital.

This signaled the following to third parties: The borrowing bank's creditworthiness was sounder than it actually was.

This in turn signaled the following:

1. The banking system was more stable than it actually was.
2. Things were closer to normal than they really were.

In my opinion, the intent of all this signaling may have been to prevent something like a bank run and system-wide financial collapse.

Motive #2

Barclays Bank set up an investment fund named the Ricardo Master Fund. This was under CEO Bob Diamond, the very CEO who has denied knowing anything about LIBOR rigging at his bank. This fund stood to profit if LIBOR fell. Barclays itself invested $100Mn in this fund and made a $100Mn profit, according to the BBC documentary.

There is strong evidence of LIBOR rigging dated Sept 2007 and October 2008, according to the same documentary. However, according to @davidenrich's Spider Network book, LIBOR was widely known to be manipulated to suit banks' positions as early as 1991.

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Bloomberg Debate at 

Davos 2017 World Economic Forum:

Comments by Ray Dalio & Larry Summers

Bloomberg recently held its annual debate at Davos, bringing together figures from politics, government, and finance. The debate was moderated by Bloomberg anchor Francine Laqua. This was part of the 2017 World Economic Forum.

Larry Summers and Ray Dalio were panel members. Here's the 50-minute video of that debate.

This blog is about comments made by Summers and Dalio that I'd personally like to take away and record for future reference.

Overview

• Populism as a new, worrisome trend
• U.S. economic success under Trump
• U.S. economic policy recommendations

Ray Dalio

Dalio highlighted the following:

• Rising trend of populism at a global scale 
• Very similar to 1930's. 
• Brexit, Italian referendum, Trump election are all examples.
• Populism means 
• Protectionism
• Nationalism
• Anti-globalization. 
• Risk of polarization at a global scale. 
• "Populism scares me."
• Globalization & wealth gap 
• The globalization that started in the 90's ...
• Increased trade and 
• Reduced the wealth gap between rich & poor countries, but 
• Increased it within countries. 
• We may now be at the end of globalization.

Larry Summers

Paraphrasing Summers: The lesson from history is that populist policies will hurt those very people in whose name those policies are carried out. "Those people" = the middle class.


U.S Economic Success under Trump

Dalio thought that U.S. economic success under Trump was a complicated question. The positive aspects were "economic confidence" and the unleashing of "animal spirits" that seems to be occurring. Dalio noted that we live in a world where capital is very mobile and can easily relocate to where the environment was more pro business. He further noted that the U.S. was known for the "rule of law" and "protection of property".

Both Dalio and Summers were in agreement that populism was a big negative.

I should put the above comments into context by noting (from elsewhere) that Trump has signaled the willingness to reduce regulation and taxes. He is also willing to raise trade barriers on imports. Reducing regulation and taxes is what unleashes animal spirits. Raising trade barriers is how populism manifests itself and possibly polarizes countries.

Elsewhere on Dec. 19, 2016, Dalio had blogged that there's little doubt that Trump is an aggressive leader. He had written that the question was whether he'll be aggressive and thoughtful or aggressive and reckless. Reference.


U.S. Economic Policy

Summers offered the following guidelines for U.S. economic policy.

He said the slogan ought to be "Make America greater than before" instead of making it "great again" as Trump has said.

Summers' three major policy recommendations for the US were:

1) Public investment on an adequate scale, starting from infrastructure, but also embracing technology and education.

2) Global strategy focused on making global integration work for ordinary people, starting with addressing "capital mobility and control".

(I'm not sure what he went by "capital mobility and control," as it could mean something dark and restrictive of freedom, so I went back and listened to previous sections of the video and discovered that he made comments indicating being in favor of eliminating "tax arbitration" and "regulatory arbitration" across countries. For example, a company operating in country X shouldn't be allowed to register in country Y because country Y offers lower taxes than country X.)

3) Enabling the dreams of young American people, by addressing issues of (a) education, (b) improving the school-to-work transition for those not pursuing higher education, and (c) ability to purchase a first home.

(He means (a) improving the quality of education and reducing its cost, (b) making low-income jobs more readily available in a world where automation and technology are moving these jobs toward obsolescence, (c) making homes more affordable for first-time home buyers. To make homes more affordable, they'd have to offer this group low mortgage rates, provide tax incentives such as keeping mortgage interest payments tax deductible, etc.

Summers' recommendation on point #3 are rooted in the 30-40 year trend that fewer children are earning more than their parents. I had Tweeted about this here.)

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