The Global Economy in Turbulent Times

CHAPTER 82 LIBOR Scandal Fuss¹

Since the outbreak of the LIBOR scandal, public reaction has ranged from the very basic, What’s this LIBOR?, to the more mundane, How does it affect me? Some friends have raised more critical questions: Barclays appear to have manipulated LIBOR to lower it: Isn’t that good? The problem first arose in early 2008: Why isn’t it resolved by now? To demystify this very everydayness at which banks fix this far-reaching key rate, this chapter will be devoted to going behind the scandal—starting from the very basics about the mechanics of fixing the rate, to what really happened (why Barclays paid the huge fines in settlement), to its impact and how to fix the problem.

What’s LIBOR?

The London Interbank Offered Rate (LIBOR) was first conceived in the 1980s as a trusty yardstick to measure the cost (interest rate) of short-term funds, which highly rated banks borrow from one another. Each day at 11 a.m. in London, the setting process at the British Bankers’ Association (BBA) gets moving, recording submissions by a select group of global banks’ (including three large US banks) estimates of the perceived rates they would pay to borrow unsecured in “reasonable market size” for various currencies and for different maturities. LIBOR is then calculated using a “trimmed” average, excluding the highest and lowest 25 percent of the submissions. Within minutes, the benchmark rates flash onto thousands and thousands of traders’ screens around the world, and ripple ...