Speaker 1: Hello, and welcome to another edition of the ad Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. Joe, do you
Speaker 1: remember Libor? I think I remember that, Yes I do.
Speaker 1: That's totally a loaded question. Libor the London Interbank offered rate,
Speaker 1: basically the rate at which banks lend money to each other.
Speaker 1: It was a big librar scandal, right, yeah, I mean
Speaker 1: there there's so much you could say about libor. So
Speaker 1: it became a big deal during the Financial crisis because
Speaker 1: the rate blew out because basically all these banks didn't
Speaker 1: want to lend money to each other, so they had
Speaker 1: to offer a higher rate in order to do it.
Speaker 1: And then after the financial crisis we found out that
Speaker 1: libor had been rigged in various ways. And that's because
Speaker 1: the way libor actually works is it was done by hervey.
Speaker 1: So someone would actually go to the banks and collect
Speaker 1: there are estimates of libor each day, and then they
Speaker 1: would come up with a sort of aggregate. So it
Speaker 1: was a self reported rate that ended up being manipulated
Speaker 1: by some of the people that were reporting it. I
Speaker 1: was so shocked when it turned out that it was manipulated.
Speaker 1: Isn't the thing where they do the price literally called
Speaker 1: a fix. Yeah, that's right, in retrose. I can't believe that.
Speaker 1: I can't believe that in retrospect something called the fix
Speaker 1: turned out to be manipulated. I was. I was totally
Speaker 1: stunned by that. All right, we are all shocked, But
Speaker 1: I will tell you something that is actually shocking now.
Speaker 1: Sort of. We are all expecting Libor to be phased
Speaker 1: out at one point or another, um relatively soon actually,
Speaker 1: given what happened with the self reporting scheme, it's supposed
Speaker 1: to be replaced by something that hopefully won't be as
Speaker 1: subject to manipulation. But just as Libor was about to
Speaker 1: be consigned to financial market history, it was about to die, right,
Speaker 1: it has come back from the dead effectively to haunt
Speaker 1: financial markets. Oh I'm I'm intrigued. Yes, So we are
Speaker 1: going to call this episode Revenge of the Libor, And
Speaker 1: we have the perfect person to talk about all this,
Speaker 1: not just what happened in two thousand eight and then
Speaker 1: during the Libor manipulation scandal, but also to discuss what's
Speaker 1: happening now and why people are once again discussing Libor.
Speaker 1: Let's do it so, our guest for this episode is
Speaker 1: Scott Pyng. He is the CEO of Advocate Capital Management,
Speaker 1: and he also used to be head of US interest
Speaker 1: rate strategy at City Group of Fact. That will be
Speaker 1: relevant in just a few minutes. Scott, thanks so much
Speaker 1: for coming on. Thanks for having me guys. So I'm
Speaker 1: so glad we could have you do this because you
Speaker 1: truly are the perfect person to talk about libor, because
Speaker 1: you were one of the first people, if not the
Speaker 1: first person, to actually point out that it looked like
Speaker 1: libor potentially was being manipulated in some ways. That right, Yeah,
Speaker 1: And it's been a long and strange journey since that point.
Speaker 1: And I would sort of contend with the statement that
Speaker 1: libor is dead because rumors of its death as well
Speaker 1: discuss are somewhat greatly exaggerated. So, just to back up
Speaker 1: Tracy mentioned in the intro, libor being the rate that
Speaker 1: banks used to price short term lending to one another.
