Odd Lots - Meet the Man Who Blew the Whistle on LIBOR

Episode Date: June 1, 2020

Welcome to the Odd Lots LIBOR series, in which Tracy Alloway and Joe Weisenthal take a look at life after LIBOR, the interest rate tied to more than $350 trillion worth of financial assets.On the first episode in our LIBOR series, we speak with Richard Robb, a former interest rate trader who was one of the first to warn about potential manipulation of the Libor rate to which trillions of dollars worth of financial assets are tied. Robb, who’s now CEO of the hedge fund Christofferson, Robb & Company and teaches at Columbia University, warned of problems in the interest rate as early as the mid-1990s. He also had a front-row seat to witness the benchmark’s downfall after the 2008 financial crisis. He talks about what went wrong.See omnystudio.com/listener for privacy information.

Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. So, Joe, we're finally doing it. We're finally doing our LIBOR series. Yeah, we've been talking about this for a while, the idea of doing a big series on LIBOR, what happened to it, what it was, what its state is now, where it's going. And we're going to kick it off. Yep, this is the first of those episodes. So just as an introduction, let's talk about what LIBOR is. LIBOR is the London Interbank Offered Rate, and it is, as you mentioned, Joe, in a state of transition. Just for background, this is basically the reference rate that governs trillions of dollars worth of asset prices.

So for instance, if you sell a bond in the market, it will be priced off LIBOR. So whatever the interbank offered rate is plus an additional yield. Same thing if you sell a loan. Home mortgages priced off LIBOR. Basically, the financial system has for many, many years, run on LIBOR. And that is a big deal because we are supposed to be moving away from that particular reference rate. Right. So this is not a topic that I know particularly well. I know about the centrality of the rate. I know that there is a, uh, effort afoot to move all of these various offerings that currently index in some way to LIBOR onto something new, which we'll get to in this series. And I know that around the time of the crisis, there was manipulation of this price and that that was a major scandal and that the way the price is set and measured opened itself to all kinds of shenanigans. But honestly, I don't know much more about it than that. I don't know much about its history. I don't know the

degree to which the manipulation really affected things. I don't know why it's so difficult to change, and I'm very much looking forward to learning more as we embark on this series, because although I don't know very much about it, I get the sense that this is extremely important and that people in credit markets, it's one of the big things that is going to affect their industry and that they're all watching. Absolutely. And you've set the scene perfectly, and we are actually going to start with a discussion about what LIBOR is, how it came into being, and of course, the manipulation scandal that happened after the financial crisis. So it's a good place to start. And our guest is actually the perfect guest to talk about this. He's basically been a Cassandra

when it comes to warning about the potential for banks to do sketchy stuff with LIBOR. his name is Richard Rob. He's currently the CEO of the hedge fund, Christofferson Rob, also a professor at Columbia. And many, many years ago, he was actually a rates trader at DKB Financial in New York. And he famously wrote a letter to one of the regulators, the CFDC, warning of the potential for LIB manipulation. And this was way back in, I think, the late 1990s. So really the perfect person to discuss this. I can't wait. I can't wait to learn all about it. Excellent. Richard, thank you so much for coming on. Great to be here. So I guess just to begin with, I'm curious, what was it like being a rates trader in the 90s? Quite a lot happening back then when it comes to interest rates.

Oh, it was so much fun. The interest rates would move 10, 15 basis points a day. The interbank market was very active. You know, the IB and LIBOR stands for interbank. banks would often borrow and lend to each other, and the rates that they would lend were important to the banks. They were important to financial markets at the time. So, DKB stands for Daichi Kango Bank.

We were actually the largest bank in the world at the time. Wow. And I know it's my students at Columbia, Japanese students, and some of them have never heard of DKB. It kind of breaks my heart, you know. But then my students at Columbia, it breaks my heart that they haven't heard of DKB because it was a great bank,

it's a fun place to work. It's merged and formed Mizuho now, which readers will know, listeners will know of. The capital markets were developing. They were developing in Japan. And it was kind of the heyday of financial engineering before the term financial engineering

became a way to disparage. You know, it's an exercise in financial engineering. In those days, it was something to be proud of. So let's really break this down into simple, basic ideas for people like me and maybe a few of our listeners who don't know as much. You mentioned the IB and LIBOR Interbank. What was it attempting to measure specifically? And why did this need there to be an index at all? Yeah.

