LIBOR and Self-Regulation

While the head has been cut off of the snake at Barclays PLC, with the CEO, Bob Diamond, the COO and the Chairman of the Board all resigning, the proverbially shit still has a far way to go before it hits the fan. Although the collusion between banks to set the rates, the implicit wink and nod from the Bank of England to get Barclays to lower their rate and, especially, the callous collusion between traders in various banks to rig the market so they could make more money are all shocking, how LIBOR (the London inter-bank offered rate) was set in the first place provided the biggest offense. As described in last week's The Economist:

For LIBOR, a borrowing rate is set daily by a panel of banks for ten currencies and for 15 maturities. The most important of these, three-month dollar LIBOR, is supposed to indicate what a bank would pay to borrow dollars for three months from other banks at 11am on the day it is set. The dollar rate is fixed each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow if they needed money. The top four and bottom four estimates are then discarded, and LIBOR is the average of those left. The submissions of all the participants are published, along with each day’s LIBOR fix.

Emphasis added. This is patently Linsane as is it that anyone is surprised by this. The banks involved are only required to give an estimate, based on nothing else than what they think/feel is right, and people are surprised that this system did not work like gangbusters? The article goes on to point out that banks/traders were actually incentivized to rig the numbers as millions of dollars stood to be made based on where the LIBOR was at. I mean, I know hindsight is 20/20, but how did no one think about this beforehand? We are supposed to ignore the obvious conflict of interest and hope that those good chaps in the white shoe financial firms will work in everyone's best interest? This scandal again illustrates the ridiculous amounts of problems with self-regulation in banking. As much as folks like Jamie Dimon state that regulation will handcuff, prevent growth and curb stomp the entrepreneurial spirit because firms will not invest, why would anyone believe that self-regulation is remotely possible in an industry where tinkering with a few numbers or changing a few assumptions in a few projections can mean the difference in hundreds of millions, if not billions, of dollars?

Self-regulation is clearly not the answer, but government regulation has to be, if not effective, then at least competent. The Wall Street Journal pointed out last week that Tim Geithner was at least somewhat aware of these problems in 2008 and wrote to Mervyn King, the Bank of England Governor, suggesting possible changes that could improve the LIBOR. The simplest change, however, seems obvious: to affix the LIBOR to what it actually costs banks to lend and borrow. In most cases this process would become straightforward and could easily be backed up by hard data. The Economist concurs and goes another step:

Two big changes are needed. The first is to base the rate on actual lending data where possible. Some markets are thinly traded, though, and so some hypothetical or expected rates may need to be used to create a complete set of benchmarks. So a second big change is needed. Because banks have an incentive to influence LIBOR, a new system needs to explicitly promote truth-telling and reduce the possibilities for co-ordination of quotes.

The Economists recommendation, as delivered by Rosa Abrantes-Metz of NYU Stern, is to increase the number of banks on the LIBOR panel drastically so that the average is harder to game. That's all find and dandy, but we are long passed the era of the gentleman banker. In the 1970s and, especially the 1980s, with the rise of more aggressive money making schemes through hostile takes overs, LBOs and the development of overly complicated derivative trading strategies, gentlemen banks were replaced with ravenous financial wolves on the hunt for pure profit. Promoting truth-telling seems foolishly naivete. Hopefully, after one of these scandals, people will start to see and accept that.

IMAGE: The Telegraph Online

Cuomo Out to be the Millennial Candidate in 2016?

New York Governor Andrew Cuomo, with the support of Mayor Palpatine Bloomberg and Police Commissioner Kelly, will request the the legislature decriminalize the possession of small amounts of marijuana in order to mitigate the disproportionate affect the city's "stop and frisk" policy has on young minorities. The possession of less than 25 grams of marijuana would be a violation, almost like having an open container, rather than a misdemeanor; i.e., you get a ticket rather than going to jail. Clearly this is a good policy but does not do enough to counter the many problems with stop and frisk and certainly does nothing to fight marijuana's ludicrous classification as a schedule 1 drug. Nonetheless, I like what Governor Cuomo is doing here. Whether he meant to or not, he's clearly differentiating self from "No Soda Nanny" Bloomberg in how he is deciding to leave his NYC legacy.