Speaker 1: Just give us the sort of quick history of how
Speaker 1: this rate became a thing. Sure, before I started the
Speaker 1: business in the eighties, the key short term rate was
Speaker 1: actually not liebor, was actually three month treasury bills. Libel
Speaker 1: came along the mid eighties as a way to for
Speaker 1: a non US tom ossalled banks to obtain financing in
Speaker 1: the your dollar market UM and over time, with increased
Speaker 1: usage within with its center status in the middle of
Speaker 1: interest rate swaps, it took over UM the benchmark status
Speaker 1: from three month T bills and it's been the benchmark
Speaker 1: UM since the late eighties early nineties. So that was
Speaker 1: really the genesis of LIBL And at some point maybe
Speaker 1: we'll have some time to touch back on that because
Speaker 1: I think going back to three months T bills may
Speaker 1: actually be a very useful thing in terms of considering
Speaker 1: librar replacements. Yeah, we're definitely going to talk about library
Speaker 1: replacements UM, but before we do, just to set the scene,
Speaker 1: remind us what library looked like, you know, in two
Speaker 1: thousand and eight in the depths of the financial crisis,
Speaker 1: because we not only saw a librar blowout, we also
Speaker 1: measured library against o I s UM overnight index swaps
Speaker 1: basically a risk free rate of lending PEG to typically
Speaker 1: fed funds futures. Walk us through the dynamics there. Why
Speaker 1: did we see that spread blowout? Well, the basic mechanics
Speaker 1: of libor back then was there were sixteen submission banks
Speaker 1: and the library setters, which is the British Banks Association,
Speaker 1: would take the four highest, four lowest, throw them out
Speaker 1: and average the rest, and that process was supposed to
Speaker 1: eliminate any attempt at collusion. During the global financial crisis,
Speaker 1: bank funding costs started to rise and library did begin
Speaker 1: to rise. However, because at that point libor rates um
Speaker 1: submitted by each bank was published on sources like Bloomberg,
Speaker 1: people could see when the bank was vulnerable because they
Speaker 1: could see its library submission start to rise. And people
Speaker 1: began looking very carefully at these library submissions, and that
Speaker 1: creates an incentive on the part of many banks to
Speaker 1: begin to under count the actual financing rate. And that
Speaker 1: really was, you know, the issue that we pointed out
Speaker 1: when we did our analysis on libor in April of
Speaker 1: two tho eight. Can you explain a little bit that
Speaker 1: mechanism The banks submit numbers based on what and then
Speaker 1: they throw some out. It sounds kind of like an
Speaker 1: Olympic scoring system of lopping off the edges. But just
Speaker 1: walk us through that process a little bit more sure.
Speaker 1: Banks are supposed to submit libor based on where they
Speaker 1: are financed, and typically the submission entity is supposed to
Speaker 1: be squared away in the middle of a bank's funding area.
Speaker 1: Over time, some of those supposedly walled off people and
Speaker 1: ward off entities began to be influenced by other parts
Speaker 1: of the trading desk. Very frequently, these submission entities and
Speaker 1: people sat on the same trading floor as traders who
Speaker 1: are taking positions on where library or interest rate swaps are.
Speaker 1: So over time you started getting some influence from the
Speaker 1: traders we were market making and taking market positions, influencing
Speaker 1: the people who are actually setting the rates. So there
Speaker 1: were two reasons to manipulate library, right, Like, on the
Speaker 1: one hand, you could potentially help your portfolio, your colleagues
Speaker 1: at the bank, you know, help the positions depending on
Speaker 1: where you shifted library. But on the other hand, during
Speaker 1: the financial crisis, people were much more concerned about reputational risks,
Speaker 1: so typically they started under reporting the library rate because
Speaker 1: they didn't want to make it look like there was
Speaker 1: a huge interbank lending crunch and that they were getting
Speaker 1: the worst of it. Is that right, right? And you know,
Speaker 1: the more noble goal, if you will, is to make
Speaker 1: a bank appear stronger than it would be, And the
Speaker 1: more mundane goal would be for the traders to trying
Speaker 1: to profit on ongoing basis from these rate sets. Now,
Speaker 1: when I published my article, um, we're not able to
Speaker 1: get access to sort of the day to day manipulations
Speaker 1: that men have been going on. But what we could
Speaker 1: see is using publicly available data, we can start to
Speaker 1: see the discrepancy between where people are staying libboard verses
Speaker 1: where banks are actually funding. So that really was the
Speaker 1: genesis of my analysis that you can uh find um,
Speaker 1: this discrepancy from publicly available market data. So you said,
Speaker 1: there's theoretically two different sort of strains of library manipulation.
Speaker 1: One would be designed to conceal the degree of vulnerability
Speaker 1: in the system overall, which because of self fulfilling prophecies,
Speaker 1: may in theoretically have been beneficial in some way. And
Speaker 1: then the other is the more cynical manipulating the number
Speaker 1: so as to profit off of trades that are tied
Speaker 1: to the number. How big was or is the market
Speaker 1: for instruments that are in some way connected to library
Speaker 1: I mean, libralar is tied into pretty much everything around us.