Well, this was created in 1984 by the British Bankers Association. It was meant to provide a benchmark index for short-term borrowing costs, originally for banks, and then over time that was extended to companies, to loans, to home mortgages, and then into many different currencies as well as U.S. dollars. The index was created for not just three-month LIBOR, but six-month, one year, and various other terms of one year and less. So it's set once a day in London. It's meant to reflect.

The L in LIBOR can be confusing. It really stands for offshore when offshore activity was headquartered in London. But it can be a deposit booked in Cayman or Nassau or London or any place that's outside of the scope of taxation or deposit insurance to reflect the truest cost of funds that a bank would encounter without any of the special institutional details that might come with an onshore deposit. It's been a survey. It's always been a survey.

And at the time, the question that was created by the British Bankers Association was to poll banks. And they would ask them, if you were to go out and borrow U.S. dollars to call another bank and in normal size, what rate do you perceive you would be able to borrow if you didn't negotiate the price? So that's what makes it the offered side. You call, you don't negotiate, and you say, where could I borrow money? What made LIBOR special compared to other interest rates that were in use in the 80s or the 90s? Why did the market need an expected rate versus an actual rate? You know, we had the prime rate, which was some loans and derivatives were based off the U.S. prime rate,

which was a hard thing to understand. It was set by banks. Different banks would have different prime rates, and there wasn't much theory. There wasn't, sometimes it wouldn't respond to market developments. It was, and each bank would set it at its own discretion. There was, so the market needed an index. If you wanted to borrow money and you wanted the rate to go up, you could accept the rate going up if inflation went up

or as short-term rates go up according to the business cycle. This was the index. Another possibility would be to use U.S. Treasury bills. But those have their own special features that might not be relevant to a company that was borrowing or a bank that was borrowing. The rate on U.S. Treasury bills could depend on the supply and demand of T-bills. It could depend on, you know, costs of borrowing in the private credit markets could go up without a corresponding change in treasury bills, and banks that were receiving LIBOR payments would expect to save more, and that would not

be accounted for in an index based on Treasury bills. So there was a demand for, you An index, it had to be based on a survey. The survey got up to 20 banks. Banks voluntarily participated at the time because it was considered prestigious to be in the index. And the British Bankers Association would throw out the, you know, when it got up to, when it was 16 banks, they would throw out the top four and the bottom four. They were polled each morning at 11 o'clock, London time, throw out the top four. the bottom four, average the eighth that remained, round to five decimal places, and that's U.S. dollar LIBOR that day, in one month, two month, three month, four, five, six, and so on,

up to 12 months. So it's kind of like how they measure gymnastics or ice skating at the Olympics, and they throw out the Russian judge, and they throw out the U.S. judge so that they unscue the polls, and then everyone else they get average of it. Yeah, and it's also similar. and that you get to see what, in the Olympics, you see what each judge rates the performance. It was also out in the open at the time. So you could see what rate each bank that was in the survey, what rate they posted. We tend to think of transparency as being virtuous and good under every circumstance, but that was also part of the problem at the time.

