The Case for AMERIBOR As The Replacement for 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 (0:18)

So Joe, this is the third episode of our LIBOR series.

Joe Weisenthal (0:23)

You know, I said it in the beginning, and it was a big facetious.

This is one of those things that I felt was extremely important to understand, that I didn't have much knowledge on. And so I'm very happy that we finally working through all that.

Tracy Alloway (0:36)

You know, our first episode, we sort of talked about the problems with LIBOR pre-financial crisis and post-financial crisis. And then in the second episode, we talked a lot about the transition away from LIBOR and how that's going.

In this episode, we are going to talk to someone who's actually actively trying to come up with an alternative reference rate.

Joe Weisenthal (1:00)

It is interesting because I know that there is a very big push afoot to move, you know, as we've talked about from LIBOR over to SOFR, and there are all kinds of efforts going on towards that front. But I guess that is not the only theoretical alternative approach.

Tracy Alloway (1:19)

Yeah, exactly. So even though there's this regulatory push towards the secured overnight financing rate or SOFR, there are, well, there is the potential for alternative rates to enter the market. And we have the perfect person to talk about this.

We're gonna be speaking with Richard Sandor. He's the chairman and CEO of the American Financial Exchange. Also someone who occasionally is referred to as the father of financial futures, has a lot of experience in the derivatives market and has, well, invented quite a few contracts over the years. So again, the perfect person.

Joe Weisenthal (1:56)

I'm really looking forward to this.

Tracy Alloway (1:57)

Okay, let's bring him on. Richard, thank you so much for coming on All Thoughts.

Richard L. Sandor (2:02)

Oh, it's my pleasure. Thank you for the invitation and I'm happy to be here with both of you.

Tracy Alloway (2:11)

Oh, thank you.

So I gave a little bit of an intro just then, but it's kind of hard to summarize your career because it's quite expansive and you've done quite a few things. Can you try to summarize it in a nutshell for our viewers? Viewers, for our listeners, I should say.

Richard L. Sandor (2:30)

It's really hard to talk about yourself. I leave that to others generally, but let's say I'm a serial inventor and a financial innovator. I get it wrong a bunch of times and then get it right too. So I've spent 45 years trying to observe capital markets and see what instruments can be developed to minimize transaction costs and achieve social objectives. And LIBOR and its successors fit into that. And like most inventive activity, there's a spark.

And we had sold our last exchange, which was a series of market-based solutions to global warming, to ICE, in 2010 It was very successful. Our investors made 7 1 1 2 15 times their money between 3 and 10 The sale price was 600 million. And we had developed exchanges in North America, the UK and China.

And we reformed the incubator, which is something called the EFP, because we were looking for new markets. And we started to look at water. We had a contract with the state of New Mexico, California, looking at China, because we thought that water would be, and still do think, the commodity of the 21st century. I picked up a newspaper in 2011 and read that the Royal Bank of Scotland fired four people for manipulating LIBOR. Called the team in, and even I know it takes two to manipulate. So if there was one, then there was gonna be a second, and we binomially expanded. Two would go to four, four would go to eight, et cetera. And that ultimately, we thought that there would be a demise in LIBOR. It would end. And that we would set off on a 10-year odyssey to develop a replacement to LIBOR. LIBOR was unusual.

And in that, it was the only asset class that I knew about that had a single benchmark. All because of a loan in the 60s to the Shah of Iran. If you take a look at crude oil, it's got WTI, it's got Brent, it's got Dubai, it's now got a Shanghai. If we look at the equity markets, they have NASDAQ, S&P, Dow, Russell, Valueline, more stock indexes than there are stocks.

And the same with fixed income. So what is this anomaly called LIBOR and how could we have hundreds of trillions of dollars tied to a poll? That would be like electing the president of the United States based on the Wall Street Journal poll. It made no sense whatsoever that it was the only benchmark and it wasn't even market determined. So we set out and said, let's develop something that is everything that LIBOR isn't. Let's make it transparent.