1
00:00:08,520 --> 00:00:11,719
Speaker 1: Hello, and welcome to another edition of the ad Thoughts Podcast.

2
00:00:11,760 --> 00:00:16,079
Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. Joe, do you

3
00:00:16,079 --> 00:00:20,119
Speaker 1: remember Libor? I think I remember that, Yes I do.

4
00:00:20,360 --> 00:00:25,720
Speaker 1: That's totally a loaded question. Libor the London Interbank offered rate,

5
00:00:26,200 --> 00:00:29,920
Speaker 1: basically the rate at which banks lend money to each other.

6
00:00:30,400 --> 00:00:33,959
Speaker 1: It was a big librar scandal, right, yeah, I mean

7
00:00:34,000 --> 00:00:36,320
Speaker 1: there there's so much you could say about libor. So

8
00:00:36,720 --> 00:00:39,680
Speaker 1: it became a big deal during the Financial crisis because

9
00:00:39,720 --> 00:00:43,680
Speaker 1: the rate blew out because basically all these banks didn't

10
00:00:43,680 --> 00:00:45,519
Speaker 1: want to lend money to each other, so they had

11
00:00:45,560 --> 00:00:48,159
Speaker 1: to offer a higher rate in order to do it.

12
00:00:48,240 --> 00:00:51,839
Speaker 1: And then after the financial crisis we found out that

13
00:00:52,000 --> 00:00:56,680
Speaker 1: libor had been rigged in various ways. And that's because

14
00:00:56,720 --> 00:01:00,320
Speaker 1: the way libor actually works is it was done by hervey.

15
00:01:00,480 --> 00:01:03,080
Speaker 1: So someone would actually go to the banks and collect

16
00:01:03,480 --> 00:01:06,560
Speaker 1: there are estimates of libor each day, and then they

17
00:01:06,600 --> 00:01:08,520
Speaker 1: would come up with a sort of aggregate. So it

18
00:01:08,560 --> 00:01:12,560
Speaker 1: was a self reported rate that ended up being manipulated

19
00:01:12,640 --> 00:01:15,000
Speaker 1: by some of the people that were reporting it. I

20
00:01:15,040 --> 00:01:18,760
Speaker 1: was so shocked when it turned out that it was manipulated.

21
00:01:19,319 --> 00:01:22,360
Speaker 1: Isn't the thing where they do the price literally called

22
00:01:22,360 --> 00:01:26,480
Speaker 1: a fix. Yeah, that's right, in retrose. I can't believe that.

23
00:01:27,080 --> 00:01:30,399
Speaker 1: I can't believe that in retrospect something called the fix

24
00:01:30,440 --> 00:01:33,080
Speaker 1: turned out to be manipulated. I was. I was totally

25
00:01:33,120 --> 00:01:35,560
Speaker 1: stunned by that. All right, we are all shocked, But

26
00:01:35,640 --> 00:01:38,840
Speaker 1: I will tell you something that is actually shocking now.

27
00:01:38,880 --> 00:01:42,280
Speaker 1: Sort of. We are all expecting Libor to be phased

28
00:01:42,319 --> 00:01:45,959
Speaker 1: out at one point or another, um relatively soon actually,

29
00:01:46,640 --> 00:01:50,240
Speaker 1: given what happened with the self reporting scheme, it's supposed

30
00:01:50,240 --> 00:01:53,320
Speaker 1: to be replaced by something that hopefully won't be as

31
00:01:53,360 --> 00:01:58,120
Speaker 1: subject to manipulation. But just as Libor was about to

32
00:01:58,200 --> 00:02:04,280
Speaker 1: be consigned to financial market history, it was about to die, right,

33
00:02:04,480 --> 00:02:08,639
Speaker 1: it has come back from the dead effectively to haunt

34
00:02:08,720 --> 00:02:18,360
Speaker 1: financial markets. Oh I'm I'm intrigued. Yes, So we are

35
00:02:18,360 --> 00:02:21,880
Speaker 1: going to call this episode Revenge of the Libor, And

36
00:02:21,919 --> 00:02:25,080
Speaker 1: we have the perfect person to talk about all this,

37
00:02:25,200 --> 00:02:27,320
Speaker 1: not just what happened in two thousand eight and then

38
00:02:27,400 --> 00:02:31,560
Speaker 1: during the Libor manipulation scandal, but also to discuss what's

39
00:02:31,600 --> 00:02:35,760
Speaker 1: happening now and why people are once again discussing Libor.

40
00:02:36,200 --> 00:02:43,480
Speaker 1: Let's do it so, our guest for this episode is

41
00:02:43,560 --> 00:02:47,720
Speaker 1: Scott Pyng. He is the CEO of Advocate Capital Management,

42
00:02:47,840 --> 00:02:50,440
Speaker 1: and he also used to be head of US interest

43
00:02:50,520 --> 00:02:55,480
Speaker 1: rate strategy at City Group of Fact. That will be

44
00:02:55,639 --> 00:02:58,639
Speaker 1: relevant in just a few minutes. Scott, thanks so much

45
00:02:58,639 --> 00:03:01,440
Speaker 1: for coming on. Thanks for having me guys. So I'm

46
00:03:01,440 --> 00:03:03,360
Speaker 1: so glad we could have you do this because you

47
00:03:03,400 --> 00:03:06,880
Speaker 1: truly are the perfect person to talk about libor, because

48
00:03:06,919 --> 00:03:09,839
Speaker 1: you were one of the first people, if not the

49
00:03:09,880 --> 00:03:13,560
Speaker 1: first person, to actually point out that it looked like

50
00:03:13,840 --> 00:03:19,280
Speaker 1: libor potentially was being manipulated in some ways. That right, Yeah,

51
00:03:19,320 --> 00:03:22,639
Speaker 1: And it's been a long and strange journey since that point.

52
00:03:22,680 --> 00:03:26,079
Speaker 1: And I would sort of contend with the statement that

53
00:03:26,200 --> 00:03:29,600
Speaker 1: libor is dead because rumors of its death as well

54
00:03:29,720 --> 00:03:33,840
Speaker 1: discuss are somewhat greatly exaggerated. So, just to back up

55
00:03:33,880 --> 00:03:37,880
Speaker 1: Tracy mentioned in the intro, libor being the rate that

56
00:03:38,120 --> 00:03:42,480
Speaker 1: banks used to price short term lending to one another.

