There are times when regulators are the adults in the room, spanking the banking system full of little petulant children who absolutely do require some disciplining. Take away their prop trading abilities or change the weighted calculation for some asset class or other. Maybe even some liquidity rules. The banks will stomp their feet and pitch a fit, but the wizened adults stand firm because, having seen so many things before, they actually do know what’s good for the kids.

Those little few times, however, are in the extreme minority.

It’s the other times, those when regulators and central bankers want you to believe they are the adults seeking out good deeds to accomplish when instead they are just clueless bureaucrats who occasionally have to justify their own existence. And most times, the justification is a purposeful distraction from the consequences of getting everything else wrong everywhere else.

It’s always easy to blame the stupid kids for trashing the place, to pick on Wall Street; most there are, to the public, so unlikeable. When in doubt, trash the Street.

Ah, but which Street? You might not know there’s more than one choice. Regulators in America, at least, would prefer you never find this out.

The one you know already: Wall. The one far superior in that it supersedes Wall Street in the hierarchy of actual monetary form and existence: Lombard Street.

You see, many years ago now Ben Bernanke’s Fed got fed up and decided LIBOR stunk. Banks (on Lombard Street) had been cheating at pennies, taking advantage of little ol’ grammas and their meager stashes of dimes and nickel savings. That’s how many in the media, taking their cues from more carefully-worded Federal Reserve claims, made it sound.

Yeah, no. While there was cheating, LIBOR is an interbank rate which only applies to others who participate in the global interbank market for dollars running largely through the City of London’s Lombard district; as well as the myriad of nodes connecting globally outside the United States boundary. Offshore currency of the virtual virtual kind few regular folks have dreamed of let alone could ever figure out how to participate.

To take some heat off the first failed economic recovery attempt, just the first false dawn around 2011 and 2012, the Federal Reserve let the financial media tell Congress this LIBOR stuff was the equivalent of the “crime of the century.” Laying it on way too thick, Chairman Bernanke was called onto the Congressional carpet (not that Bernanke ended up caring). Congressman Scott Garrett wasn’t buying the obvious theatrics back in ‘12:

You [Bernanke] have been before this committee countless numbers of times since 2008 and if this is the crime of the century, as so many people are reporting today, never once did you ever once come and mention it as being a problem, never once did you come here and say this is what you’re going to do about it.

Chairman Bernanke was so darn busy he must have just forget to bring this up at any point during and for the first few years following that whole (subprime mortgages, right?) global financial crisis thing-y. All of a sudden in 2012, with an economy “unexpectedly” sputtering that was supposed to have been recovering, as Congressman Garrett correctly surmised, what the Federal Reserve decided instead was that officials were going subvert this offshore eurodollar rate – because that’s what LIBOR actually is – and replace it with something which makes it at least sound like dollars are an American rather than mostly foreign affair.

In 2014, the bureaucrats struck back with something called SOFR – secured overnight financing rate. This was decreed the new standard, the replacement for LIBOR which would be predicated instead upon “real” markets including repo (even though, at crucial times, the way LIBOR is tabulated is actually far superior – for market participants to understand how bad central bankers are at money). An new overnight rate to rule all other money rates, so sayeth the lumbering officeholders of decree-ers.

Their real intent wasn’t fusing repo markets into the pricing structure of structured products globally. Oh no, the Fed’s petulant whining was grounded much deeper. I wrote back in January this year:

A totally independent money rate [LIBOR] linked specifically to the global offshore dollar markets that don’t officially exist, and certainly don’t fall under the Fed’s regulatory mandates which stop at the US border. No wonder it sounds like a personal vendetta, LIBOR shows directly how the monetary situation worldwide is far, far more complicated.

Central bankers want and need you to believe everything is so simple. How they’ve got it all covered and it’s all so easy. The LIBOR scandal was the perfect excuse to act.

The other issue with LIBOR, as it pertains to the lack of movement away from it, is a similar reminder about the big picture. If the Fed hates LIBOR because of how it might prompt everyone to realize what is the real global reserve currency, the reluctance of banks to migrate out of it demonstrates why the eurodollar remains king more than a dozen years after it fractured.

