Wall Street Prepares for the End of a Crucial Benchmark
Their only choice is to prepare for the end.
That’s where Jason Granet comes in. Plucked from Goldman Sachs Group Inc.’s asset-management unit last year, he now leads a group of bankers and lawyers working day in and day out to ready the lender for the fateful day -- still more than two years away -- when the world’s most important reference rate is set to be phased out.
The major Wall Street banks -- not to mention insurers, money managers, law firms and advisory businesses -- are all mobilizing employees around the globe in anticipation of Libor’s demise. The benchmark’s key role in financial markets -- at last count it underpins more than $350 trillion of mortgages, loans and derivatives across various currencies -- means they’re being pulled from all corners of the industry. For Granet, the objective is clear: ensure that what many say is one of the most significant and complex transitions in the history of modern finance goes off without a hitch at Goldman Sachs.
“My job completely changed,” said Granet, who now reports to Treasurer Beth Hammack after spending the bulk of his almost 20-year career at the bank overseeing money-market funds. “It’s an international, complex intellectual challenge.”
For decades, the London interbank offered rate was a convenient way to determine the cost of floating-rate debt around the world. It’s calculated from a daily survey of more than 15 large banks that estimate the price to borrow from each other without putting up collateral.
But the trading behind those estimates has dried up, and coupled with the post-crisis discovery of rampant manipulation, U.K. officials two years ago signaled an end to Libor, saying they’ll stop compelling banks to submit quotes after 2021.
The decision has spurred global regulators to push ahead with their own domestic funding-rate alternatives, and forced financial firms to figure how to extricate themselves from a benchmark so thoroughly entwined in global markets.
At a June roundtable, Goldman Sachs, JPMorgan Chase & Co., Wells Fargo & Co. and others discussed how they’re establishing oversight committees, setting up joint steering groups and recruiting employees to build out their Libor transition capabilities. Consulting companies such as Oliver Wyman & Co. and Accenture Plc are advising clients on how to best manage the shift, while law firms such as Cadwalader, Wickersham & Taft have helped craft fallback language for credit contracts that reference the benchmark.
When Wells Fargo’s Brian Grabenstein became the head of the lender’s Libor transition office last year, he quickly realized that he needed to staff up. He now has a team of a dozen people coordinating meetings with the consumer banking and wealth management groups, among others, and running committees focused on various aspects of the transition -- from legal documentation to communications.
He estimates that 200 people at the bank have worked at least 10 hours on Libor over the past month.
“Up until not that long ago, this was not on a lot of people’s radar,” Grabenstein said. “I quickly realized it wasn’t just one person’s full-time role, but in fact it was going to be a number of peoples’ full time jobs.’’
Along with colleague Readie Callahan, who heads communications strategy for the transition team, the pair have crisscrossed the U.S. in recent months, speaking with groups of as many as 50 corporate customers at a time about the shift. Wells Fargo is still working on its strategy to inform retail customers about the change, which will impact products such as adjustable-rate mortgages.
“There’s a growing appreciation for how much work there is to be done,” Grabenstein said.
It’s not just banks affected by Libor’s end. MetLife Inc., the biggest U.S. life insurer, faces exposure through its $587 billion investment management portfolio. It tapped Jason Manske, head of global derivatives and liquid markets, as transition point man.
The firm was an early adopter of the Secured Overnight Financing Rate -- a new benchmark developed by the Federal Reserve Bank of New York as a potential Libor replacement -- via its primary market issuance. It’s priced $2.5 billion of SOFR-linked notes since the reference rate’s debut early last year, according to data compiled by Bloomberg.
Still, industry veterans are growing concerned about potential risks to financial stability in the coming years, given the broader market’s slow embrace of products based on alternative benchmarks. Many say the change is comparable in scope to the adoption of the Dodd-Frank reforms following the 2008 financial crisis, while others liken the situation to Y2K, which presented significant operational challenges to Wall Street even if it ultimately proved benign.
Manske, who is a member of the New York Fed’s Alternative Reference Rates Committee designed to smooth the shift to SOFR (pronounced ‘So-fur’), compares the transition’s impact on financial markets to the adoption of the euro two decades ago.
“The euro was dealing with a spot FX rate, forwards and options markets,” Manske said. “This is cross-border, secured versus unsecured, credit spread versus no credit spread, cash and derivatives markets. It’s definitely more complicated than most things the market has done.”
For Goldman Sachs’s Granet, who grew up doing jigsaws, it’s one of the largest, most challenging puzzles he’s ever faced. Along with his four-person team and a dedicated group of lawyers, he’s been focusing in recent months on reviewing portfolio exposure, rewriting contracts and retooling trading systems to incorporate Libor’s anticipated replacements.
The scale of the task means “literally every part of the firm is involved,” Granet said. “Taking a step back, it’s a pretty foundational change to a lot of things that are going on now” in global finance.
©2019 Bloomberg L.P.