September 2008. The financial system was both frozen and burning. Trust had evaporated. Liquidity went up in smoke. Under these fraught conditions, the dials on the financial dashboard spun crazily. Banks marked assets to market based on, well, very little. Credit default swap spreads, VIX numbers, asset prices veered wildly. Meanwhile, LIBOR was acting oddly normal. The first stories about something awry in LIBOR appeared around then. Messing with LIBOR was like committing a crime in Times Square. Maybe everyone would be too distracted to notice. Maybe they'd think it was just a typical form of street entertainment, like the naked (well, seminaked) cowboy. And for a while, that proved to be the case. But LIBOR, for all its obscurities, is deeply ubiquitous and profoundly public. And so investigations began, first into how LIBOR was set and how to improve it, then into who did what. Now, four years or so later, Barclays has been shamed and other big banks line up in the hallway for spankings. Robert Diamond has tumbled. Despite the obscurity of LIBOR, this scandal looks like the largest, clearest and most systemic wrongdoing tossed up yet by the crisis.
Who can defend the bankers? Barclays confessed. The LIBOR mess is another bundle of dried sticks piled atop the auto-da-fé of modern banking. More sins; more scandal; more chatty emails. What does it mean? First, the LIBOR mess fits neatly into one of the themes of postmodern finance: the snares, delusions and conflicts of interpretation in an age drunk on quantification. LIBOR rates emerge not from a calculation, based upon hard and verifiable numbers, but by "expert opinion." This relic of traditional banking, when many things were determined by guessing, was a disaster waiting to happen. There was of course institutional and individual self-interest. But there were also the dynamics of the herd. In crisis, no bank wants to be an outlier. Sticking out makes you a lightning rod on a parapet. Cheating becomes a group activity. Second, regulators either had to know or were incompetent (this is a Barclays talking point, but valid). But, of course, regulators had their own interests. Since LIBOR was a judgment, and markets desperately craved a sedative, what did it matter if banks pretended they could borrow more cheaply? Who would be hurt? What is objectivity anyway? Fudging LIBOR absorbed shock, much like banks not marking real estate loans to market. Third, looms the cultural decline argument. This transgression might not have occurred if banks were still banks and not go-go speculators. It's possible. It's also possible that LIBOR has been messed with for years (Barclays was doing it in credit crunch-less 2005).
What is real? LIBOR was besmirched, but the larger question of mark-to-market, which loomed so large in the crisis, has been brushed aside. Mark-to-market, particularly in a meltdown, is a fiction that renders all financial values suspect. It spawns the cynical belief that values and valuations are manipulated, subject to self-interest, and thus unshackled from reality. There are so many cases of values drifting ghostlike in our globalized, networked, market wonderland. Consider corporate accounting, pension accounting, the economics of the CDO squared, Basel I, II and III. Even better, ponder the illusions of fiscal accounting; mull the fate of the Social Security lockbox; the magic of central banks and money. Before Greece fiddled with its accounts, the European Union actually helped candidates for the euro zone mask deficits. What is a deficit but a number so large as to lose touch with sense? In a made-up world, a lie is a mere fiction, signifying nothing.
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