Because if a bank was perceiving that was having funding troubles, it would have a self-interest not to reveal that to the whole world by posting a high rate. There's the question posed by the British Bankers Association. If you went to borrow without negotiating, what rate do you perceive? And let's say in the late 90s during the Asian crisis, a bank like DKB or Fuji Bank was having funding pressures. They didn't want to say, oh, well, our rate would be very high because nobody wants to lend to us. And by the way, we just want everybody to see it in this official calculation. women are looking for more. More to themselves, their businesses, their elected leaders, and the world are out of them. And that's why we're thrilled to introduce the Honest Talk podcast. I'm Jennifer

Stewart. And I'm Catherine Clark. And in this podcast, we interview Canada's most inspiring women. Entrepreneurs, artists, athletes, politicians, and newsmakers, all at different stages of their journey. So if you're looking to connect, then we hope you'll join us. Listen to the Honest Talk podcast and IHart Radio or wherever you listen to your podcasts. There was a moment in, again, I think it was the late 90s, when LIBOR sort of became even more embedded with the financial market. And that was when the CME, the Chicago Mercantile Exchange, decided to use LIBOR instead of a reference rate that it had been calculating previously. Why did it decide to do that? And how did that impact the market and LIBOR's overall integration with the market?

The Chicago Mercantile Exchange had a contract that it launched shortly after the British Bankers Association created LIBOR. They used to have also another index they used to have was a commercial paper index, but that also had a lot of idiosyncrasies that were attached to it that made it unhelpful. So they switched to something that they call Eurodollar. And Eurodollar were based on an index that the Chicago Mercantile Exchange created to try to mimic LIBOR. And it would differ from LIBOR by a basis point or two. So they would conduct their survey on four times a year on the Monday before the third Wednesday of every March, June, September, and December. So, and it was, they would draw from a very large panel of banks. It was random.

Then they would, I believe they picked 20 banks, and then they threw out the top and the bottom. It was anonymous. And then they did the whole thing again. They randomized again to pick 20 banks, and then they surveyed them. They didn't know, banks didn't know who was going to be surveyed. And then they would average the results of those two surveys together. It was created in the mid-80s by the chief economist Fred Arditti at the Chicago Mercantile

Exchange, who was a beloved character in the futures markets by many people, including me. And then in 96, the Chicago Mercantile Exchange applied to the CFTC to switch to using the official British Bankers Association contract. They were worried at the time that some competitive exchange would create a contract based on official LIBOR, and that that might give them an advantage because loans, interest rate, swaps, and so forth, were all tied to the official LIBOR. Talks us a little bit about that sort of network effect. Why there can't be or why it's difficult to imagine a world of multiple indexes or mortgages

and credit cards and all these things and they all eventually sort of coalesce around one. why does that naturally happen and one sort of has to emerge as the way? You know, if there are many indices around, first it creates noise for if you have an interest rate swap and you're paying BBA official LIBOR and you're hedging using your dollar futures, you have a kind of basis risk there. Now, you can be, try to be very clever and understand the basis risk and make it operate to your advantage. People try to do that. And then, And if there are many indices floating around, the users of those indices will worry that, you know, some whoever is offering them the product or some index that they didn't expect is doing this

in a unscrupulous way. So if there's a single index, then it's the same for everybody and it's clearly the same for everybody. I think it's a healthy thing, just not the index the BBA hit. So by 1996, LIBOR has sort of edged out a bunch of other rates in the market. and sort of is on its way to becoming the standard. The CME has just adopted it for Eurodollar futures. And that, I think, is when you wrote your very well-known letter to the CFTC in protest of this move.

What did the letter say? Yeah, I wrote the letter before they actually had permission from the CFTC to make the switch because I wanted to stop them from doing it because I thought their survey was much better than the BBA survey. I argued that there were two problems with the BBA index. First, that a small number of banks were selected, and the same ones were selected again and again. They were all active participants in derivatives and that they might move the rate to their own advantage, that they might manipulate it. At the time, it was unregulated. There were no particular criminal penalties for doing this.

All that's changed after the crisis. And then I also argue that a bank might try to disguise its funding troubles because it didn't want to make them worse by posting a high rate if that's what it truly believed. In the letter, I just dug up the letter the other day before I came to see you. and I wrote in the letter that the CME claims the BBA survey will self-correct if markets become more volatile. They argue that the outstanding notion of instruments tied to BBA fixings is enormous. And I wrote, but enormous markets create enormous temptations. The CME argument works only to the extent that we rely on BBA members to look beyond their self-interest.