When one considers this latest legislative move by Cuomo in light of his push for the recognition of gay marriage, it is hard to believe that Governor Cuomo is not setting himself up for a 2016 run as the candidate of the mostlikely newly economically powerful and more mature millennial generation. It is a beautiful political play as, between his continuously rising favorability numbers and the support of the Bloomberg/Kelly duo, he's basically bulletproof here. State GOP can attempt to call him soft on crime, but that is pretty hard to pull off when you have the Mayor and the Commish in your corner. So he has no political liability and gets to ease off of another law that millennials find ridiculous... illegality of marijuana. Impressive anyway you look at it.

I actually hope Cuomo does run as he seems to be really cutting his teeth as Governor and I think he'll be ripe by the time 2016 comes around. He has strong political ideas and ideals and I know many a millennial who will support his sensible policies.

Quick Mini Rant:

Please indulge me briefly. Or don't and just stop reading here. It's my rant and I'll do what I want to. How EFF'N RIDICULOUS is it that marijuana is still considered a schedule 1 drug? Just so we are all on the same page, here is the DEA's definition and examples of a schedule 1 drug:

Substances in this schedule have a high potential for abuse, have no currently accepted medical use in treatment in the United States, and there is a lack of accepted safety for use of the drug or other substance under medical supervision.

Some examples of substances listed in schedule I are: heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), peyote, methaqualone, and 3,4-methylenedioxymethamphetamine (“ecstasy”).

Really? REHHEAAALLLYY? Take a look at that list and please tell me which one doesn't belong. And which one of those is the scientific name for cocaine again? Oh wait, it is not on there because it is a schedule 2 drug because of it's medical benefits! Please read this whole rant again. We can have medical cocaine, but not medical marijuana without state DEA's, ostensibly with the implicit okay of President Obama, busting things up. Because that make sense.

UGH... I need to go smoke a joi pack of cigarettes and nail back a fifth of whiskey. Legally.

Image: NY Daily News

A Simple Request

I know it is usually Music Video Mondays but this had to be posted for a number of reasons:

1) both the video and, more importantly, the song are fantastic.

2) I may or may not have been in love with Fiona Apple in, like, the 7th grade or so.

3) this video was directed by Paul Thomas Anderson. For realsies. Look it up. The guy who directed this, and this, and this, and this upcoming one. How was I not aware of this? Is P.T. Anderson just a huge Fiona Apple fan (I'd get it) or does she have some crazy dirt on him? Does Maya Rudolph make him do it because she's home-girls with Fiona? I have a million questions about this artist-director relationship and I would watch a complete documentary on it. So, Mr. Anderson, please get crack-a-lacking on that documentary. Thank you sir and have a fantastic Memorial Day Weekend. I look forward to The Master and, as always, to making fun of Scientologists generally.

David Frum Flips the Script on the Euro Crisis

As noted first by Sully, David Frum has an interesting take on the benefits Germany derived from the Euro and how it had a deleterious effect on the rest of the Euro-zone. Essentially, the currency manipulation inherent in the Euro made it so that Germany became the Euro-zone's lender and many countries (Ireland, Greece, Portugal, Spain... sound familiar?) racked up an enormous amount of debt because interest rates were so low. On the other hand, because Germany had changed to the Euro and no longer had the Deutsche Mark, there was no currency appreciation in Germany that would have negatively affected their trade surplus, retention of corporations and unemployment. Basically. Germany was able to continue to grow on fundamentals while the rest of Europe built castles in the air supported by massive amounts of loans from Germany.

Not to take away from the foolish behavior of the other countries (the Irish built like a they were dru... nevermind, Greece's public sector and taxation was/is a bloody mess, etc.), but I think it's an interesting take on how Germany should cop to their complicity and stop playing the victim.

(Image from the Economist)