Speaker 1: We're talking about hundreds of trillions of notionals of interest
Speaker 1: rate swaps that directly refer to libor. On top of that,
Speaker 1: you have ank loans, student loans, mortgages that are all
Speaker 1: indexed to a great variety of lieborars. So library is
Speaker 1: really an intricate part of our everyday lives. So, Scott In,
Speaker 1: I think it was April two thou eight, you publish
Speaker 1: your report is Libor Broken? What happened after that? Did
Speaker 1: you get a lot of backlash? I can't imagine. UM
Speaker 1: your colleagues, even at City Bank potentially were were that
Speaker 1: enthused about it? Yeah? I mean we wrote on analysis,
Speaker 1: UM got sent out to clients and there was kind
Speaker 1: of radial silence for about a five day period, and
Speaker 1: then the Wellster Journal picked it up and was on
Speaker 1: the front page, and then all of a sudden, all
Speaker 1: hell broke loose. So let's just say that I got
Speaker 1: called into quite a few meetings that day as a
Speaker 1: result of that. Who was the most upset about it?
Speaker 1: When you say all hell broke loose? Where were you
Speaker 1: hearing that the most? Um? We heard that bb A
Speaker 1: wasn't happy with us. We heard that UM management was
Speaker 1: not happy with us. UM the good was I signed
Speaker 1: off on the article with my boss, Michael Schumacher of
Speaker 1: the same name as a race car driver prior to publications,
Speaker 1: so I knew he had my back, but there was
Speaker 1: a lot of political blowback from that because if you
Speaker 1: think about it, you know, again library is so central
Speaker 1: to everything, and not just finance but in the whole
Speaker 1: world that you know, calling the question was really a
Speaker 1: big deal. So I want to move on to what
Speaker 1: librar is actually doing now and why we're all talking
Speaker 1: about it, But before we do, maybe just to sum up,
Speaker 1: after the financial crisis, we have an actual investigation into
Speaker 1: libor and how it was said. What was the outcome
Speaker 1: of that investigation. I think the outcome was that a
Speaker 1: great many of the banks who involved in liborar sets
Speaker 1: were were tainted in this submission um, whether it's on
Speaker 1: an ongoing basis or whether it's um infrequently, because of
Speaker 1: the influence of market makers and risk takers on the
Speaker 1: library submission side. So I think the key results is
Speaker 1: that now we have a new administrator for libralar, we
Speaker 1: have banks who who have much clear policies in terms
Speaker 1: of the wall around the library centers, and hopefully when
Speaker 1: a bit of a better place. I have one more
Speaker 1: question about library history before we move on. You touched
Speaker 1: on the important point, and one of the reasons the
Speaker 1: story resonated so much is because it touches all of
Speaker 1: our lives, and so many of us have financial instruments
Speaker 1: that are in some way tied to library costs. But
Speaker 1: why did that happen? I mean, you mentioned there was
Speaker 1: an earlier benchmark, the three month treasury. When you think
Speaker 1: about things like student loans or credit cards, it's not
Speaker 1: intuitive why the industry would start to price those off
Speaker 1: of bank lending rates as opposed to something a little
Speaker 1: more industry neutral. I think if you look at bank
Speaker 1: assets and liabilities, the coevolution of that through time is
Speaker 1: part of what drove liborar's popularity. Again, some of the
Speaker 1: old floating rate indu cries that banks used to use
Speaker 1: where things like prime or our CD rates. But as
Speaker 1: libel kind of gained primacy in the drumatist market in
Speaker 1: the futures market, more banks decided to adopt libel as
Speaker 1: both as assets and liability indices. And when you do that,
Speaker 1: you basically set policies to say, have a fixed floating
Speaker 1: funding mix, and the floating part of it is going
Speaker 1: to be directed towards the standard benchmark, which is libor
Speaker 1: likewise on the assets side. Then as libel kind of
Speaker 1: becomes stand on liability side, the asset side is going
Speaker 1: to take live or as well as its mentionmark. So again, increasingly,
Speaker 1: over time you had more and more bank products beginning
Speaker 1: to index the fillion rates off of libor. Alright, so
Speaker 1: let's fast forward to today. We went through the financial crisis,
Speaker 1: We went through this big libraar scandal. At the end
Speaker 1: of the scandal, most people agreed that we were going
Speaker 1: to try to find a replacement for this rate uh
Speaker 1: something else that we could peg trillions of dollars worth
Speaker 1: of financial assets too. We're going to talk about that
Speaker 1: effort in a second, but before we do, let's talk
Speaker 1: about the recent rise in library because of course, the
Speaker 1: thing has not been doing much for years and years
Speaker 1: and years, and we all kind of forgot about it,
Speaker 1: and then suddenly it's in the headlines once again. Scott
Speaker 1: walk us through what's happening with the rise in library
Speaker 1: short Tracy. Since the end of two thousand seventeen, we
Speaker 1: have seen libar, especially three month libel, which is the
Speaker 1: benchmark in library space, rise more than half a percent.