Again, without impugning any of the BBA banks, we do not consider this to be a sound basis for predicting human behavior. So I was a snarky little guy then. But, uh, well, obviously spot on too. But so in retrospect, obviously your argument will get to the manipulation that did occur. But in retrospect, the issues that you highlighted back then, they're like, oh yeah, it seems obvious. There's potential for manipulation to make trades go one way. And a bank facing funding stress isn't going to want to put an accurate number on a survey in which the survey is not a. anonymous. So that all seems like obvious in retrospect, why wasn't this a source of concern

from the very beginning? Because, yeah, why weren't they more worried about that? Because it seemed to be working. It was the derivatives market was growing, the forward rate agreements, which are tied to LIBOR, were growing. The whole market was centered on LIBOR. it was expanding to 16 currencies. I think you have to wait for something bad to happen before you can disrupt a force like that. Seems like how the world works. I'm afraid it does. Yeah. Did anyone from the CFTC get back to you? Yeah. They got back to me. As I recall, they said they worked at a dealet. It was a business decision. And they gave me a sweatshirt. They gave you a sweatshirt? They did, yeah. Do you still have No, no. Oh, man. But that was that was the outcome. Oh, I love that detail. So obviously,

LIBOR continued to grow. By the time, you know, fast forward a few years, by the time we get to the financial crisis and when the shenanigans started to be uncovered, how much of the world's credit markets and how much was linked then to this one index? You know, they say that, U.S. dollar LIBOR has a $450 trillion footprint right now. It was probably about the same at the time. If you count your dollar futures, corporate loans, all loans are tied to LIBOR. This is just dollars, and it's probably just as big in euros tied to Yeribor, British pounds, yen, Swiss franc, and many other currencies at the time. So the number, say something, I mean, if you count every year dollar futures contract, you get to quite lofty numbers. I mean, adding them all together is,

is in a way, kind of fishy. But that's, that, it's huge. By any standards of hugeness, it's huge. Yeah. So if we fast forward to 2008 or 2009, as far as I can remember, the charges of LIBOR manipulation or the rumors of LIBOR manipulation started surfacing in the financial media, I think in early 2009, and you sort of got a steady drip of allegations of certain behavior. What did you think in those days watching this, where you just sort of sat in your office going, see, I told you so? Hopefully, in those days, I had other things to do, problems of my own at that moment. There's a key turning point in the first quarter of 2008 in understanding what happened to LIBOR,

we have to recognize the change in the policy of the Federal Reserve to start paying interest on excess reserves that banks held at the Fed. Starting in Q1 of 08, the Fed would pay at the top of its target rate and then later at the top of its target range, money that banks left at the Fed. So why would I lend to another bank

when I could just leave the money at the central bank and get a generous interest rate. I wouldn't. So as a result of that, LIBOR became unhinged to anything that was happening in the world. 2007, it's not to do with the financial crisis. It's just a change that Bernanke had planned for a long time at the Federal Reserve. So the interbank, the IB and the LIBOR, vanished. So it left banks to really guess what, you know, they might be. borrow if they were to borrow, even though they hadn't borrowed in a long time. As a year's rolled by,

it became the individuals at the banks responsible for submitting the LIBOR each day would just imagine what they might have done if an interbank market still existed, but it didn't exist. Talk to us a little bit more about the process back when it existed and then didn't. So the survey says, what do you think that you could borrow at if you weren't negotiating, what would you be offered at? What was the actual process within a generic bank?

Someone's job was to come up with that number. How would they have done that? And then how did that change once that market disappeared? I can only speak from my own bank at the time. We would wait. There was a bank called Fuji Bank that would submit it

and you could see their submission and we would wait and do something close to theirs. What they actually did at Fuji Bank, I don't know. But it would pretty much be based on at the time on what the overnight rate was plus an expectation for what the overnight rate would average over the term. Because borrowing overnight, overnight rolling it for 90 days is a substitute for borrowing for 90 days at a term rate. So it would more or less be the bank's estimate of what they expected. from the Federal Reserve over the three-month period,

and then a little bit more because it was the offered side, the OR. And then if there were some liquidity premium, some pressures on term funding, some extra compensation that a bank would be willing to pay for having the money for three months or six months, then they would tack on a basis point or two for that. But that was actually very small.

