Small number times huge number
December 13, 2012, 9:14 pm
Filed under: Uncategorized

I don’t know about you, but when reading this article about LIBOR manipulation, the closing paragraph made me do a double-take:

The next morning RBS said it paid 0.97 percent to borrow in yen for three months, up from 0.94 percent the previous day. The Edinburgh-based bank was the only one of 16 surveyed to raise its rate. If it had lowered its submission in line with others, the cost of borrowing in yen would have fallen one-fifth of a basis point, or 0.002 percent, according to data compiled by Bloomberg. Even that small a move could mean a gain of $250,000 on a position of $50bn.

Did they really mean to put that ‘Even’ in there? Shouldn’t it be more like, ‘To illustrate how small this number is, one could have had $50 billion notional of yen swaps on and still the effect would only have been like $250k.’

If you had a more modest, say, $10 million swap on, we’re talking about 50 dollars here. Good luck in your class-action suit, I hope you recover all 50, you can treat your floor to some pizza. Or at least maybe some donuts (after the lawyers and consultants take out their fees). The article also mentions nursing homes and mortgage borrowers joining class action suits; now we’re talking about a cup of coffee.

Which is not to say it’s not a scandal. And evidently the traders in question, whose desk perhaps could have conceivably had that sort of total exposure for all I know, were indeed trying to nudge LIBOR in the direction of their book and pick up that $250k. But contra the author’s implication, these sorts of numbers don’t show that they had a good motive to do so. If anything, they show the opposite – the sheer stupidity of manipulating LIBOR (or trying to) “for the PnL”, on most of these dates.

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