Speaker 1: And this is in the absence of any Federal Reserve
Speaker 1: rate hike over that period, So that has obviously been
Speaker 1: of major concern to the market because of because everything
Speaker 1: is basically index off of libor. So to me, I
Speaker 1: what I wanted to do was to us to look
Speaker 1: through UM strategistal analyst research to say, okay, what has
Speaker 1: been a driver of this? And I was really not
Speaker 1: able to find it, So I basically had to do
Speaker 1: my own UM analysis and that really drove UM. You
Speaker 1: know what we found out, which is that if you
Speaker 1: look at how much Libel has risen and you really
Speaker 1: try to attribute it into different sources, what we find
Speaker 1: is that about half of the rise came from the
Speaker 1: market pricing in UH future FED hikes only half, So
Speaker 1: that means the other half has to come from some
Speaker 1: other sources. UM about two thirds of that is coming
Speaker 1: in analysis from increases in short term treasury will supply
Speaker 1: as the government UM is in the process of funding
Speaker 1: the tax reform. But there is a there is a
Speaker 1: small but recognizable component of the Libel rise that is
Speaker 1: due to UH shifts in the credit market, which we
Speaker 1: identified as well. Breakdown that that second half. So it's
Speaker 1: easy enough to understand how you could figure out how
Speaker 1: much is attributable to expectations for an increase in Fed
Speaker 1: funds that um the other parts where you said part
Speaker 1: of it is short term treasury supply I guess, competing
Speaker 1: with inter bank lending, and also the slight change in
Speaker 1: credit perceptions of borrowers. How did you sort of disambiguate
Speaker 1: those two aspects right? You can. You can think of
Speaker 1: library as a bunch of stacked lego bricks. So at
Speaker 1: the bottom of that stack is the ristless rate. How
Speaker 1: much the market is expecting uh FED funds rate to move,
Speaker 1: And we can find that out by looking at market
Speaker 1: predictions of three months oh i s overnight index swap,
Speaker 1: which is where markets pricing average three month FED funds.
Speaker 1: That's the bottom stack, and we find that that's really
Speaker 1: about fifty eight percent of the Libel rise. The next
Speaker 1: set of lego bricks is really actual securities, and the
Speaker 1: least risky securities in the three months sector is three
Speaker 1: month treasury bills. So we looked at how much three
Speaker 1: months treasury blow yields have changed since the end of
Speaker 1: the year. We found that it rose thirty seven basis points.
Speaker 1: From that thirty seven basis points, you subtract the twenty
Speaker 1: four basis points the bottom stack of lego bricks that's
Speaker 1: from the three month oh I s and the residual
Speaker 1: the thirteen basis points we attribute to increased strategy bill supply.
Speaker 1: And then the final piece of the puzzle is a
Speaker 1: difference between three month treasury yield and the most comparable
Speaker 1: instrument to three month libr in a market, which is
Speaker 1: ninety day commercial financial commercial paper rate, and that that
Speaker 1: difference contributed to the final eight basis points of the puzzle.
