By William Davis


It’s been said that finance is a set of social conventions, and much of the financial industry is an arena for battling over those conventions. In that sense, the story of Libor — the London interbank offered rate — is the perfect finance story.

The tale begins in 1986 when Libor was created to help banks set interest rates on big corporate loans. Intended to be little more than an invisible bit of financial wiring hidden deep below the surface, the British Bankers’ Association, or BBA, simply asked banks to estimate how much it might cost them to borrow, did the arithmetic, and posted the results. An honor system, if you will, amongst London’s clubby financiers.

American banks adopted Libor to determine what borrowers paid on variable-rate mortgages, student loans, and credit cards

Flash forward 10 years or so, and Libor, for reasons known only to the financial gods, has literally become a foundation of global finance. And bankers — in their role as providers of the numbers that affect profitability of their own loan portfolios — have become quite skilled at manipulating Libor in the favor. In other words, the world’s most important number is based on guesswork from banks that have financial interest in the outcome of their guesswork.

The rate underpins more than $3 trillion in syndicated loans, around $1.5 trillion in commercial mortgages, and $1.44 trillion in residential mortgages

In the final chapter, more than a dozen banks have paid roughly $10 billion in penalties related to fraudulent Libor activities. The BBA has disbanded. Senior executives have lost their jobs. And otherwise nameless traders like Tom Hayes — known to colleagues as Rain Man for his brainy but socially awkward behavior — are in jail.

As a cheerless epilogue, U.K. regulators announced last week that Libor will be phased out altogether.

Studies have estimated that hundreds of trillions of dollars of financial contracts world-wide are based on the benchmark

We’ve also heard it said that it’s possible to get too cynical about the world of finance and its shenanigans. Hard to see how you could.

What the equity markets have been doing…

With a nice boost from energy stocks and no meaningful surprises in second quarter earnings reports, stocks moved ahead across the two-week stretch. The blue-chip Dow performed best among the major benchmarks. Among the important market sectors, healthcare stocks, for any number of reasons, fared poorest.

The period’s economic data were mixed and had little impact on stock prices. Important reports included existing home sales, which declined in June, and the Conference Board’s gauge of consumer confidence, which increased. Less encouraging news came from the manufacturing sector, with core capital goods orders contracting slightly. On Friday, the Commerce Department released its initial estimate of second-quarter growth, which showed GDP expanding slightly below expectations.


INDEX Friday’s Close One-Week Point Change Year-to-Date Change
DJIA 21830.31 +192.57 +10.46%
S&P 500 2472.10 +12.83 +10.42%
NASDAQ 6374.68 +62.21 +18.42%


What the fixed income markets have been doing…

Despite word out of the Fed’s policy meeting that the central bank will begin reducing its holdings of mortgage-backed securities and Treasuries “relatively soon,” Treasuries barely moved for the period. The investment grade and high-yield traders also ignored the Fed remarks and focused instead on quarterly earnings reports, which did not contain any major surprises. The municipal new issuance calendar was again relatively light, which continued to drive returns and activity in the secondary market.


FIXED INCOME Period YTD 12 Months Yield
U.S. Treasuries
2.0% -(2.2%)% 2.3%
U.S. Investment Grade -(0.1% 4.6% 1.9% 3.1%
U.S. High Yield -(0.2)% 6.1% 10.8% 5.4%
U.S. Municipals -(0.1)% 4.4% -(0.3)% 2.2%
Non-U.S. Developed -(0.1)% 8.6% -(1.0)% 0.8%


What the numbers are saying…


The expected increase in earnings at S&P 500 companies in the second quarter, following a 15% increase in the first. The U.S.’s largest companies are on pace to post two consecutive quarters of double-digit profit growth for the first time since 2011, helped by years of cost-cutting, a weaker dollar, and stronger consumer spending.

What the pundits have been saying…

“The retail industry is clearly facing headwinds. The internet has made the value proposition for a lot of shopping malls less relevant.”

  • Nadeem Meghji, head of North American real estate at Blackstone

“People say the internet killed bricks-and-mortar retailers. But bricks and mortar killed itself. People say they don’t know how we’ll survive, but we do it by adapting.”

  • Greg Maloney, chief executive for Americas retail at real estate investment and management company JLL

What people have been saying…

“We have to have projects that are resilient in a world where oil has peaked. When it will happen we don’t know, but that it will happen we are certain.”

  • Ben van Beurden, Chief Executive, Royal Dutch Shell

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