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-- -- -- the interest rate manipulation scandal was heating up as regulators probe into some of the world's.
Most prominent banks many of them US banks we've got a former Federal Reserve member who first raised the issue of possible rate fixing nearly fifteen years ago.
-- joining us now Jeremy Berkowitz all the Federal Reserve -- risk analyst -- Jeremy what was it the first and got your attention fifteen years ago.
Well actually at the time there -- some distortions they were.
Probably mistakes that crept into some of the Libor quotes that we were looking at on a Bloomberg terminal.
And that could have potentially contaminated the international measurement of Libor but it didn't because of these trying out of the highest and lowest.
OK so what -- first just quickly say that that the way this London Interbank offered rate.
That a lot of other rates are set upon is put together by fifteen different banks reporting what they feel -- the average rate there.
So so -- you first notice that these possible problems issues were there what did you do.
I wrote eResearch.
Paper with some theoretical musings on statistical techniques that would be best able to cope with contaminated data.
And we were envisioning essentially.
Data errors typos.
So when a bank had a 5% interest -- it was accidentally report its 50%.
That's something we can deal within a statistical -- namely by throwing out the highest bid out of sixteen or eighteen -- But -- you think the way this is set up Jeremy and we must be honest it's it's a little bit of -- it's a little bit of collusion it's kind of -- private club a Coble if you like.
I mean isn't that the way it is set up anyway.
That it appears to be a lesson from the current experiences -- -- -- back when I wrote this paper I don't think I would of imagined collusion being.
-- partly because the penalty should be so high partly because these banks compete with each other and partly just if you coordination difficulty but that predict if that was my prediction back then I would have been wrong.
This is fascinating to me that when you wrote your paper.
You wrote it with the belief that it was a fat fingered missed punch meaning somebody.
Actually -- a -- -- went in truth is we now know from emails through Barkley is that traders were manipulating the actual numbers.
Jeffrey who at the Fed read your paper and who took it seriously and do you believe that had they taken your notes more seriously.
We might not have this issue today.
I feel look I wouldn't say that the Fed didn't take it seriously but the Fed was not and even today the Federal Reserve board in Washington is not directly -- in a supervisory position over the British banking association and over -- alive or calculations.
To a certain extent the CFTC.
May be partly responsible for this kind of supervision.
To a certain extent may be the New York fed but I think the Federal Reserve in Washington this was just more of a theoretical idea.
Do you think this is a turning point Jeremy the perhaps this whole system may be changed now what because this has come to light.
I think it's very likely I think it's very likely that the use of Libor in the international derivatives market in particular interest rate derivatives will be.
Given a second look.
I think the calculus -- even if that was not the case the calculation of Libor itself will be given a second look and yes I do think this is a turning point.
This is something I -- that we that there -- -- even go ahead.
I was just gonna say this is even for somebody who who thought about this problem fourteen years ago was a shocking episode.
Are -- you are compared to the head so it's obviously not lives at stake but you know an FBI agent who was noticing problems with the -- certain pilots.
We're learning how to fly planes but not -- -- I mean you do does it frustrate you that perhaps had somebody.
Looked at this over the British banking association that it could have been avoided.
It could have been mitigated in the sense that there are alternative statistical techniques that could be used that would be even less sensitive to miss reporting.
But I would say this.
Collusion by enough banks will defeat any statistical techniques so.
And -- if five -- -- -- five excluded this time next time it could be seven or nine banks and this arms race between the statistician and the banks the banks will ultimately win -- the collusion is severe enough.
There's the -- Canada -- Jeremy thank you so much for joining us Jeremy Berkowitz.
Is the former Federal Reserve member who first noticed these issues with possible rate manipulation didn't see -- fact that because wasn't you know but wrote a paper.
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