Last we reported on the Libor scandal, several no-name bankers involved in the rate rigging were being arrested. All’s been quiet on the Libor front, business as usual until now. A new group is in charge of setting the benchmark interest rate: the New York Stock Exchange (NYSE). No, this is not a joke.
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After news of the scandal broke, the main financial regulator in the UK initiated a sweeping review of the Libor process. The review determined that among the most questionable aspects of the Libor was the fact that bankers set the rate themselves, resulting in an ultimately disastrous conflict of interest.
Thus, the regulator recommended the British Banker’s Association (BBA) be stripped of their duty to run the Libor and that it ought to be handed over to, “an independent third party” — accent on the word independent.
The NYSE’s parent company won the contract in a bidding process that also included the London Stock Exchange. Officials in the British government have delightfully stated the NYSE’s governorship of the Libor will lead to a safer and stronger business sector. But where is the evidence?
first tuesday insight
Well, apparently the powers that be have determined the NYSE to be an “independent third party.” The sheer lunacy of this development boggles the mind.
Each day it seems we are confronted with the reality that the global financial system is even more corrupt than we thought. How can a stock exchange, whose trillions of dollars in daily dealings are benchmarked to the Libor, possibly be considered independent?
Well, if you’re defeatist about fixing this sullied interest rate benchmark, as we obviously are, your only option is to steer clear of Libor-indexed adjustable rate mortgages (ARMs) until our regulators get involved in the cleanup. Rates on fixed rate mortgages (FRMs) are still low enough that the ARMs-to-loan ratio has yet to show any distortions.
However, rates are rising and will continue to cyclically rise for the foreseeable future, which means ARM originations will soon garner higher demand as excessive prices and uninformed buyers collide. Here’s hoping those risk-taking souls jumping into ARMs are rewarded for trusting the NYSE with the largest expenditure of their lives.
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Of course, we think this is like trusting a fox to guard your hen house, or whatever.
Re: “NYSE EuroNext to Take Over Administration of Libor” from the New York Times