Speaker 1: So this is actually the only analysis that I've seen
Speaker 1: attempt to quantify each of those aspects and their impact
Speaker 1: on library UM. It's really good, But talk to us
Speaker 1: about the tax component of it, because I think for
Speaker 1: most listeners when they think about tax reform, they're not
Speaker 1: necessarily going to start thinking about what the impact is
Speaker 1: going to be on money markets. Sure, and the impact
Speaker 1: of tax reform visa VI. What we're talking about today
Speaker 1: is that as tax reform was enacted, obviously the companies
Speaker 1: that had a significant chunk of their overseas earnings UM
Speaker 1: left in overseas markets had a rake in terms of repatriation. Now,
Speaker 1: a lot of these were already invested in dollar assets
Speaker 1: dollar short term masses such as a CP market, so
Speaker 1: there was no significant asset allocations shift from that repatriation. However,
Speaker 1: what has been noted by industry sources such as Credit
Speaker 1: Swiss is that since the passage of tax reform, the
Speaker 1: CP market has seen significant shortening of the maturity stack.
Speaker 1: So what we've seen is that the percentage of the
Speaker 1: CP market that is six weeks or shorter in credits
Speaker 1: research has risen from low fifties to mid s over
Speaker 1: that same period. Now that may not seem very much,
Speaker 1: but it's a pretty substantial shift in terms of the sponsorship.
Speaker 1: And my interpretation of what that means is that the
Speaker 1: cash rich companies such as a snail Apple, who have
Speaker 1: had that cash overseas, when they bring it back, they
Speaker 1: tend to want to keep it in shorter maturity paper
Speaker 1: because they're not necessarily sure what they're gonna do with it.
Speaker 1: Perhaps they're going to be announcing some um some bonuses
Speaker 1: for workers, perhaps they're gonna start building another another headquarters,
Speaker 1: whatever that may be. There is some policy uncertainty on
Speaker 1: the part of the company, and as a result, that's
Speaker 1: reflected in the stance of the tragedy department who are
Speaker 1: managing this cash flow. Their stands would be, let's keep
Speaker 1: it shorter until we figure out what to do with it.
Speaker 1: But spending it great, we don't have to do very
Speaker 1: much with it. So they shortening in the maturity profile
Speaker 1: in the CP market um has has really been the
Speaker 1: big driver of this increased credit component of LIEB or
Speaker 1: So is this worrisome? The numbers don't seem very big,
Speaker 1: and we're certainly not talking about anywhere near the scale
Speaker 1: we saw during the crisis or anything like that. But
Speaker 1: how much anxiety should the increase, particularly in the credit
Speaker 1: component cause people. But now it is not worrisome if
Speaker 1: you again, if you sum up the tragic bill component
Speaker 1: and the credit component, that adds up to roughly about
Speaker 1: bases points or roughly one FED hike. So it's not
Speaker 1: that worrisome right now, maybe to the majority of the world,
Speaker 1: but to the FED that is an issue that they
Speaker 1: need to keep an eye on because if that component
Speaker 1: of libor continues to rise, then it has the impact
Speaker 1: of additional and intended FED hikes that will reduce liquidity
Speaker 1: in the marketplace over and beyond what the FED is doing. Well,
Speaker 1: I was going to ask the consensus is that we
Speaker 1: shouldn't all freak out just yet. But what does this
Speaker 1: say about the feds exit from monetary policy? At the
Speaker 1: very least, it seems like it's a good example of
Speaker 1: how tricky it might be to actually tighten monetary policy
Speaker 1: and the number of things that the Central Bank is
Speaker 1: going to have to take into account, you know, like
Speaker 1: fiscal stuff such as tax reform. It seems like you're
Speaker 1: asking a lot of them. Yes, right, dude, that's absolutely right.
Speaker 1: And what we are seeing with what is going on
Speaker 1: at CP market is that as the Fed is withdrawing
Speaker 1: its unprecedented liquidity, any additional shifts in liquidity provision is
Speaker 1: probably going to have an amplified effect in this environment.
Speaker 1: So it's revenge of the Library. But we shouldn't all,
Speaker 1: you know, panic just yet. Scott, you mentioned earlier about
Speaker 1: attempts to find a replacement for Library and maybe sort
Speaker 1: of going back to the future and looking at what
Speaker 1: we used to use. What is up for discussion and
Speaker 1: what do you think the best reference rate would actually be.
