Is that the next financial collapse? LIBOR not only faked, but vaporized!
It have now been nearly nine years since the last time the banks brought the global economy to its knees. But the reasons for that have not been solved, so many people believe it is just a matter of (a short) time until the next bank-induced global crash.
Of course there is only one thing you can be sure about: The crash will come from something nearly no one predicted and the party will go on even when the train is already derailed.
But there seems to be a hot candidate: the LIBOR
Now, you may thing, we know that. The banks faked the LIBOR rate – the amount of interest they have to pay to borrow from other banks – for years and this is known. No reason for panic, right?
But you see, the banks have not only faked their LIBOR submittings, the LIBOR itself was based on pure air. Because the Inter Banking Loans did not happen. Not at all. Banks weren’t lending to each other. But they still set a rate at which to do it.
In math that would be a division by zero – undefinable.
The admission comes by way of Andrew Bailey, head of Britain's Financial Conduct Authority. He said recently (emphasis mine):
"The absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks. If an active market does not exist, how can even the best run benchmark measure it?"
As a few Wall Street analysts have quietly noted in the weeks since those comments, an "absence of underlying markets" is a fancy way of saying that LIBOR has not been based on real trading activity, which is a fancy way of saying that LIBOR is bullshit.
Again, you may ask: So what? But you need to remember that the LIBOR is not only something banks can make money off – it is something that is the base of nearly every loan there is! The amount is estimated to be approximately 350 trillion dollar!
What to do?
In the meantime, there is the question of how this gets fixed. The Brits and Bailey have announced a plan to replace LIBOR with "viable risk-free alternatives by 2021."
But even if that happens, it means that all the contracts based on the LIBOR – like more then half of all mortgages in the U.S. - have to be rewritten.
At least we know that this time’s banking crises will not cost many banker’s jobs, since they will have to rewrite all that stuff.
Interesting idea. But how to destroy a non-existent market? Interest rates will play a role, but rather not the libor.
Reason for next financial collapse?
Credit bubble or bond market. That´s my tip.
Credit bubble again is boring, and bonds? Nah...
Did not know that it must be exciting. Exciting enough for me.
Aren't you excited at a big price drop? More stocks for less money! ;)