So it was really just, what do we think the overnight rate will average during this time, plus a little bit for the offered side. And that was how it worked. Could you walk us through the exact motivations for manipulating LIBOR? And specifically, the motivation for manipulating LIBOR higher. Because I think a lot of people will understand that, you know, you might low ball the number because you don't want to out yourself as having a higher rate of borrowing in the interbank market than some of your other bank peers. But why would anyone want to manipulate the rate higher? How did that work?

Okay. There are two classes of manipulation here. The first is if you're receiving or making a payment tied to LIBOR, if you're making a payment, you would like it a little lower. If you're receiving a payment tied to LIBOR, you would like it to be a little higher. Now, you might be making a payment or receiving a payment, depending, most likely, tied to an interest rate swap. So in an interest rate swap, a bank will pay fixed and receive a sequence of payments based on LIBOR, or if it's receiving a fixed rate, it will make payments

tied to LIBOR. So it's completely symmetrical that way. There may be days when a bank has a big LIBOR fixing on an interest rate swap where it's receiving fixed and would like it to be a little higher or days when it's paying fixed and would like it to be a little lower. That's a of a micro manipulation. Yeah. And then there's the other, there's the signaling effect where it would like to create lower, it doesn't want to stand out from the crowd if there's suspicion that it has funding problems. The so-called LIBOR scandal was the first kind of manipulation where banks would presumably

change their rate based on what was going to happen on their self-interest at that day. We and women are looking for more. More to themselves, their businesses, their elected leaders, and the world are out of them. And that's why we're thrilled to introduce the Honest Talk podcast. I'm Jennifer Stewart. And I'm Catherine Clark. And in this podcast, we interview Canada's most inspiring women. Entrepreneurs, artists, athletes, politicians, and newsmakers, all at different stages of their journey.

So if you're looking to connect, then we hope you'll join us. Listen to the Honest Talk podcast on IHeart Radio or wherever you listen to your podcasts. Now, you mentioned in the beginning, I think you said they pull 20 banks, they lop off the top four, and they lop off the bottom four. So that makes it difficult, of course, for anyone bank to manipulate the underlying price, because you could post something extreme in one direction, but they'll just lop it off. This gets to where there must have been, and there was an element of collusion. Okay. I don't believe, I agree with your statement that it's hard to move the rate by very much. So, you know, a bank like Barclays might move the rate by, let's say, eight basis points. They can still not be lopped off. Let's take the case where they're, let's suppose that they're able to move the rate by one basis point. Okay. I think that's possible acting on their own. Let's say that they're receiving a $5 billion set. They're receiving that.

A $5 billion reset for three months. So that's one basis point on a million dollars is $25. So in $5 million, it's $125,000. So if they can move it up by a basis point, which would be heroic for them to do that, they could get, they could make $125,000. So, you know, this has been called, Rolling Stone called this the scandal of all scandals. Some publications called this the greatest crime of the 20th century. I don't know what the greatest crime of the 20th century is, but I don't think it's this.

I think it's small change that the manipulation that they were able to affect. And collusion, you know, I don't believe that there was collusion. I don't know that, but it'd be very hard, if any collusion were to happen, it would be orchestrated by the brokers. ICAP has been implicated in this. But since banks have competing interests every day, the idea that they'd all want a high set on this particular day is unlikely. So, you know, if 125,000 is a lot of money, but it's not a lot of money to someone in trading a gigantic swaps book. So I think it was kind of acute, for them, acute and small-time crime. What made this really scandalous, for a couple of reasons, it is scandalous.

