The march of the Libor apologists

No offense but I’d like to know which planet Mikhail Chernov is living on. In Bloomberg he writes

People are rightly appalled at the way bankers manipulated Libor, a benchmark interest rate that influences the value of hundreds of trillions of dollars in financial contracts worldwide.

But before authorities topple more banks’ managements and scrap an indicator that has served the market for three decades, they should ask themselves a question: Who was really harmed?

Does this really need to be explained?

Confidence is an essential nutrient for any economy, and we see this played out in all kinds of ways. Take whatever currency you happen to have in your wallet. Hyperinflation? It happens when enough people wake up and have strong reason to fear that the dollars they have today will be worth much less tomorrow. Credit crisis? You get that when people who lend money are afraid that they might never be repaid. Rising cyclical unemployment, i.e. the kind that can’t be explained away by things like technology or outsourcing? That’s when companies fear that they won’t have enough future demand for their products and services to justify hiring people. Low spending? When people fear that they might lose their jobs.

Confidence is so important that economists, investors and media pay close attention to monthly measures of it. If confidence is general then trust, another essential economic nutrient, is specific. That’s when you believe that you’re not going to get screwed, cheated, conned. It’s why a gun-shy investor would prefer to put her money in a place like Canada, where the law is applied consistently, as opposed to Russia, where it isn’t.

Take any important industry and imagine how it would fare in the absence of trust. Cars, for example. Would you ever buy a new one if you knew there was a high chance that it might explode every time you turned it on?

Chernov would have us believe that banks’ lies about Libor during the crisis were no big deal. In fact, he says, they may have helped.

The misreporting was bad for investors in various securities, such as mortgage bonds tied to Libor, because it artificially lowered the payments they received. It also provided a welcome relief for millions of struggling U.S. homeowners with floating-rate mortgages, and greatly helped the Federal Reserve in its efforts to get interest rates down. At the time, the Wall Street Journal estimated that the benefit to homeowners and other borrowers amounted to more than $10 billion a month — a meaningful stimulus at a crucial moment in the recession.

He even goes so far as to say:

[B]y lying about their borrowing costs to make themselves look healthier than they were, banks might actually have done humanity a great service.

If we were in 17th century France I’d throw my glove at him.

He conveniently ignores the fact that Libor was being manipulated by several banks before the financial crisis was even a glimmer in Dick Fuld’s eye. The investigations into all of this are far from over, and we have no idea where this trail of excrement leads. Yet Chernov chooses to tap dance like Savion Glover around the fact that confidence, trust, and freedom from large-scale fraud form the bedrock of any economy worth its salt, and any republic that wants to avoid the prefix “banana”. We are talking here, folks, about widespread collusion to manipulate a rate that affects $800 trillion of financial contracts.

Again, what planet is Mikhail Chernov living on? From Bloomberg:

Ah, yes. That one.

 

Tags: Libor, Liebor, Mikhail Chernov

Category: Business