57
00:03:42,880 --> 00:03:45,440
Speaker 1: Just give us the sort of quick history of how

58
00:03:45,480 --> 00:03:49,320
Speaker 1: this rate became a thing. Sure, before I started the

59
00:03:49,360 --> 00:03:52,800
Speaker 1: business in the eighties, the key short term rate was

60
00:03:52,840 --> 00:03:56,560
Speaker 1: actually not liebor, was actually three month treasury bills. Libel

61
00:03:56,640 --> 00:03:58,840
Speaker 1: came along the mid eighties as a way to for

62
00:03:58,960 --> 00:04:02,640
Speaker 1: a non US tom ossalled banks to obtain financing in

63
00:04:02,760 --> 00:04:07,080
Speaker 1: the your dollar market UM and over time, with increased

64
00:04:07,160 --> 00:04:12,400
Speaker 1: usage within with its center status in the middle of

65
00:04:12,440 --> 00:04:17,000
Speaker 1: interest rate swaps, it took over UM the benchmark status

66
00:04:17,040 --> 00:04:20,480
Speaker 1: from three month T bills and it's been the benchmark

67
00:04:20,680 --> 00:04:24,240
Speaker 1: UM since the late eighties early nineties. So that was

68
00:04:24,279 --> 00:04:27,560
Speaker 1: really the genesis of LIBL And at some point maybe

69
00:04:27,600 --> 00:04:29,440
Speaker 1: we'll have some time to touch back on that because

70
00:04:29,480 --> 00:04:31,880
Speaker 1: I think going back to three months T bills may

71
00:04:31,960 --> 00:04:34,719
Speaker 1: actually be a very useful thing in terms of considering

72
00:04:34,839 --> 00:04:38,279
Speaker 1: librar replacements. Yeah, we're definitely going to talk about library

73
00:04:38,320 --> 00:04:41,800
Speaker 1: replacements UM, but before we do, just to set the scene,

74
00:04:41,880 --> 00:04:45,520
Speaker 1: remind us what library looked like, you know, in two

75
00:04:45,520 --> 00:04:48,000
Speaker 1: thousand and eight in the depths of the financial crisis,

76
00:04:48,080 --> 00:04:51,640
Speaker 1: because we not only saw a librar blowout, we also

77
00:04:51,720 --> 00:04:56,640
Speaker 1: measured library against o I s UM overnight index swaps

78
00:04:56,680 --> 00:05:01,279
Speaker 1: basically a risk free rate of lending PEG to typically

79
00:05:01,400 --> 00:05:04,839
Speaker 1: fed funds futures. Walk us through the dynamics there. Why

80
00:05:04,880 --> 00:05:08,800
Speaker 1: did we see that spread blowout? Well, the basic mechanics

81
00:05:08,920 --> 00:05:12,920
Speaker 1: of libor back then was there were sixteen submission banks

82
00:05:13,040 --> 00:05:17,640
Speaker 1: and the library setters, which is the British Banks Association,

83
00:05:17,760 --> 00:05:20,480
Speaker 1: would take the four highest, four lowest, throw them out

84
00:05:20,520 --> 00:05:23,679
Speaker 1: and average the rest, and that process was supposed to

85
00:05:23,720 --> 00:05:29,080
Speaker 1: eliminate any attempt at collusion. During the global financial crisis,

86
00:05:29,080 --> 00:05:32,880
Speaker 1: bank funding costs started to rise and library did begin

87
00:05:32,960 --> 00:05:37,640
Speaker 1: to rise. However, because at that point libor rates um

88
00:05:37,800 --> 00:05:41,800
Speaker 1: submitted by each bank was published on sources like Bloomberg,

89
00:05:42,040 --> 00:05:45,080
Speaker 1: people could see when the bank was vulnerable because they

90
00:05:45,080 --> 00:05:47,919
Speaker 1: could see its library submission start to rise. And people

91
00:05:47,960 --> 00:05:51,680
Speaker 1: began looking very carefully at these library submissions, and that

92
00:05:51,720 --> 00:05:54,839
Speaker 1: creates an incentive on the part of many banks to

93
00:05:55,200 --> 00:05:59,400
Speaker 1: begin to under count the actual financing rate. And that

94
00:05:59,480 --> 00:06:02,680
Speaker 1: really was, you know, the issue that we pointed out

95
00:06:02,720 --> 00:06:05,640
Speaker 1: when we did our analysis on libor in April of

96
00:06:05,680 --> 00:06:09,200
Speaker 1: two tho eight. Can you explain a little bit that

97
00:06:09,279 --> 00:06:13,320
Speaker 1: mechanism The banks submit numbers based on what and then

98
00:06:13,360 --> 00:06:15,200
Speaker 1: they throw some out. It sounds kind of like an

99
00:06:15,200 --> 00:06:19,200
Speaker 1: Olympic scoring system of lopping off the edges. But just

100
00:06:19,279 --> 00:06:21,800
Speaker 1: walk us through that process a little bit more sure.

101
00:06:21,880 --> 00:06:25,000
Speaker 1: Banks are supposed to submit libor based on where they

102
00:06:25,440 --> 00:06:30,800
Speaker 1: are financed, and typically the submission entity is supposed to

103
00:06:30,839 --> 00:06:34,040
Speaker 1: be squared away in the middle of a bank's funding area.

104
00:06:34,720 --> 00:06:39,080
Speaker 1: Over time, some of those supposedly walled off people and

105
00:06:39,120 --> 00:06:42,960
Speaker 1: ward off entities began to be influenced by other parts

106
00:06:43,160 --> 00:06:46,680
Speaker 1: of the trading desk. Very frequently, these submission entities and

107
00:06:46,720 --> 00:06:49,960
Speaker 1: people sat on the same trading floor as traders who

108
00:06:49,960 --> 00:06:53,200
Speaker 1: are taking positions on where library or interest rate swaps are.

109
00:06:53,360 --> 00:06:57,240
Speaker 1: So over time you started getting some influence from the

110
00:06:57,279 --> 00:07:00,920
Speaker 1: traders we were market making and taking market positions, influencing

111
00:07:01,000 --> 00:07:03,839
Speaker 1: the people who are actually setting the rates. So there

112
00:07:03,839 --> 00:07:06,800
Speaker 1: were two reasons to manipulate library, right, Like, on the

113
00:07:06,839 --> 00:07:12,040
Speaker 1: one hand, you could potentially help your portfolio, your colleagues

114
00:07:12,080 --> 00:07:14,640
Speaker 1: at the bank, you know, help the positions depending on

115
00:07:14,680 --> 00:07:18,080
Speaker 1: where you shifted library. But on the other hand, during

116
00:07:18,080 --> 00:07:22,760
Speaker 1: the financial crisis, people were much more concerned about reputational risks,

117
00:07:22,800 --> 00:07:26,200
Speaker 1: so typically they started under reporting the library rate because

118
00:07:26,240 --> 00:07:27,760
Speaker 1: they didn't want to make it look like there was

119
00:07:27,800 --> 00:07:31,920
Speaker 1: a huge interbank lending crunch and that they were getting

120
00:07:31,920 --> 00:07:34,880
Speaker 1: the worst of it. Is that right, right? And you know,

121
00:07:34,960 --> 00:07:37,760
Speaker 1: the more noble goal, if you will, is to make

122
00:07:37,800 --> 00:07:39,920
Speaker 1: a bank appear stronger than it would be, And the

123
00:07:40,000 --> 00:07:42,640
Speaker 1: more mundane goal would be for the traders to trying

