Meet the Man Who Blew the Whistle on LIBOR

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:19)

So Joe, we're finally doing it. We're finally doing our LIBOR series.

Joe Weisenthal (0:25)

Yeah, we've been talking about this for a while, the idea of doing a big series on LIBOR, what happened to it, what it was, what its state is now, where it's going, and we're gonna kick it off.

Tracy Alloway (0:41)

Yep, this is the first of those episodes. So just as an introduction, let's talk about what LIBOR is. LIBOR is the London Interbank Offered Rate. And it is, as you mentioned, Joe, in a state of transition.

Just for background, this is basically the reference rate that governs trillions of dollars worth of asset prices. So for instance, if you sell a bond in the market, it will be priced off LIBOR.

So whatever the Interbank Offered Rate is, the rate is plus an additional yield. Same thing if you sell a loan. Home mortgages priced off LIBOR. Basically, the financial system has, for many, many years, run on LIBOR. And that is a big deal because we are supposed to be moving away from that particular reference rate.

Joe Weisenthal (1:26)

Right, so this is not a topic that I know particularly well. I know about the centrality of the rate.

I know that there is an effort afoot to move all of these various offerings that Curly indexed in some way to LIBOR onto something new, which we'll get to in this series.

And I know that around the time of the crisis, there was manipulation of this price and that that was a major scandal and that the way the price is set and measured opened itself to all kinds of shenanigans. But honestly, I don't know much more about it than that. I don't know much about its history. I don't know the degree to which the manipulation really affected things. I don't know why it's so difficult to change. And I'm very much looking forward to learning more as we embark on this series, because although I don't know very much about it, I get the sense that this is extremely important and that people in credit markets, it's one of the big things that is going to affect their industry and that they're all watching.

Tracy Alloway (2:29)

Absolutely. And you've set the scene perfectly.

And we are actually going to start with a discussion about what LIBOR is, how it came into being, and of course, the manipulation scandal that happened after the financial crisis. So it's a good place to start. And our guest is actually the perfect guest to talk about this. He's basically been a Cassandra when it comes to warning about the potential for banks to do sketchy stuff with LIBOR.

His name is Richard Robb. He's currently the CEO of the hedge fund, Christopherson Robb, also a professor at Columbia. And many, many years ago, he was actually a rates trader at DKB Financial in New York. And he famously wrote a letter to one of the regulators, the CFTC warning of the potential for LIBOR manipulation. And this was way back in, I think, the late 1990s. So really the perfect person to discuss this.

Joe Weisenthal (3:29)

I can't wait. I can't wait to learn all about it.

Tracy Alloway (3:32)

Excellent. Richard, thank you so much for coming on.

Richard Robb (3:36)

Great to be here.

Tracy Alloway (3:37)

So I guess just to begin with, I'm curious, what was it like being a rates trader in the 90s? Quite a lot happening back then when it comes to interest rates.

Richard Robb (3:47)

Oh, it was so much fun.

The interest rates would move 10, 15 basis points a day. The interbank market was very active. The IB in LIBOR stands for interbank. So banks would often borrow and lend to each other and the rates that they would lend were important to the banks. They were important to financial markets at the time. So DKB stands for Daichi Kangyo Bank. We were actually the largest bank in the world at the time. And I know my students, Columbia, Japanese students and some of them have never heard of DKB. It kind of breaks my heart. But then, my students at Columbia, it breaks my heart that they haven't heard of DKB because it was a great bank, it was a fun place to work. It's merged and formed Mizuho now, which readers will know, listeners will know. The capital markets were developing, they were developing in Japan.

And it was kind of the heyday of financial engineering before the term financial engineering became a way to disparage, it's an exercise in financial engineering. In those days, it was something to be proud of.