A Blogger Tail Risk

At the end of this year the GBP LIBOR will cease to exist and I spent few months ‘fixing this issue’, i.e. renegotiating trades, at the office. I am mentioning this because the legal story that brought us here, and in particular who got punished and who did not, is quite interesting.

LIBOR was (is? depends on the currency you refer to…) the benchmark for a LOT of financial products, from your mortgage to elaborate derivatives.

The British Bankers Association was the body in charge of calculating LIBOR every day; the process was simple, they were calling a panel of banks asking their number for the day, removing the highest and lowest value and making an average of the results. Even if each bank was supposed to communicate a number that reflected their cost of funding for that day, banks were free to say whatever they wanted: there was no link between their LIBOR figure and any actual trade that happened on the day. (In fact, banks were incentivised to keep their number low because a higher than average print might be read by the market as the bank having difficulties to access funding, which might spiral into a self-fulfilling prophecy of no one willing to lend to a bank that has alleged difficulties).

Each bank in the LIBOR panel had a department that was in charge to publish its reference rate and a department that was trading and holding derivatives (and making money) based on the same rate. How tick to you think it was the ‘Chinese Wall’ (a virtual barrier erected to block the exchange of information between departments in a company) dividing the two? Yeah, not much. Some banks started to collude and direct the LIBOR rate, via their submissions, in the direction that generated the highest profit for their trading book. If you are interested in the full story, there is a great book on the subject called The Spider Network.

The fraud had negative effects on consumers because LIBOR was used to fix mortgages and student loans, so once discovered it became a very public matter. LIBOR manipulation has been common since at least 1991 and the first public article about it was published in 2012. In that period, profits made by the banks involved generated bonuses and promotions for a large group of people, up to the CEOs.

One guy, Tom Hayes, went to prison. One. One CEO, Bob Diamond of Barclays, lost his job. One. Several banks, and consequently their shareholders, paid billions in fines; no bonuses were returned.

It feels a bit random to me.

I write this blog in a pseudo-anonymous way but in the era of social media you do not have to be Snowden to find out my name, where I work and even the pictures of my wedding. Yesterday I read Matt Levine column on finfluencers and it reminded me again how things in life, and especially law related stuff, should be rational and objective and instead are not. In short, Roaring Kitty, one of the WallStBets guys behind the GME short squeeze earlier this year, was working for an insurance company at the time and was a licensed securities broker. He was not working as a broker and yet the Massachusetts State fined the insurance company $4m because they did not supervise his activity. Roaring Kitty never used his name or the name of the company he was working for; he subsequently ‘resigned’ from the company, because I think he realised there were better ways to employ his time, skills and…fame?, but I bet the insurance company had a part in his career decision. At the same time, other regulated financial companies like Betterment are paying and sometimes hiring TikTokers to attract clients and promote their services on social media.

Does it make sense? Sure, Betterment knows that has TikTokers on its payroll and can (potentially) vet their content while MassMutual, Roaring Kitty employer, did not. But the TikTokers are also driving business towards Betterment for Betterment profit while Roaring Kitty had nothing to do with MassMutual, only his ‘non-metaverse alter ego’ Keith Gill did and in a very different capacity.

When you are employed, everything you create, even in your ‘free time’, belongs to the company who pays your salary. It is written in your employment contract. Your employer does not want the risk of you leaving the job with any IP that might be critical for the company and having a law so lax ensure your company that nothing might fall between the cracks.

I do not think that a lot of people would dispute this part of the contract before they start a new job, mainly because no one heard British Petroleum claiming rights on the cooking blog of one of its employees. But the legal risk is there nonetheless. And the risk is even higher if you code something or create a trading system, even if you work in the marketing department.

And…SO?

While writing this blog can be partially beneficial for my professional life, for example it trains me to explain hard concepts in a more palatable way, it can also represent a career risk: I might work in a regulated industry and if the regulator, not my employer, decides that I cannot do the job because of something I wrote here, I am out.

Expressing an opinion in 2021 is not free.

Last April Elle Hunt, a journalist, wrote a tweet asking her followers if the movie Alien could be considered an horror movie. This tweet was prompted by a discussion with her friends, it did not have anything to do with her role as a journalist. In her opinion an horror movie cannot be set in space. Unbeknown to her, the tweet went viral and she was ultimately forced to apologise, even to many famous directors. A great example of “content collapse”.

Context collapse or “the flattening of multiple audiences into a single context” is a term arising out of the study of human interaction on the internet, especially within social media.^[2] Context collapse “generally occurs when a surfeit of different audiences occupy the same space, and a piece of information intended for one audience finds its way to another” with that new audience or audiences’ understanding being all the stronger for failing to understand the original context.

from Wikipedia

Internet is the great “shit happens” amplifier. Do you have a personal opinion about Tibet? Taiwan? Hong Kong? Those are opinions about China, and your employer might have a business relationship that is related to China…and suddenly your opinion is not an opinion anymore, is a resignation letter.

I have limited knowledge and experience related to the Anglo-Saxon judicial system. I have been amazed when I saw for the first time written on a Starbucks cup that tea inside was really hot. I ordered that tea. But according to some judge somewhere in the US, Starbucks is still liable if I burn my mouth because they did not expressly told me that what I ordered is indeed what I am now holding in my hands. This is linked to the law as much as to the culture: imagine to try to sue someone in the same context in Italy, everyone would laugh at you, the judge included.

You cannot act assuming common sense, the customer knows what is ordering, but you have to cover all the possible angles and be over-explicit. What happens if someone that does not know how to read burn his mouth? Is Starbucks still liable? Should they write and TELL you?

I then move to court and I find another plot twist: the alleged crime is not judged by experts or by a person that has demonstrated an higher sense of judgement in their life, the defendant is ultimately judged by a group of random people. Imagine if the same concept would be applied to the person that determine if the roof of your house will collapse on your head or the airplane you are taking for a holiday is fit to fly. Sorry but I do not get it.

Now take both elements, context collapse and this type of judicial system (which is unfortunately getting more and more common in the Western world, in a practical if not yet formalised way) and you understand why I spend the most of my week listening to podcast that should not be relied on for investment decision …yes, I listen to optimal glidepath solutions because I find the topic more entertaining than One Direction, sure.

“We will tap into the collective wisdom of the British people” David Frost said last week about EU rules that should be cut in UK after Brexit. That’s exactly what you should NOT do: it is the Government role to guide a country, not the other way around. This is what happens when you elect your fifth grade mate, someone that is like you, instead of someone that is better and smarter than you. We are losing democracy where it belongs, elections (China, Russia, Turkey, Hungary and counting) and we are adding it where it does not, science and to a certain extent law.

Ok, I probably digressed too much…

Welcome to Obvious-land

It is not a news that sometimes people do bad and get away with it and some other times people get punished for doing good (or at least, no harm). I also think most readers get how producing content add convexity to the creator: if you hit the right audience and/or you go viral, the payoff is not linear but exponential.

What is not obvious is that good and bad are context-dependent and we are less and less in control of our context. The real risk is not that no one will consume your content but that it will go viral for the wrong reason…or to the wrong audience. This is the left tail of the distribution and it is so fat it can eat your job and your salary.

(yes, related to all of this I also watched The Chair on Netflix last week)

What I am reading now:

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