Speaker 1: Sure Currently, the government has put forth an overnight rate
Speaker 1: called s o f R SOFA, which represents basically an
Speaker 1: arrogant where securitized borrowing takes place. So typically, if you
Speaker 1: hold treasury bonds, you can pledge those bonds and borrow
Speaker 1: cash against that. That's basically what this rate will reflect. Now,
Speaker 1: this is a very front rate and its nature from
Speaker 1: libra or. Libra or is supposed to represent UM a
Speaker 1: couple of things. One is unsecuritized landing and second thing
Speaker 1: is obviously for longer than overnight rates. So this proposal
Speaker 1: is really a very very different animal than LIBOR. It
Speaker 1: is not meant to replace library. Cannot replace librar because
Speaker 1: to attempt to do so would invite many, many different
Speaker 1: lawsuits on the part of at least half the market
Speaker 1: who would be disadvantaged by this. Now, the issues I
Speaker 1: have with using rates like sofar are multipold. One is
Speaker 1: again you're you're using a securitized rate to replace a
Speaker 1: quote unquote replace and unsecuritized rate. The second is that
Speaker 1: the reason they've only proposed this overnight rate is because
Speaker 1: of lack of volume in longer term rates UM. If
Speaker 1: you look at sort of overnight repose, hundreds of billions trade,
Speaker 1: but once you push term repo to one month or
Speaker 1: three months, the percentage of the entire report transaction that
Speaker 1: occurs in the one month three month point relative to
Speaker 1: the overnight point drops to well lesson tempatent, so you
Speaker 1: can't This is why the government can't tell the market
Speaker 1: hey when we use a one month securitized rate, because
Speaker 1: the volumes they're just are not They're just like um,
Speaker 1: you know, their arguments for pushing out LIBORAD. There's their
Speaker 1: arguments for not using lib words that there's insufficient volume there. Well,
Speaker 1: there's insufficient volume in terms strong securitized financing as well.
Speaker 1: So the current best pick by the government is this
Speaker 1: overnight securitized rate, which I disagree with. I'm much more
Speaker 1: in favor of using a rate such as three month
Speaker 1: fee bill because one it's been out there for a
Speaker 1: long time, people know what it is to its weekly
Speaker 1: auction treasury bills. So the rate determination is based on
Speaker 1: the very transparent auction process. And if we need daily sets,
Speaker 1: we can certainly increase the frequency of these auctions and
Speaker 1: still get significant volume. For example, the previous weekly three
Speaker 1: months or thirteen week treasury bill produced well over three
Speaker 1: times the fifty billion of treasury bills that was sold,
Speaker 1: So there's plenty of liquidity in the tragedy bill market,
Speaker 1: and I think the government in putting all of its
Speaker 1: weight behind SOFUR is really doing the wrong thing and
Speaker 1: doing wrong. By doing the wrong thing, I mean that
Speaker 1: we didn't come up with libor as the benchmark rate
Speaker 1: by FIAT. The market kind of gravitated towards that there
Speaker 1: was more and more usage. It started off with tragedy bills,
Speaker 1: market usage kind of gravitated around librard as a benchmark,
Speaker 1: and so I think creating a benchmark by FIAT is
Speaker 1: something that is going to have difficulty working. I think
Speaker 1: what the government and others should do is to promote
Speaker 1: a variety of different types of floating rate indicries and
Speaker 1: kind of let the market decide. Now, it's harder for
Speaker 1: the market to decide right now in this market environment
Speaker 1: because in the past, derivative instruments are pretty much traded
Speaker 1: over the counter, so it's just there's no regulation, it's
Speaker 1: just by lateral agreements. Now pretty much all the swaps
Speaker 1: that are done have to be cleared. So to really
Speaker 1: have a new benchmark going, one needs the cooperation of
Speaker 1: regulators like the FED, of the OTC, clearing houses like
Speaker 1: CIME or l c H, and also in these such
Speaker 1: as fast by because fast by issues regulations governing hedge accounting,
Speaker 1: for example, So UM corporations are going to a new
Speaker 1: floating right index if fast by dozen't so bless this rate.