124
00:07:42,680 --> 00:07:46,600
Speaker 1: to profit on ongoing basis from these rate sets. Now,

125
00:07:46,680 --> 00:07:50,240
Speaker 1: when I published my article, um, we're not able to

126
00:07:50,280 --> 00:07:53,200
Speaker 1: get access to sort of the day to day manipulations

127
00:07:53,240 --> 00:07:55,440
Speaker 1: that men have been going on. But what we could

128
00:07:55,440 --> 00:07:58,680
Speaker 1: see is using publicly available data, we can start to

129
00:07:58,680 --> 00:08:01,840
Speaker 1: see the discrepancy between where people are staying libboard verses

130
00:08:01,840 --> 00:08:05,520
Speaker 1: where banks are actually funding. So that really was the

131
00:08:05,600 --> 00:08:09,840
Speaker 1: genesis of my analysis that you can uh find um,

132
00:08:09,880 --> 00:08:13,360
Speaker 1: this discrepancy from publicly available market data. So you said,

133
00:08:13,520 --> 00:08:18,720
Speaker 1: there's theoretically two different sort of strains of library manipulation.

134
00:08:18,880 --> 00:08:23,000
Speaker 1: One would be designed to conceal the degree of vulnerability

135
00:08:23,000 --> 00:08:27,560
Speaker 1: in the system overall, which because of self fulfilling prophecies,

136
00:08:27,600 --> 00:08:30,960
Speaker 1: may in theoretically have been beneficial in some way. And

137
00:08:30,960 --> 00:08:35,440
Speaker 1: then the other is the more cynical manipulating the number

138
00:08:35,840 --> 00:08:39,080
Speaker 1: so as to profit off of trades that are tied

139
00:08:39,160 --> 00:08:43,840
Speaker 1: to the number. How big was or is the market

140
00:08:44,120 --> 00:08:47,760
Speaker 1: for instruments that are in some way connected to library

141
00:08:48,120 --> 00:08:51,760
Speaker 1: I mean, libralar is tied into pretty much everything around us.

142
00:08:51,920 --> 00:08:55,000
Speaker 1: We're talking about hundreds of trillions of notionals of interest

143
00:08:55,120 --> 00:08:59,280
Speaker 1: rate swaps that directly refer to libor. On top of that,

144
00:08:59,360 --> 00:09:03,679
Speaker 1: you have ank loans, student loans, mortgages that are all

145
00:09:03,800 --> 00:09:07,599
Speaker 1: indexed to a great variety of lieborars. So library is

146
00:09:07,679 --> 00:09:11,560
Speaker 1: really an intricate part of our everyday lives. So, Scott In,

147
00:09:11,880 --> 00:09:14,240
Speaker 1: I think it was April two thou eight, you publish

148
00:09:14,320 --> 00:09:19,160
Speaker 1: your report is Libor Broken? What happened after that? Did

149
00:09:19,160 --> 00:09:21,800
Speaker 1: you get a lot of backlash? I can't imagine. UM

150
00:09:21,840 --> 00:09:26,600
Speaker 1: your colleagues, even at City Bank potentially were were that

151
00:09:27,000 --> 00:09:30,040
Speaker 1: enthused about it? Yeah? I mean we wrote on analysis,

152
00:09:30,200 --> 00:09:32,920
Speaker 1: UM got sent out to clients and there was kind

153
00:09:32,920 --> 00:09:36,160
Speaker 1: of radial silence for about a five day period, and

154
00:09:36,200 --> 00:09:38,680
Speaker 1: then the Wellster Journal picked it up and was on

155
00:09:38,720 --> 00:09:40,560
Speaker 1: the front page, and then all of a sudden, all

156
00:09:40,559 --> 00:09:43,120
Speaker 1: hell broke loose. So let's just say that I got

157
00:09:43,120 --> 00:09:45,679
Speaker 1: called into quite a few meetings that day as a

158
00:09:45,720 --> 00:09:48,240
Speaker 1: result of that. Who was the most upset about it?

159
00:09:48,240 --> 00:09:51,000
Speaker 1: When you say all hell broke loose? Where were you

160
00:09:51,080 --> 00:09:54,719
Speaker 1: hearing that the most? Um? We heard that bb A

161
00:09:54,880 --> 00:09:57,959
Speaker 1: wasn't happy with us. We heard that UM management was

162
00:09:58,000 --> 00:10:00,880
Speaker 1: not happy with us. UM the good was I signed

163
00:10:00,880 --> 00:10:04,240
Speaker 1: off on the article with my boss, Michael Schumacher of

164
00:10:04,280 --> 00:10:07,439
Speaker 1: the same name as a race car driver prior to publications,

165
00:10:07,480 --> 00:10:10,120
Speaker 1: so I knew he had my back, but there was

166
00:10:10,160 --> 00:10:13,120
Speaker 1: a lot of political blowback from that because if you

167
00:10:13,120 --> 00:10:16,240
Speaker 1: think about it, you know, again library is so central

168
00:10:16,320 --> 00:10:18,760
Speaker 1: to everything, and not just finance but in the whole

169
00:10:18,760 --> 00:10:21,640
Speaker 1: world that you know, calling the question was really a

170
00:10:21,679 --> 00:10:25,240
Speaker 1: big deal. So I want to move on to what

171
00:10:25,320 --> 00:10:27,839
Speaker 1: librar is actually doing now and why we're all talking

172
00:10:27,880 --> 00:10:30,360
Speaker 1: about it, But before we do, maybe just to sum up,

173
00:10:30,400 --> 00:10:35,360
Speaker 1: after the financial crisis, we have an actual investigation into

174
00:10:35,480 --> 00:10:38,880
Speaker 1: libor and how it was said. What was the outcome

175
00:10:39,000 --> 00:10:41,720
Speaker 1: of that investigation. I think the outcome was that a

176
00:10:41,760 --> 00:10:44,960
Speaker 1: great many of the banks who involved in liborar sets

177
00:10:45,120 --> 00:10:49,160
Speaker 1: were were tainted in this submission um, whether it's on

178
00:10:49,200 --> 00:10:52,920
Speaker 1: an ongoing basis or whether it's um infrequently, because of

179
00:10:53,000 --> 00:10:57,640
Speaker 1: the influence of market makers and risk takers on the

180
00:10:57,679 --> 00:11:01,160
Speaker 1: library submission side. So I think the key results is

181
00:11:01,240 --> 00:11:03,720
Speaker 1: that now we have a new administrator for libralar, we

182
00:11:03,800 --> 00:11:07,360
Speaker 1: have banks who who have much clear policies in terms

183
00:11:07,360 --> 00:11:11,240
Speaker 1: of the wall around the library centers, and hopefully when

184
00:11:11,280 --> 00:11:13,480
Speaker 1: a bit of a better place. I have one more

185
00:11:13,520 --> 00:11:17,440
Speaker 1: question about library history before we move on. You touched