First, the email traffic is really embarrassing. The famous, I'm opening a bottle of Bollinger champagne emails and that sort of thing. It was actually Curry that they were getting once his credit card was retired. Then he wrote, anything for you, big boy. And I also believe, you know, if I think a lot of this was just bluster, I'm not sure, you know, I'm not sure that as much happened as the broker might say, you know, I'll arrange this for you, big boy, and then not do it. And then if the rate went the way that they were hoping they would take credit for it,

I think there was plenty of that going on. This gets to one of my very side issues that has almost. nothing to do with finance per se, which is that all of our emails in texts and direct messages look a lot worse than reality because people just talk and they bluster and they BS and they brag. And then if any of us were to have all of our private correspondences dragged out in a court of law or in the media, it would look pretty terrible. That's just a general belief beyond any sort of, you know, fixing of an index. Yeah. And I think people are more careful. as a result of this scandal because it blew up.

You know, part of, there's a second scandal, or there's a lot of blame to go around here. And the other scandal is paying interest on reserves for the central bank. And they're not doing anything to fix LIBOR. This should have been done in 2007. This was, because how can you continue to use as a centerpiece of three-month rate

that doesn't exist anymore? So if the, fundamental process of setting LIBOR via survey just continued on, even after the interbank market de facto ended with the payment of interest on excess reserves. Is there anything visible in the data that shows weirdness? Like, did the dispersion of inputs start to change because the numbers became more fictitious and made up? Like, is there a way to sort of, if you looked at it forensically, could you see something happened at that switch? I don't think so.

You know, groups were moving in a pack so they could see each other. I think, you know, Fed funds, the overnight market, the domestic market, also basically vanished. So there's still a Fed Funds Index. You may wonder which banks are lending to each other overnight. And that became the only banks that would lend in the interbank market for Fed funds became federal home loan banks that offered reserve pulling services for their member banks that didn't have access to the Federal Reserve. So it just became a very small market. They couldn't lend at the Fed. So they would lend to Japanese banks that didn't have to pay deposit insurance. They would turn around and put the reserves

at the Federal Reserve. So it became a tiny market of about $50 billion overnight after the first quarter of 2008. So I think the scandal, became a maybe a catalyst to overhaul LIBOR, but it had to be done eventually anyway, and I think it should have been done a long time ago. I mean, from what I remember, there was some academic research, I think from 2008, where they did look into LIBOR submissions, and I think they did find some sketchiness there, like some banks seem more inclined to, quote, higher than others. and it never came to a firm conclusion, but it sort of kicked off a lot of discussion.

I was just wondering, as this came to light and as the allegations are sort of flying around post-2009, were you surprised at all by the reaction of the British Bankers Association? Because they defended the LIBOR process to the very end. Maybe, you know, that was a prestigious thing for them. It was what they were known for. but there was not a role for them, not post crisis, but post, in dollars post the first quarter of 2008. So I guess it's, I guess it shouldn't come as a surprise that people want to hang on to their power. So talk to us a little bit more about the other form of manipulation and that significant.

So as you mentioned, there was the attempts to adjust the rate for perhaps to gain, a little bit of an edge on a trade or maybe to convince a client that you've done something really big for them. But as you put it, it is a scandal, but probably not the greatest scandal of the 21st century or the biggest crime or the biggest swindle ever. But what about this other part of the significance or the degree to which banks disguise their funding weakness just by submitting false bills? Yeah. I'll say one thing on behalf of the bank. Let's consider September 15th of 2008 on the Monday when Lehman went into administration. The question becomes, if you were to go and borrow for three months, six months from another bank without negotiating, what rate would you get?

Now, on that day, Goldman Sachs and Deutsche Bank wouldn't settle spot for an exchange with each other. So if you were to call another bank and ask to borrow for three months and not negotiate, The answer would be infinity. There's no responsible thing to do because this question that you're being asked is posed for a different environment, for a different background. So the question, just the grammar of the question doesn't make any sense. You have to give something. So, you know, make up, if they had put, you know, a million percent or a thousand percent, then they would have blown up all the derivatives of the world and all the home mortgages and all the floating rate does. So they just put something.