Speaker 1: So it's harder, I think for people to come around
Speaker 1: a new benchmark. But I think we do need to
Speaker 1: let the market decide what the appropriate benchmark is rather
Speaker 1: than just being told that so you know you have
Speaker 1: to use so for going forward. Another interesting stat I
Speaker 1: had as I pulled derivative counterparties is that even now,
Speaker 1: many many years after the Libel crisis, well over nine
Speaker 1: of all the swaps has traded in a single day
Speaker 1: is based in Libel. So that really tells you. So
Speaker 1: the staying power library, which goes back to my statement
Speaker 1: that you know the rumors of his death are greatly exaggerated, Well,
Speaker 1: I was just going to say, you know, let's say, okay,
Speaker 1: the government or regulators settle on some new benchmark. How
Speaker 1: difficult and wrenching of a process would it be, given
Speaker 1: the number of instruments that are that are currently based
Speaker 1: on Libra, or to say okay, everybody switch, Well, I
Speaker 1: think it's it's gonna be a long time coming. The
Speaker 1: fed only started publishing, sof um only will start publishing
Speaker 1: so far in April. Um The market is going to
Speaker 1: have to get its arms around how this index looks
Speaker 1: versus other industries they're familiar with FED funds in terms
Speaker 1: of overnight comparison. It's going to have to be a
Speaker 1: basis swap market that develops around this index, and then
Speaker 1: over time people may start trading this index outright in
Speaker 1: futures form and derivatives form and swap form. So it
Speaker 1: has to be a block by block process. I think
Speaker 1: the timetable that regulators have put forth i e. Libel
Speaker 1: is going to be basically outdated, outmoded, eliminated by I
Speaker 1: think that's pretty dawn ambitious. Okay, that may be the
Speaker 1: spookiest part of this entire story. Scott Paying, CEO of
Speaker 1: Advocate Capital Management, thank you so much. Thank you very much, guys.
Speaker 1: Thanks that was great. So Joe, I love that conversation because,
Speaker 1: as ever, it sort of brings back the good old
Speaker 1: days of financial crisis history for me. What a time
Speaker 1: to be a markets reporter. Well, I think that was
Speaker 1: a great conversation because a it was right in your
Speaker 1: wheelhouse and you've covered this a lot, and you understand
Speaker 1: this stuff better than most people I know, and be
Speaker 1: I don't really understand any of this of and I've
Speaker 1: always been sort of a little shy around this topic.
Speaker 1: Just kind of the the perfect conversation for both of
Speaker 1: our needs. Your expertise in me this big hole in
Speaker 1: my knowledge that I really needed to fill. Now, Joe,
Speaker 1: I'm sure that's not true. I'm sure you understand it
Speaker 1: very well. But I think if anyone wants a broad
Speaker 1: takeaway from this conversation, it's that there's this thing called
Speaker 1: libor that exists, and it's incredibly important for the financial system.
Speaker 1: It's incredibly important for our system of credit, and it's
Speaker 1: the thing that trillions, literally trillions of dollars worth of
Speaker 1: assets are actually pegged to, and no one really knows
Speaker 1: how it works or what affects it. Like we are
Speaker 1: here having this discussion. We've been talking for about, let's say,
Speaker 1: twenty five minutes, and we can kind of figure out
Speaker 1: some of the things that might be causing it, but
Speaker 1: there's no exact certitude. And in fact, if you talk
Speaker 1: to other analysts in the market, they'll have all these
Speaker 1: different opinions that kind of amazes me. Yeah, I know
Speaker 1: there's been all these stories we've done and seen recently
Speaker 1: about this inexorable rise in Library, and everyone has their
Speaker 1: own theories, so the degree of non consensus about what's
Speaker 1: driving it has really been fascinating. I'm also just really
Speaker 1: interested in the point that Scott made about the sort
Speaker 1: of organic, natural way that Library emerged. It wasn't by Fiata,
Speaker 1: wasn't saying Okay, we're gonna price all this stuff towards
Speaker 1: Library is a sort of network effects thing. We're more
Speaker 1: and more entities thought it made sense, and the sort
Speaker 1: of difficulty of replicating that process in an artificial manner
Speaker 1: and just saying okay, now we're doing something else very
Speaker 1: different from the environment through which Library originally emerged. Yeah,
Speaker 1: it's going to be really interesting to watch and see
Speaker 1: how long it actually takes to come up with the
Speaker 1: replacement and then transition it in. Yes, all right, this
Speaker 1: has been another episode of add Thoughts. You can follow
Speaker 1: me on Twitter at Tracy Alloway, and you can follow
Speaker 1: me on Twitter at the Stalwarts, and you should follow
Speaker 1: our producer tofur Foreheads at Foreheads T, as well as
Speaker 1: the Bloomberg head of podcast, Francesca Levy at Francesca Today,
Speaker 1: Thanks for listening,