186
00:11:17,440 --> 00:11:19,360
Speaker 1: on the important point, and one of the reasons the

187
00:11:19,360 --> 00:11:22,200
Speaker 1: story resonated so much is because it touches all of

188
00:11:22,200 --> 00:11:24,800
Speaker 1: our lives, and so many of us have financial instruments

189
00:11:24,840 --> 00:11:28,160
Speaker 1: that are in some way tied to library costs. But

190
00:11:28,760 --> 00:11:31,040
Speaker 1: why did that happen? I mean, you mentioned there was

191
00:11:31,080 --> 00:11:33,880
Speaker 1: an earlier benchmark, the three month treasury. When you think

192
00:11:33,880 --> 00:11:36,560
Speaker 1: about things like student loans or credit cards, it's not

193
00:11:36,600 --> 00:11:40,640
Speaker 1: intuitive why the industry would start to price those off

194
00:11:40,679 --> 00:11:43,480
Speaker 1: of bank lending rates as opposed to something a little

195
00:11:43,480 --> 00:11:47,079
Speaker 1: more industry neutral. I think if you look at bank

196
00:11:47,200 --> 00:11:51,640
Speaker 1: assets and liabilities, the coevolution of that through time is

197
00:11:51,760 --> 00:11:55,320
Speaker 1: part of what drove liborar's popularity. Again, some of the

198
00:11:55,360 --> 00:11:57,920
Speaker 1: old floating rate indu cries that banks used to use

199
00:11:58,000 --> 00:12:01,920
Speaker 1: where things like prime or our CD rates. But as

200
00:12:01,960 --> 00:12:05,000
Speaker 1: libel kind of gained primacy in the drumatist market in

201
00:12:05,040 --> 00:12:09,240
Speaker 1: the futures market, more banks decided to adopt libel as

202
00:12:09,240 --> 00:12:12,880
Speaker 1: both as assets and liability indices. And when you do that,

203
00:12:13,840 --> 00:12:17,040
Speaker 1: you basically set policies to say, have a fixed floating

204
00:12:17,120 --> 00:12:19,760
Speaker 1: funding mix, and the floating part of it is going

205
00:12:19,800 --> 00:12:23,200
Speaker 1: to be directed towards the standard benchmark, which is libor

206
00:12:23,800 --> 00:12:26,600
Speaker 1: likewise on the assets side. Then as libel kind of

207
00:12:26,600 --> 00:12:29,360
Speaker 1: becomes stand on liability side, the asset side is going

208
00:12:29,400 --> 00:12:32,359
Speaker 1: to take live or as well as its mentionmark. So again, increasingly,

209
00:12:32,360 --> 00:12:34,640
Speaker 1: over time you had more and more bank products beginning

210
00:12:34,640 --> 00:12:39,080
Speaker 1: to index the fillion rates off of libor. Alright, so

211
00:12:39,200 --> 00:12:43,160
Speaker 1: let's fast forward to today. We went through the financial crisis,

212
00:12:43,200 --> 00:12:46,000
Speaker 1: We went through this big libraar scandal. At the end

213
00:12:46,040 --> 00:12:48,880
Speaker 1: of the scandal, most people agreed that we were going

214
00:12:48,920 --> 00:12:52,400
Speaker 1: to try to find a replacement for this rate uh

215
00:12:52,559 --> 00:12:55,440
Speaker 1: something else that we could peg trillions of dollars worth

216
00:12:55,440 --> 00:12:58,520
Speaker 1: of financial assets too. We're going to talk about that

217
00:12:58,600 --> 00:13:02,480
Speaker 1: effort in a second, but before we do, let's talk

218
00:13:02,559 --> 00:13:06,360
Speaker 1: about the recent rise in library because of course, the

219
00:13:06,440 --> 00:13:08,960
Speaker 1: thing has not been doing much for years and years

220
00:13:08,960 --> 00:13:10,800
Speaker 1: and years, and we all kind of forgot about it,

221
00:13:10,880 --> 00:13:15,520
Speaker 1: and then suddenly it's in the headlines once again. Scott

222
00:13:15,600 --> 00:13:19,160
Speaker 1: walk us through what's happening with the rise in library

223
00:13:19,480 --> 00:13:22,520
Speaker 1: short Tracy. Since the end of two thousand seventeen, we

224
00:13:22,640 --> 00:13:25,560
Speaker 1: have seen libar, especially three month libel, which is the

225
00:13:25,600 --> 00:13:29,120
Speaker 1: benchmark in library space, rise more than half a percent.

226
00:13:29,600 --> 00:13:33,199
Speaker 1: And this is in the absence of any Federal Reserve

227
00:13:33,360 --> 00:13:37,120
Speaker 1: rate hike over that period, So that has obviously been

228
00:13:37,160 --> 00:13:40,480
Speaker 1: of major concern to the market because of because everything

229
00:13:40,559 --> 00:13:44,280
Speaker 1: is basically index off of libor. So to me, I

230
00:13:44,440 --> 00:13:46,800
Speaker 1: what I wanted to do was to us to look

231
00:13:46,840 --> 00:13:50,640
Speaker 1: through UM strategistal analyst research to say, okay, what has

232
00:13:50,679 --> 00:13:52,960
Speaker 1: been a driver of this? And I was really not

233
00:13:53,040 --> 00:13:55,360
Speaker 1: able to find it, So I basically had to do

234
00:13:55,440 --> 00:13:59,520
Speaker 1: my own UM analysis and that really drove UM. You

235
00:13:59,559 --> 00:14:01,920
Speaker 1: know what we found out, which is that if you

236
00:14:01,960 --> 00:14:05,319
Speaker 1: look at how much Libel has risen and you really

237
00:14:05,320 --> 00:14:07,920
Speaker 1: try to attribute it into different sources, what we find

238
00:14:08,000 --> 00:14:10,720
Speaker 1: is that about half of the rise came from the

239
00:14:10,760 --> 00:14:14,920
Speaker 1: market pricing in UH future FED hikes only half, So

240
00:14:15,000 --> 00:14:16,840
Speaker 1: that means the other half has to come from some

241
00:14:16,920 --> 00:14:21,040
Speaker 1: other sources. UM about two thirds of that is coming

242
00:14:21,120 --> 00:14:25,200
Speaker 1: in analysis from increases in short term treasury will supply

243
00:14:25,800 --> 00:14:28,920
Speaker 1: as the government UM is in the process of funding

244
00:14:28,960 --> 00:14:31,720
Speaker 1: the tax reform. But there is a there is a

245
00:14:31,760 --> 00:14:35,960
Speaker 1: small but recognizable component of the Libel rise that is

246
00:14:36,040 --> 00:14:38,840
Speaker 1: due to UH shifts in the credit market, which we

247
00:14:38,920 --> 00:14:42,600
Speaker 1: identified as well. Breakdown that that second half. So it's

