The Spider Network- LIBOR

The Spider Network- LIBOR

When Minos Zombanakis managed to arrange a borrowing of 80 mn USD for the shah of Iran who was in dire need of funding after the war, Zombanakis paved way for two of the now often?used facilities in the modern finance world- syndicate loan and variable rate based loan.?

Starting around 1970, the benchmark rate became a reference point for millions worth of loans and contracts. Around mid 1990s, the British Banking Association (BBA) started to work for formalising the use of the variable rate (then informally termed LIBOR)?for the banking industry.?

The decisive moment for the rate was when the Chicago Mercantile Exchange adopted it for settling its contacts, granting it almost a virtuous stamp of sanctity. Come 2007, its usage become so prominent that a basis point of shift here and there could cause ripples in financial markets- for instance banks like USB stood to nab a profit of roughly 2 mn USD for 1 bps decline in LIBOR. So much so that even after the LIBOR scam was unearthed by 2012, the dependency on LIBOR as an index continued unperturbed. How was it determined, where was the manipulation, was it even required- "The Spider network" is a book unraveling all of this .?

With almost all the savings of people invested in markets through funds, AMCs- including in the?advanced exotic products in the markets, all of which depended on derivatives linked to LIBOR or some other version of it, the poor investors got dragged into a?labyrinth of fraud and greed. It was not too late before the investment banks started to tweak their submissions of borrowing costs and thus to tweak libor?to suit there positions in markets.?

Tom Hayes primarily a market maker played his role the way he wanted to; he helped functioning of the market and never?hesitated in entering a trade he found functional. But in his attempt to help his institution make more and more profit by tweaking LIBOR, he stopped creating the?value zombanais thought of while devising the arrangements.?

The Spider Network is an account of one of the biggest financial frauds occurred in the name of LIBOR- the rate I personally remember using in electricity generation tariff determination?exercises for entities with foreign borrowings. So, the benchmark was consistently manipulated.?

The incident culminating into this fraud only reinstates what the greats?have said time and again- one must learn to question the status quo; it is often when we are able to answer the basics that the gaps emerge. The book indicates?9/10 people dealing with LIBOR had no clue on how it was worked out! but they had blind faith in it. Why was it even required in the first place? There's a good reason to question everything we read-?Is the ongoing energy crisis for real or made up to benefit some of us??

Ever wonder that no country has ever declared energy sufficiency, the more you electrify, the farther?that goalpost moves. One after another tech has been peddled?to be game changer; took us almost a century to realise decentralisation is the way forward; who knows?what we believe next to solve our problems.?

Tom Hayes was primarily a market maker.?By the way, what is a Market maker- In financial market it is someone who takes counter position to as many trades it can, in order to ensure liquidity in the market. What can it do in energy markets- in a continuous market, it can offer simultaneous buy-sell to provide liquidity to financially settled contracts. So, lower the spread,?better will be the liquidity and better will be the price reflective of market.?

Overall, the book is a bit verbose but readable.?

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