The Case for AMERIBOR As The Replacement for LIBOR

Episode Summary

Executive Summary: The episode explores LIBOR’s flaws and the effort to replace it with a more transparent, transaction-based benchmark. Guest Richard Sandor explains why he pursued a U.S.-based alternative, leading to AMERIBOR, and argues that market benchmarks should be regulated, transparent, and rooted in actual lending rather than polls or quotes.

Main Topics: Bloomberg Stock Movers promo (Priority: 1/5): The transcript opens with a promo for Bloomberg’s short Stock Movers audio reports, emphasizing quick market updates on winners and losers. LIBOR’s problems and transition away from it (Priority: 5/5): The hosts recap prior episodes on LIBOR’s issues before and after the financial crisis and note the broader move toward SOFR. Why alternative reference rates matter (Priority: 4/5): Joe and Tracy discuss that SOFR is the regulatory default, but other theoretical or practical benchmark alternatives could still emerge. Richard Sandor’s background as a financial innovator (Priority: 4/5): Sandor describes himself as a serial inventor who has spent decades designing market instruments to reduce transaction costs and address social problems. The origin of a LIBOR replacement effort (Priority: 5/5): Sandor says the catalyst was reading about LIBOR manipulation in 2011, which convinced him the benchmark would eventually die and needed replacement. Design principles for a new benchmark (Priority: 5/5): Sandor argues the replacement should be transparent, regulated, transaction-based, and American, unlike LIBOR’s poll-based structure. Skepticism vs. innovation in markets (Priority: 3/5): Sandor frames his work as contrarian, saying his most successful ideas often began when industry consensus said there was 'no need' for them.

Key Arguments: LIBOR was structurally flawed because it was based on a poll rather than actual transactions, making it vulnerable and hard to justify as a market benchmark. A single global benchmark for so many contracts is anomalous; many other asset classes have multiple reference rates or indexes. The United States should have its own benchmark for overnight unsecured bank lending instead of relying on London-based LIBOR. A better benchmark should be transparent, regulated, and transaction-only to reduce manipulation risk. Sandor’s experience suggests that major financial innovations often face initial skepticism, but that skepticism can be a sign the idea has real potential.

Data Points: Live Horse series position: Third episode - Hosts describe this conversation as the third installment in their series on LIBOR. Podcast format: Short audio reports, five minutes or less - Bloomberg promo describes Stock Movers episodes. Timeline since LIBOR manipulation report: 2011 - Sandor says he read about RBS firing four people for manipulating LIBOR in 2011. Benchmark replacement effort: 10-year odyssey - Sandor says the team spent about a decade developing a LIBOR replacement. Experience in financial innovation: 45 years - Sandor describes his career observing capital markets and developing new instruments. Number of small banks visited: 125 - Sandor says he and colleagues visited 125 small banks across the U.S. to build the alternative benchmark. People fired at RBS: 4 - Sandor cites the RBS LIBOR manipulation case as the catalyst for the replacement effort.

Pivotal Quotes: "I'm a serial inventor and a financial innovator. I get it wrong a bunch of times and then get it right too." — Richard Sandor: Sandor summarizes his career and approach to innovation. "How could we have hundreds of trillions of dollars tied to a poll?" — Richard Sandor: He criticizes LIBOR’s design as a benchmark for vast amounts of financial contracts. "Let's make it transparent. Let's make it regulated. Let's make it based on transactions only. And let's make it American." — Richard Sandor: Sandor states the core design principles for a LIBOR alternative.

Implications: The episode frames benchmark reform as a major financial infrastructure issue: if LIBOR was flawed, market participants may need multiple credible, transaction-based alternatives beyond SOFR. Innovation in reference rates could reshape lending, derivatives, and market transparency.