248
00:14:42,640 --> 00:14:45,280
Speaker 1: easy enough to understand how you could figure out how

249
00:14:45,360 --> 00:14:48,680
Speaker 1: much is attributable to expectations for an increase in Fed

250
00:14:48,720 --> 00:14:52,520
Speaker 1: funds that um the other parts where you said part

251
00:14:52,560 --> 00:14:56,120
Speaker 1: of it is short term treasury supply I guess, competing

252
00:14:56,720 --> 00:15:01,240
Speaker 1: with inter bank lending, and also the slight change in

253
00:15:01,400 --> 00:15:05,239
Speaker 1: credit perceptions of borrowers. How did you sort of disambiguate

254
00:15:05,360 --> 00:15:07,360
Speaker 1: those two aspects right? You can. You can think of

255
00:15:07,480 --> 00:15:11,280
Speaker 1: library as a bunch of stacked lego bricks. So at

256
00:15:11,280 --> 00:15:14,320
Speaker 1: the bottom of that stack is the ristless rate. How

257
00:15:14,400 --> 00:15:17,800
Speaker 1: much the market is expecting uh FED funds rate to move,

258
00:15:17,960 --> 00:15:20,800
Speaker 1: And we can find that out by looking at market

259
00:15:20,800 --> 00:15:24,760
Speaker 1: predictions of three months oh i s overnight index swap,

260
00:15:24,800 --> 00:15:28,280
Speaker 1: which is where markets pricing average three month FED funds.

261
00:15:28,320 --> 00:15:30,800
Speaker 1: That's the bottom stack, and we find that that's really

262
00:15:30,800 --> 00:15:34,680
Speaker 1: about fifty eight percent of the Libel rise. The next

263
00:15:34,720 --> 00:15:39,760
Speaker 1: set of lego bricks is really actual securities, and the

264
00:15:40,040 --> 00:15:42,920
Speaker 1: least risky securities in the three months sector is three

265
00:15:42,920 --> 00:15:45,600
Speaker 1: month treasury bills. So we looked at how much three

266
00:15:45,600 --> 00:15:47,800
Speaker 1: months treasury blow yields have changed since the end of

267
00:15:47,800 --> 00:15:52,360
Speaker 1: the year. We found that it rose thirty seven basis points.

268
00:15:52,880 --> 00:15:56,160
Speaker 1: From that thirty seven basis points, you subtract the twenty

269
00:15:56,200 --> 00:15:59,360
Speaker 1: four basis points the bottom stack of lego bricks that's

270
00:15:59,440 --> 00:16:02,280
Speaker 1: from the three month oh I s and the residual

271
00:16:02,360 --> 00:16:05,920
Speaker 1: the thirteen basis points we attribute to increased strategy bill supply.

272
00:16:06,440 --> 00:16:08,200
Speaker 1: And then the final piece of the puzzle is a

273
00:16:08,200 --> 00:16:12,080
Speaker 1: difference between three month treasury yield and the most comparable

274
00:16:12,160 --> 00:16:14,640
Speaker 1: instrument to three month libr in a market, which is

275
00:16:14,720 --> 00:16:18,880
Speaker 1: ninety day commercial financial commercial paper rate, and that that

276
00:16:18,960 --> 00:16:22,240
Speaker 1: difference contributed to the final eight basis points of the puzzle.

277
00:16:22,680 --> 00:16:25,040
Speaker 1: So this is actually the only analysis that I've seen

278
00:16:25,080 --> 00:16:28,520
Speaker 1: attempt to quantify each of those aspects and their impact

279
00:16:28,600 --> 00:16:31,400
Speaker 1: on library UM. It's really good, But talk to us

280
00:16:31,440 --> 00:16:35,280
Speaker 1: about the tax component of it, because I think for

281
00:16:35,360 --> 00:16:38,240
Speaker 1: most listeners when they think about tax reform, they're not

282
00:16:38,280 --> 00:16:41,160
Speaker 1: necessarily going to start thinking about what the impact is

283
00:16:41,200 --> 00:16:45,200
Speaker 1: going to be on money markets. Sure, and the impact

284
00:16:45,320 --> 00:16:48,760
Speaker 1: of tax reform visa VI. What we're talking about today

285
00:16:49,000 --> 00:16:53,200
Speaker 1: is that as tax reform was enacted, obviously the companies

286
00:16:53,240 --> 00:16:57,600
Speaker 1: that had a significant chunk of their overseas earnings UM

287
00:16:57,760 --> 00:17:02,520
Speaker 1: left in overseas markets had a rake in terms of repatriation. Now,

288
00:17:02,560 --> 00:17:05,840
Speaker 1: a lot of these were already invested in dollar assets

289
00:17:05,840 --> 00:17:08,239
Speaker 1: dollar short term masses such as a CP market, so

290
00:17:08,520 --> 00:17:13,560
Speaker 1: there was no significant asset allocations shift from that repatriation. However,

291
00:17:13,760 --> 00:17:16,879
Speaker 1: what has been noted by industry sources such as Credit

292
00:17:16,880 --> 00:17:21,240
Speaker 1: Swiss is that since the passage of tax reform, the

293
00:17:21,280 --> 00:17:25,600
Speaker 1: CP market has seen significant shortening of the maturity stack.

294
00:17:25,720 --> 00:17:28,840
Speaker 1: So what we've seen is that the percentage of the

295
00:17:28,880 --> 00:17:32,640
Speaker 1: CP market that is six weeks or shorter in credits

296
00:17:33,040 --> 00:17:37,600
Speaker 1: research has risen from low fifties to mid s over

297
00:17:37,640 --> 00:17:40,480
Speaker 1: that same period. Now that may not seem very much,

298
00:17:40,480 --> 00:17:43,320
Speaker 1: but it's a pretty substantial shift in terms of the sponsorship.

299
00:17:43,840 --> 00:17:46,960
Speaker 1: And my interpretation of what that means is that the

300
00:17:47,040 --> 00:17:50,560
Speaker 1: cash rich companies such as a snail Apple, who have

301
00:17:50,880 --> 00:17:53,880
Speaker 1: had that cash overseas, when they bring it back, they

302
00:17:54,040 --> 00:17:56,480
Speaker 1: tend to want to keep it in shorter maturity paper

303
00:17:56,600 --> 00:17:59,560
Speaker 1: because they're not necessarily sure what they're gonna do with it.

304
00:17:59,600 --> 00:18:03,000
Speaker 1: Perhaps they're going to be announcing some um some bonuses

305
00:18:03,040 --> 00:18:06,760
Speaker 1: for workers, perhaps they're gonna start building another another headquarters,

306
00:18:07,119 --> 00:18:10,199
Speaker 1: whatever that may be. There is some policy uncertainty on

307
00:18:10,200 --> 00:18:12,720
Speaker 1: the part of the company, and as a result, that's

308
00:18:12,720 --> 00:18:15,280
Speaker 1: reflected in the stance of the tragedy department who are

309
00:18:15,280 --> 00:18:18,400
Speaker 1: managing this cash flow. Their stands would be, let's keep

310
00:18:18,400 --> 00:18:20,399
Speaker 1: it shorter until we figure out what to do with it.