Here we are in 2020, and the deadline fast approaching for banks to become forbidden in using LIBOR any longer. And the banking system is simply ignoring them.

Yes, you read that right. Ignoring.

Why? Because SOFR is nothing more than the height of institutional arrogance pressed into action by even more pressing technical incompetence. Not only was its genesis shrouded in all the wrong reasons, worst of all the official demand that it substitute for LIBOR forever forward further betrays what should be a shocking lack of understanding about how, you know, the monetary system actually works.

Honestly, they’re just making crap up.

It isn’t shocking because time and time again these morons keep showing you just what idiots and incompetents they are when it comes to the very monetary system they wish to project to you the public only their unchallenged adult-ness. To maintain the illusion of being in charge of a paradigm they just don’t have the first clue to try and understand.

I’m not making this up.

SOFR, for an example, is utterly useless for the things which LIBOR is used regularly for in trillions upon trillions of assets and asset transactions around the whole world. To begin with, SOFR has no term structure; it’s strictly an overnight rate which the Fed and the various bank regulators, betraying what little grasp they have on modern money, have nothing more than hoped the futures market might create a term structure from out of nothing.



Didn’t think to provide one because, apparently, they didn’t realize just how important one of the most important parts of the system has been for decade after decade after decade.

While this might sound esoteric and complex, and it is esoteric and complex, what it really means is that the nuts and bolts of the credit system, where interbank money meets dealer warehousing meets final end demand for credit, SOFR is totally, completely pointless. Banks are being told they have to replace a widely-used, deeply fundamental pricing mechanism with one that can’t be used in the same way.

Because SOFR is, in fact, hopelessly impractical, guess what? The real world of global eurodollars absolutely continues to go on with itself as if SOFR doesn’t exist. The Fed demands that American banks knock it off with LIBOR, and British regulators unleash threat after threat upon its continued use by British banks, etc. And yet, approaching the end of 2020, the IMF just yesterday was nonplussed to report:

US markets seem to be ignoring the upcoming Libor transition deadline in which Libor is scheduled to be eliminated in 13 months (December 2021). This is worrying regulators who have urged market participants to abandon Libor as quickly as possible and switch to the new Secured Overnight Funding Rate (SOFR) benchmark. Billions of dollars of Libor-indexed derivative and bond transactions continue to be produced despite the looming deadline.

And eurodollar futures contracts, every one linked to 3-month LIBOR, continue to be written by the millions, completely unabated.

This should worry regulators – but for very different reasons than it does. The fact that the banking system continues to snub SOFR is a very clear example, even if you don’t understand the nitty gritty details of SOFR vs. LIBOR, it is a very clear example that regulators especially central bankers have no freakin’ clue about what they are supposed to be doing.

To the point they’ll press ahead anyway with SOFR even though it should be apparent by now this is beyond a sunk cost.

As I wrote back in 2018, and keep having to write throughout 2020’s inflationary, stalling recovery “puzzle”:

In other words, for every inch of him [Bernanke] that might have wanted to outright blame England for this “crime of the century” he simply couldn’t. That would be going too far in a direction the Fed will not go. What does the Bank of England have to do with dollars?

This gets right to the heart of the matter. Is the Federal Reserve responsible for only banks operating in the United States? Or, does the central bank owe responsibility to the currency? The dollar works well enough here domestically, but it’s the eurodollar that keeps pulling the world into repeated trouble.

You’d think they’d want to therefore fix the trouble in the eurodollar system and let the whole world know that they have! Makes for common sense. But what this sorry and growing SOFR debacle demonstrates instead is that authorities are only going to go in the other direction, trying to come up with hopefully (for them, not us) some better way of trying to hide all of it. Not just the trouble in offshore currency, the whole eurodollar system itself.

You can’t just willy nilly replace parts of the global currency system on a badly-conceived whim. Real central bankers might know that. We’ve only got domestic bank regulators who play central bankers on TV.

That’s what this is really all about. And that, not some ancient, cheesed-up LIBOR scandal, really is the true Crime of the last Half Century.