If one thinks Trump’s economic advisors are the dumbest people on the planet, I have a new candidate for that award – a few supposed experts on intercompany loans that work for KPMG:
In 2017, the ARRC selected the Secured Overnight Financing Rate (SOFR) as the alternative that represents the best replacement rate for USD-denominated LIBOR. SOFR is based on overnight transactions in the U.S. dollar Treasury repo market, the largest rates market at a given maturity in the world … In the time since the Federal Reserve Bank of New York began daily publication of SOFR in 2018, significant progress has been made in building liquidity in SOFR-linked markets (which include dollar-based derivatives and loans) … SOFR is fundamentally different than LIBOR in a number of key elements. SOFR is (currently) an overnight rate, is secured and is designed to reflect a (virtually) risk-free rate. LIBOR has forward-looking term options, is unsecured and is designed to reflect a bank’s cost of funding. All of these characteristics factor into how SOFR will perform under certain circumstances and how it can be used by market participations. For example, the following figure compares 3-month LIBOR, one the most commonly used LIBOR benchmarks, to the 3-month simple average of SOFR. SOFR is generally both lower and, depending on the methodology applied to derive a term structure, less volatile as compared with LIBOR. This is to be expected given the lower risk profile of SOFR, since it represents borrowings collateralized by U.S. Treasury securities while LIBOR reflects interbank credit risk.
The purpose of their ramblings was to advise multinationals on what to do with a set of their intercompany loans once LIBOR disappears, which is sort of making an easy issue hard so their arrogant and overpriced clowns can charge lots of fees for virtually nothing. But hey – that is what the Big Four does.
Their 11/25 “part I” discussion was just shy of 1700 words. On 11/26 they put up “part II’ which was over 2000 words. All of these 3700 plus bamblings were a confused bit of word salad. Yet these clowns charge multinationals big bucks for their gibberish. I guess they get paid by the word.
Over at Econospeak, I updated my post with a link to something really dumb written by the “experts” at BDO:
Update: This dumb idea of comparing an overnight rate (SOFR) to the 3-month LIBOR rate may have originated with BDO:
SOFR is a secured interbank overnight interest rate. As a result, SOFR rates are lower than LIBOR rates because SOFR is secured by collateral. The table below shows a comparison between historical LIBOR and SOFR since the introduction of the SOFR in April 2, 2018.
Well not quite. One reason why SOFR is lower than this 3-month LIBOR rate has something to do with the term structure as well. Those who know – avoid BDO!