311
00:18:21,000 --> 00:18:22,800
Speaker 1: But spending it great, we don't have to do very

312
00:18:22,880 --> 00:18:26,840
Speaker 1: much with it. So they shortening in the maturity profile

313
00:18:26,920 --> 00:18:30,720
Speaker 1: in the CP market um has has really been the

314
00:18:30,760 --> 00:18:34,399
Speaker 1: big driver of this increased credit component of LIEB or

315
00:18:35,240 --> 00:18:38,800
Speaker 1: So is this worrisome? The numbers don't seem very big,

316
00:18:38,920 --> 00:18:41,600
Speaker 1: and we're certainly not talking about anywhere near the scale

317
00:18:41,680 --> 00:18:44,919
Speaker 1: we saw during the crisis or anything like that. But

318
00:18:45,200 --> 00:18:49,479
Speaker 1: how much anxiety should the increase, particularly in the credit

319
00:18:49,520 --> 00:18:53,320
Speaker 1: component cause people. But now it is not worrisome if

320
00:18:53,359 --> 00:18:56,400
Speaker 1: you again, if you sum up the tragic bill component

321
00:18:56,440 --> 00:18:59,119
Speaker 1: and the credit component, that adds up to roughly about

322
00:18:59,640 --> 00:19:04,040
Speaker 1: bases points or roughly one FED hike. So it's not

323
00:19:04,119 --> 00:19:07,399
Speaker 1: that worrisome right now, maybe to the majority of the world,

324
00:19:07,440 --> 00:19:10,200
Speaker 1: but to the FED that is an issue that they

325
00:19:10,240 --> 00:19:13,560
Speaker 1: need to keep an eye on because if that component

326
00:19:13,640 --> 00:19:17,480
Speaker 1: of libor continues to rise, then it has the impact

327
00:19:17,680 --> 00:19:23,200
Speaker 1: of additional and intended FED hikes that will reduce liquidity

328
00:19:23,200 --> 00:19:27,119
Speaker 1: in the marketplace over and beyond what the FED is doing. Well,

329
00:19:27,160 --> 00:19:29,840
Speaker 1: I was going to ask the consensus is that we

330
00:19:29,880 --> 00:19:33,200
Speaker 1: shouldn't all freak out just yet. But what does this

331
00:19:33,320 --> 00:19:38,720
Speaker 1: say about the feds exit from monetary policy? At the

332
00:19:38,880 --> 00:19:41,560
Speaker 1: very least, it seems like it's a good example of

333
00:19:41,600 --> 00:19:45,960
Speaker 1: how tricky it might be to actually tighten monetary policy

334
00:19:46,000 --> 00:19:48,760
Speaker 1: and the number of things that the Central Bank is

335
00:19:48,800 --> 00:19:50,760
Speaker 1: going to have to take into account, you know, like

336
00:19:51,280 --> 00:19:55,000
Speaker 1: fiscal stuff such as tax reform. It seems like you're

337
00:19:55,000 --> 00:19:57,920
Speaker 1: asking a lot of them. Yes, right, dude, that's absolutely right.

338
00:19:58,080 --> 00:20:00,879
Speaker 1: And what we are seeing with what is going on

339
00:20:00,920 --> 00:20:04,640
Speaker 1: at CP market is that as the Fed is withdrawing

340
00:20:04,840 --> 00:20:10,720
Speaker 1: its unprecedented liquidity, any additional shifts in liquidity provision is

341
00:20:11,000 --> 00:20:14,800
Speaker 1: probably going to have an amplified effect in this environment.

342
00:20:15,320 --> 00:20:18,640
Speaker 1: So it's revenge of the Library. But we shouldn't all,

343
00:20:19,240 --> 00:20:23,840
Speaker 1: you know, panic just yet. Scott, you mentioned earlier about

344
00:20:23,880 --> 00:20:27,400
Speaker 1: attempts to find a replacement for Library and maybe sort

345
00:20:27,440 --> 00:20:29,800
Speaker 1: of going back to the future and looking at what

346
00:20:29,840 --> 00:20:34,560
Speaker 1: we used to use. What is up for discussion and

347
00:20:34,600 --> 00:20:37,719
Speaker 1: what do you think the best reference rate would actually be.

348
00:20:38,160 --> 00:20:41,840
Speaker 1: Sure Currently, the government has put forth an overnight rate

349
00:20:41,920 --> 00:20:46,359
Speaker 1: called s o f R SOFA, which represents basically an

350
00:20:46,480 --> 00:20:51,080
Speaker 1: arrogant where securitized borrowing takes place. So typically, if you

351
00:20:51,119 --> 00:20:53,520
Speaker 1: hold treasury bonds, you can pledge those bonds and borrow

352
00:20:53,600 --> 00:20:58,399
Speaker 1: cash against that. That's basically what this rate will reflect. Now,

353
00:20:58,560 --> 00:21:02,000
Speaker 1: this is a very front rate and its nature from

354
00:21:02,119 --> 00:21:05,200
Speaker 1: libra or. Libra or is supposed to represent UM a

355
00:21:05,240 --> 00:21:08,440
Speaker 1: couple of things. One is unsecuritized landing and second thing

356
00:21:08,520 --> 00:21:12,800
Speaker 1: is obviously for longer than overnight rates. So this proposal

357
00:21:13,080 --> 00:21:17,159
Speaker 1: is really a very very different animal than LIBOR. It

358
00:21:17,320 --> 00:21:21,040
Speaker 1: is not meant to replace library. Cannot replace librar because

359
00:21:21,160 --> 00:21:24,200
Speaker 1: to attempt to do so would invite many, many different

360
00:21:24,280 --> 00:21:26,720
Speaker 1: lawsuits on the part of at least half the market

361
00:21:27,040 --> 00:21:31,119
Speaker 1: who would be disadvantaged by this. Now, the issues I

362
00:21:31,240 --> 00:21:35,320
Speaker 1: have with using rates like sofar are multipold. One is

363
00:21:35,480 --> 00:21:38,800
Speaker 1: again you're you're using a securitized rate to replace a

364
00:21:38,840 --> 00:21:42,560
Speaker 1: quote unquote replace and unsecuritized rate. The second is that

365
00:21:42,600 --> 00:21:45,800
Speaker 1: the reason they've only proposed this overnight rate is because

366
00:21:45,800 --> 00:21:49,960
Speaker 1: of lack of volume in longer term rates UM. If

367
00:21:50,000 --> 00:21:54,240
Speaker 1: you look at sort of overnight repose, hundreds of billions trade,

368
00:21:54,680 --> 00:21:57,399
Speaker 1: but once you push term repo to one month or

369
00:21:57,440 --> 00:22:01,720
Speaker 1: three months, the percentage of the entire report transaction that

370
00:22:01,720 --> 00:22:04,040
Speaker 1: occurs in the one month three month point relative to

371
00:22:04,119 --> 00:22:08,600
Speaker 1: the overnight point drops to well lesson tempatent, so you

372
00:22:08,680 --> 00:22:11,240
Speaker 1: can't This is why the government can't tell the market

373
00:22:11,280 --> 00:22:13,520
Speaker 1: hey when we use a one month securitized rate, because

374
00:22:13,800 --> 00:22:17,320
Speaker 1: the volumes they're just are not They're just like um,

375
00:22:17,440 --> 00:22:20,400
Speaker 1: you know, their arguments for pushing out LIBORAD. There's their

376
00:22:20,480 --> 00:22:24,520
Speaker 1: arguments for not using lib words that there's insufficient volume there. Well,

377
00:22:24,720 --> 00:22:28,640
Speaker 1: there's insufficient volume in terms strong securitized financing as well.

