The problem regulators have had with LIBOR has next to nothing to do with that whole scandal. Even the bankers who ended up going to jail did so based (largely) on misleading emails (just four, in one guy’s case). What constitutes a “representative” rate anyway? Your opinion might differ from mine or the other bank reps on the LIBOR panel, and specific perception is the whole point to begin with. 

That’s not really the issue, though. This all comes down to how LIBOR showed the world – anyone paying attention to more than the mainstream version – just how poorly the Federal Reserve performs in the one task both its most basic and mostly taken for granted by the public. Liquidity, and in LIBOR’s case a specific form of (interbank) money.

And in liquidity there’s badly needed, systemic information which is why LIBOR had become the basis for pricing the whole world’s financial system products.

When LIBOR went up and stayed up not just in 2008 but during other poignant moments along the way during the past fourteen years, this was its real crime. How dare the market show up the Great Bernanke, clearly indicating that bank reserves don’t amount to liquidity!

While the Fed and the other US regulators seek to abolish the inconvenient truth beyond LIBOR the banking system which still uses it isn’t just resisting – it is now openly talking.

John Dizard of the Financial Times (one of the “good ones” in the financial media, IMHO) writes this weekend about how last week he got a few Wall Street bankers to go on record with their distaste for the whole LIBOR/SOFR debacle. Offering more of what I’ve said all along, even the big banks are wondering what has gotten into these regulators, why they’d expose their incompetence so openly.

Full disclosure: I spoke at length with John about this topic last week before the article came out and have shared my thoughts on SOFR/LIBOR with him several times previous.

Thomas Pluta, JP Morgan’s global head of linear rates trading, agrees that “yes, [SOFR] creates a lot of credit basis risk. A lot of banks, particularly regional banks, have been vocal about the lack of credit sensitivity. If you are funding yourself in unsecured markets, that is a pretty obvious concern.”

Not if you’re the Fed seeking to rid the world of LIBOR.

Then there’s the (much bigger) matter of no term structure in LIBOR’s intended replacement. Even if the CME does conjure up a substantial and liquid market for SOFR futures, it still isn’t the same thing: a 3-month futures contract linked to SOFR is not in any way a substitute for spot 3-month LIBOR.

The key takeaway seems to be, as John writes:

One New York bankers says the result is that banks will seek to hedge this risk by imposing a higher credit spread than it would with a more credit sensitive rate such as LIBOR. “The effect is to contract credit,” he says. Political poison…I have been surprised at the banks’ bitterness about the SOFR “solution.” This is not over.

Indeed. That a few bankers have even gone so far as to go on the record here with a mainstream reporter from the Financial Times is itself significant (instead of just telling John to buzz off with typical boilerplate). Undermining the market’s ability to display one of the most fundamental monetary aspects of a gigantic global system is a special case of recklessness (even if its given the fancy-sounding justification of macroprudential regulation).

I believe it really is this simple:

These people hate LIBOR because it exposes the plain truth of the matter. Central bankers are not central bankers; they are, at best, pop psychologists. They don’t do money because they wouldn’t even know where to begin. And that’s the only way anyone would ever have imagined SOFR taking over from LIBOR.

Even the banks – the closest things the Fed has to friends – are like, WTH? This isn’t sound policy, or even a decent idea. Policymakers really have no idea what they are doing.