Famously, Barclays was putting a higher rate in dollars than other banks. And Paul Tucker at the Bank of England told them to lay off a little bit because you're freaking people out. Yeah. I'm paraphrasing. And, you know, he was criticized for that. But, you know, in the context of the time, it was sort of a grown-up thing to do because nobody's, the whole thing is divorced from any kind of reality. people have to muddle through because the index was not constructed for this environment. So I'm not sure what else to do.

Well, just to be clear, in mid-September 2008, it's not like there was a lot of mystery that the banks were under a lot of stress. So even to the degree that they may have been making things up, it's not like people were under some illusion that they were all in great health. Right. I don't think it was shocking. I think looking at the details of the LIBOR submissions and trying to read anything into that was a hopeless exercise. So it would probably be over-egging it to say that actually giving the banks a degree of control over their self-reported borrowing rates might have been a good thing in September 2008 or at least gave them a little bit of leeway. But I think that's a good segue maybe to talk about the transition away from LIBOR. And I think the effort is mostly to, again, move away from this self-reported survey and go back to a reference rate that's based on actual transactions.

What do you think about that move? Yeah, I think the move to SOFA, which we have in the United States, is the right one. It's based on actual transactions. What does that stand for again? Secured overnight financing rate. And we should point out in other currencies, the move has already been made. In Australia, to bank bills, in Canada, to CEDOR, the New Zealand, Danish Krona. They've all made the transition years ago to overnight secured rate.

And in euros, the move, the equivalent to SOFER is something called Esther, the Euro short-term interest rate. And the E and Esther is the Euro symbol. And already the overnight interest rate called Eonia in Euros has switched to Esther plus a spread. And that's produced by the ECB every day. The SOFER is based on secured overnight financing. So each day at 8 o'clock, the Federal Reserve publishes the SEPA. average repo rate or secured financing that was reported to them from the previous day. And it's a volume weighted median.

So you throw out all the top and all the bottom and look what's in the middle. And so it's an overnight rate. And then the issue that the market has to confront is how to turn an overnight rate into a three-month rate or a six-month rate in order to create new contracts and also to switch over all the legacy contracts. Okay, Richard, we're going to stop it there because we're going to devote at least, I think, two more episodes into really delving into the technicalities of SOFER and other replacement rates for LIBOR. But thank you so much for coming on. That was a really fantastic conversation.

Thanks, thanks, Tracy. It was a pleasure. So, Joe, do you feel more up to speed on the LIBOR series? Yeah, that was actually incredibly helpful. I had only the most vague outlines, but just really walking through the mechanics of how they constructed it, how the manipulation worked, the degree of it, why the world credit markets coalesced around it. I feel like as we continue with this series, I feel a little bit more on firmer footing than I did a little while ago. Yeah. And I think Richard is really good at getting to the nuance of a lot of this topic, like the differences in manipulation. Why?

people did what they did and also the degree to which it was a scandal or not. Because of course, if you're manipulating the reference rate for trillions of dollars worth of financial assets, one basis point or another, it is going to have an impact on the overall market, but your actual profit from that move is probably not going to be that huge. Yep, exactly right. And it's great to hear from someone who, like, 10 years before everyone agreed or recognized that the system was flawed seemed to nail it exactly. It's only too bad that he didn't keep that sweatshirt. Yeah, it sort of speaks to what's the word I'm looking for, systemic complacency. I think people always knew that there was a possibility that a survey of self-reported borrowing costs from

the banks could maybe not necessarily reflect reality all the time. And people chose. to overlook it because LIBOR was easy for them. It was standardized at that point. And frankly, it was profitable and linked to lots of different financial instruments from euro dollars to interest rate swaths. Yeah, exactly right. All right. Should we leave it there? Yeah, we have lots more to talk about in our next episode. This has been another edition of the Allblots podcast. I'm Tracy Allo. You can follow me on Twitter at Tracy Allo. I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you can follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcasts. Francesca Levy at Francesca Today.

And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.