378
00:22:29,240 --> 00:22:32,840
Speaker 1: So the current best pick by the government is this

379
00:22:33,359 --> 00:22:38,240
Speaker 1: overnight securitized rate, which I disagree with. I'm much more

380
00:22:38,280 --> 00:22:41,080
Speaker 1: in favor of using a rate such as three month

381
00:22:41,160 --> 00:22:43,679
Speaker 1: fee bill because one it's been out there for a

382
00:22:43,720 --> 00:22:46,719
Speaker 1: long time, people know what it is to its weekly

383
00:22:46,760 --> 00:22:50,040
Speaker 1: auction treasury bills. So the rate determination is based on

384
00:22:50,080 --> 00:22:54,159
Speaker 1: the very transparent auction process. And if we need daily sets,

385
00:22:54,160 --> 00:22:57,120
Speaker 1: we can certainly increase the frequency of these auctions and

386
00:22:57,240 --> 00:23:00,920
Speaker 1: still get significant volume. For example, the previous weekly three

387
00:23:00,960 --> 00:23:05,600
Speaker 1: months or thirteen week treasury bill produced well over three

388
00:23:05,640 --> 00:23:08,719
Speaker 1: times the fifty billion of treasury bills that was sold,

389
00:23:09,080 --> 00:23:11,320
Speaker 1: So there's plenty of liquidity in the tragedy bill market,

390
00:23:11,680 --> 00:23:13,760
Speaker 1: and I think the government in putting all of its

391
00:23:13,800 --> 00:23:17,520
Speaker 1: weight behind SOFUR is really doing the wrong thing and

392
00:23:17,560 --> 00:23:19,240
Speaker 1: doing wrong. By doing the wrong thing, I mean that

393
00:23:19,800 --> 00:23:22,439
Speaker 1: we didn't come up with libor as the benchmark rate

394
00:23:22,480 --> 00:23:25,560
Speaker 1: by FIAT. The market kind of gravitated towards that there

395
00:23:25,600 --> 00:23:28,359
Speaker 1: was more and more usage. It started off with tragedy bills,

396
00:23:28,640 --> 00:23:32,400
Speaker 1: market usage kind of gravitated around librard as a benchmark,

397
00:23:32,840 --> 00:23:36,280
Speaker 1: and so I think creating a benchmark by FIAT is

398
00:23:36,320 --> 00:23:39,480
Speaker 1: something that is going to have difficulty working. I think

399
00:23:39,480 --> 00:23:43,720
Speaker 1: what the government and others should do is to promote

400
00:23:43,760 --> 00:23:47,560
Speaker 1: a variety of different types of floating rate indicries and

401
00:23:47,640 --> 00:23:49,680
Speaker 1: kind of let the market decide. Now, it's harder for

402
00:23:49,720 --> 00:23:53,000
Speaker 1: the market to decide right now in this market environment

403
00:23:53,040 --> 00:23:56,399
Speaker 1: because in the past, derivative instruments are pretty much traded

404
00:23:56,440 --> 00:23:59,640
Speaker 1: over the counter, so it's just there's no regulation, it's

405
00:23:59,680 --> 00:24:02,680
Speaker 1: just by lateral agreements. Now pretty much all the swaps

406
00:24:02,760 --> 00:24:05,960
Speaker 1: that are done have to be cleared. So to really

407
00:24:06,240 --> 00:24:09,840
Speaker 1: have a new benchmark going, one needs the cooperation of

408
00:24:10,160 --> 00:24:14,479
Speaker 1: regulators like the FED, of the OTC, clearing houses like

409
00:24:14,960 --> 00:24:18,160
Speaker 1: CIME or l c H, and also in these such

410
00:24:18,160 --> 00:24:22,080
Speaker 1: as fast by because fast by issues regulations governing hedge accounting,

411
00:24:22,119 --> 00:24:26,160
Speaker 1: for example, So UM corporations are going to a new

412
00:24:26,160 --> 00:24:30,040
Speaker 1: floating right index if fast by dozen't so bless this rate.

413
00:24:30,560 --> 00:24:34,040
Speaker 1: So it's harder, I think for people to come around

414
00:24:34,119 --> 00:24:36,639
Speaker 1: a new benchmark. But I think we do need to

415
00:24:36,720 --> 00:24:39,560
Speaker 1: let the market decide what the appropriate benchmark is rather

416
00:24:39,600 --> 00:24:42,040
Speaker 1: than just being told that so you know you have

417
00:24:42,080 --> 00:24:45,240
Speaker 1: to use so for going forward. Another interesting stat I

418
00:24:45,280 --> 00:24:50,160
Speaker 1: had as I pulled derivative counterparties is that even now,

419
00:24:50,760 --> 00:24:54,320
Speaker 1: many many years after the Libel crisis, well over nine

420
00:24:54,960 --> 00:24:57,120
Speaker 1: of all the swaps has traded in a single day

421
00:24:57,400 --> 00:25:01,240
Speaker 1: is based in Libel. So that really tells you. So

422
00:25:01,400 --> 00:25:04,000
Speaker 1: the staying power library, which goes back to my statement

423
00:25:04,040 --> 00:25:07,320
Speaker 1: that you know the rumors of his death are greatly exaggerated, Well,

424
00:25:07,320 --> 00:25:11,160
Speaker 1: I was just going to say, you know, let's say, okay,

425
00:25:11,280 --> 00:25:15,640
Speaker 1: the government or regulators settle on some new benchmark. How

426
00:25:15,720 --> 00:25:18,720
Speaker 1: difficult and wrenching of a process would it be, given

427
00:25:18,840 --> 00:25:21,680
Speaker 1: the number of instruments that are that are currently based

428
00:25:21,720 --> 00:25:25,679
Speaker 1: on Libra, or to say okay, everybody switch, Well, I

429
00:25:25,720 --> 00:25:29,320
Speaker 1: think it's it's gonna be a long time coming. The

430
00:25:29,400 --> 00:25:34,200
Speaker 1: fed only started publishing, sof um only will start publishing

