September 23, 2017
“John Ewan was born five years after Minos Zombanakis fathered his interest-rate mechanism. But by 2005, his professional life revolved around Zombanakis’s creation. Ewan didn’t have any particular interest in finance or banking. Raised in a family of quasi-socialists, he aspired to be a scientist, majoring in biology at the University of Bath in southwestern England. Tall and with muttonchop sideburns, Ewan played the guitar and loved the theatre. But his real passion was travelling. ”
September 23, 2017
“Back in England, the twenty-nine-year-old Ewan applied for a number of jobs. He eventually accepted one at the British Bankers’ Association and started working there in April 2005.”
September 23, 2017
“The BBA wasn’t a bank. It wasn’t a government agency. It wasn’t even a company. It certainly wasn’t regulated. But it was probably one of the financial world’s most powerful institutions. And that was because the BBA controlled something called Libor.”
September 23, 2017
“Zombanakis’s innovative method of calculating interest rates on large loans had quickly become popular, but for more than a decade, it had remained an informal mechanism. Whenever a group of banks teamed up on a loan, they essentially would arrange their own version of the benchmark. There was nothing etched in stone, no way to easily replicate the rate for day-to-day use.”
September 23, 2017
“One impediment to accommodating these nascent markets was the lack of uniformity in how banks calculated interest rates that fed into swaps and other instruments; negotiating interest rates on a contract-by-contract basis was hardly efficient. At the request of the Bank of England, in October 1984 the BBA set up a committee of commercial bankers and powerful central bank officials to contemplate the issue. After extensive deliberations, the group hatched an idea: Each day, the BBA would collect from a group of banks—not just British ones, but also American and European lenders—data about how much it cost each of them to borrow money from each other, on a percentage basis down to two decimal places”
September 23, 2017
“BBA would disseminate the average to the banks and others for use in various financial instruments. The number was dubbed “the BBA standard for interest rate swaps.” That didn’t exactly roll off the tongue, so the group decided on a marginally catchier acronym: BBAIRS. That name didn’t last long. On New Year’s Day in 1986, the BBA for the first time published something called the London interbank offered rate—Libor, for short. Pronounced LIE-bore, it would soon be the basis for much of the modern financial world.”
September 23, 2017
“By the 1990s, the phrase “London interbank offered rate” was buried in the fine print of an increasing number of American loan agreements. Before long, the fortunes of just about anyone who borrowed money in the United States and, to a slightly lesser extent, elsewhere in the Western world hinged on Libor.”
September 23, 2017
“From the start, though, Libor was prone to problems. Chief among those was the potential for banks to manipulate it for their own benefit. Doing that was alarmingly easy. In the 1990s, junior bank employees would simply pick up the phone and call in their submissions to financial data company Thomson Reuters every morning around eleven o’clock. A low-level Reuters employee punched all the banks’ data into a computer and calculated the averages. Nobody of any seniority monitored the process. Virtually all it took for a bank to skew Libor was for it to skew its own submission.”
September 23, 2017
“Big providers of financial data were among the entities paying licensing fees to use Libor. So were banks. But the largest, most lucrative clients were those (like the Merc) that were spending lots of time creating new types of derivatives. Those derivatives needed to be based on something, and Libor often seemed like a good bet. Ewan got to work expanding the menu of Libor varieties and licensing out the benchmark for use in what he called an array of “novel derivatives.”
September 23, 2017
“Each spring, Ewan and Merriman or another colleague fanned out across the City of London and Canary Wharf to check in with the banks about how they thought Libor was working. As far back as 2005, around the time that Ewan started his job, the BBA had been hearing scattered complaints about Libor’s integrity. That year, Barclays was the main dissenter. Its concern was that Libor was too high; banks seemed to be reporting data that overstated their borrowing costs.”
September 23, 2017
“For more than a century, UBS—its name an acronym for its predecessor, the Union Bank of Switzerland”
September 23, 2017
“a conservative lender, not aspiring to anything more than being a trustworthy servant of its mostly Swiss clientele. It was considered the premier place to work in Switzerland. Like (of course) clockwork, bankers were rewarded with promotions every two years. When they reached the rank of vice president, managers got to line their new office with their choice of wood: mahogany, walnut, or pine. But the bank had started to stray from tradition during the last decade of the twentieth century. Enviously watching Wall Street firms, Union Bank embraced practices such as hedge fund investing.”
September 23, 2017
“Smith, a Brit, hadn’t attended college, having gone straight into banking in 1989, joining a company that would one day be absorbed into UBS. In 2003, he was transferred from London to the Zurich office, where he was a midlevel trader”
September 23, 2017
“There was a password-protected Excel spreadsheet into which he was supposed to enter data every morning about how much it cost the bank to borrow money from other banks. Then he would hit a “submit” button embedded in the spreadsheet, and off the data went. The system was an upgrade over the phone-it-in approach that the BBA had used in previous years, but it was still clunky and prone to crashing.
Smith had basically no clue what he was doing. ”
September 23, 2017
“Even as a rookie on the desk, he understood what was going on. The traders had big positions whose values hinged in large part on Libor—precisely what Marcy Engel and Richard Ross had warned the CFTC would happen. A lot of money was on the line. So Smith generally followed their requests when it came to what he entered into his spreadsheet. He didn’t see any reason not to.”
Notes From: David Enrich. “The Spider Network.” iBooks.
Check out this book on the iBooks Store: https://itunes.apple.com/dk/book/the-spider-network/id1145710390?mt=11