431
00:25:34,200 --> 00:25:37,040
Speaker 1: so far in April. Um The market is going to

432
00:25:37,119 --> 00:25:40,119
Speaker 1: have to get its arms around how this index looks

433
00:25:40,240 --> 00:25:43,920
Speaker 1: versus other industries they're familiar with FED funds in terms

434
00:25:43,960 --> 00:25:46,800
Speaker 1: of overnight comparison. It's going to have to be a

435
00:25:46,840 --> 00:25:51,480
Speaker 1: basis swap market that develops around this index, and then

436
00:25:51,560 --> 00:25:55,159
Speaker 1: over time people may start trading this index outright in

437
00:25:55,240 --> 00:25:58,560
Speaker 1: futures form and derivatives form and swap form. So it

438
00:25:58,680 --> 00:26:00,800
Speaker 1: has to be a block by block process. I think

439
00:26:00,840 --> 00:26:04,760
Speaker 1: the timetable that regulators have put forth i e. Libel

440
00:26:04,880 --> 00:26:11,600
Speaker 1: is going to be basically outdated, outmoded, eliminated by I

441
00:26:11,640 --> 00:26:15,199
Speaker 1: think that's pretty dawn ambitious. Okay, that may be the

442
00:26:15,240 --> 00:26:19,800
Speaker 1: spookiest part of this entire story. Scott Paying, CEO of

443
00:26:19,880 --> 00:26:23,400
Speaker 1: Advocate Capital Management, thank you so much. Thank you very much, guys.

444
00:26:23,400 --> 00:26:37,959
Speaker 1: Thanks that was great. So Joe, I love that conversation because,

445
00:26:38,320 --> 00:26:41,000
Speaker 1: as ever, it sort of brings back the good old

446
00:26:41,080 --> 00:26:44,840
Speaker 1: days of financial crisis history for me. What a time

447
00:26:44,880 --> 00:26:47,959
Speaker 1: to be a markets reporter. Well, I think that was

448
00:26:48,000 --> 00:26:50,800
Speaker 1: a great conversation because a it was right in your

449
00:26:50,800 --> 00:26:54,480
Speaker 1: wheelhouse and you've covered this a lot, and you understand

450
00:26:54,480 --> 00:26:57,320
Speaker 1: this stuff better than most people I know, and be

451
00:26:58,200 --> 00:27:01,040
Speaker 1: I don't really understand any of this of and I've

452
00:27:01,040 --> 00:27:03,600
Speaker 1: always been sort of a little shy around this topic.

453
00:27:04,000 --> 00:27:07,280
Speaker 1: Just kind of the the perfect conversation for both of

454
00:27:07,280 --> 00:27:09,840
Speaker 1: our needs. Your expertise in me this big hole in

455
00:27:09,880 --> 00:27:13,520
Speaker 1: my knowledge that I really needed to fill. Now, Joe,

456
00:27:13,640 --> 00:27:15,560
Speaker 1: I'm sure that's not true. I'm sure you understand it

457
00:27:15,640 --> 00:27:17,639
Speaker 1: very well. But I think if anyone wants a broad

458
00:27:17,760 --> 00:27:21,679
Speaker 1: takeaway from this conversation, it's that there's this thing called

459
00:27:21,760 --> 00:27:25,719
Speaker 1: libor that exists, and it's incredibly important for the financial system.

460
00:27:25,760 --> 00:27:29,200
Speaker 1: It's incredibly important for our system of credit, and it's

461
00:27:29,240 --> 00:27:32,320
Speaker 1: the thing that trillions, literally trillions of dollars worth of

462
00:27:32,359 --> 00:27:36,320
Speaker 1: assets are actually pegged to, and no one really knows

463
00:27:36,600 --> 00:27:39,320
Speaker 1: how it works or what affects it. Like we are

464
00:27:39,400 --> 00:27:43,120
Speaker 1: here having this discussion. We've been talking for about, let's say,

465
00:27:43,160 --> 00:27:47,280
Speaker 1: twenty five minutes, and we can kind of figure out

466
00:27:47,640 --> 00:27:50,000
Speaker 1: some of the things that might be causing it, but

467
00:27:50,359 --> 00:27:53,200
Speaker 1: there's no exact certitude. And in fact, if you talk

468
00:27:53,240 --> 00:27:55,640
Speaker 1: to other analysts in the market, they'll have all these

469
00:27:55,640 --> 00:27:59,320
Speaker 1: different opinions that kind of amazes me. Yeah, I know

470
00:27:59,440 --> 00:28:02,800
Speaker 1: there's been all these stories we've done and seen recently

471
00:28:02,960 --> 00:28:07,080
Speaker 1: about this inexorable rise in Library, and everyone has their

472
00:28:07,160 --> 00:28:11,880
Speaker 1: own theories, so the degree of non consensus about what's

473
00:28:11,960 --> 00:28:15,640
Speaker 1: driving it has really been fascinating. I'm also just really

474
00:28:15,720 --> 00:28:18,920
Speaker 1: interested in the point that Scott made about the sort

475
00:28:18,920 --> 00:28:24,040
Speaker 1: of organic, natural way that Library emerged. It wasn't by Fiata,

476
00:28:24,080 --> 00:28:25,960
Speaker 1: wasn't saying Okay, we're gonna price all this stuff towards

477
00:28:26,040 --> 00:28:28,400
Speaker 1: Library is a sort of network effects thing. We're more

478
00:28:28,440 --> 00:28:32,000
Speaker 1: and more entities thought it made sense, and the sort

479
00:28:32,040 --> 00:28:36,639
Speaker 1: of difficulty of replicating that process in an artificial manner

480
00:28:36,640 --> 00:28:39,080
Speaker 1: and just saying okay, now we're doing something else very

481
00:28:39,160 --> 00:28:43,680
Speaker 1: different from the environment through which Library originally emerged. Yeah,

482
00:28:43,760 --> 00:28:45,720
Speaker 1: it's going to be really interesting to watch and see

483
00:28:45,800 --> 00:28:48,080
Speaker 1: how long it actually takes to come up with the

484
00:28:48,120 --> 00:28:52,800
Speaker 1: replacement and then transition it in. Yes, all right, this

485
00:28:52,880 --> 00:28:56,160
Speaker 1: has been another episode of add Thoughts. You can follow

486
00:28:56,160 --> 00:28:59,120
Speaker 1: me on Twitter at Tracy Alloway, and you can follow

487
00:28:59,120 --> 00:29:02,120
Speaker 1: me on Twitter at the Stalwarts, and you should follow

488
00:29:02,160 --> 00:29:06,239
Speaker 1: our producer tofur Foreheads at Foreheads T, as well as

489
00:29:06,280 --> 00:29:10,800
Speaker 1: the Bloomberg head of podcast, Francesca Levy at Francesca Today,

490
00:29:10,800 --> 00:29:11,600
Speaker 1: Thanks for listening,