So You Thought LIBOR Was Fixed

Well, yes actually, but not in the sense of functioning as advertised.

Banks Sued for LIBOR Collusion — Again!
By Matt Taibbi, Rolling Stone
July 26, 2019

LIBOR was once set by the British Bankers’ Association. It’s now managed by the Intercontinental Exchange, owners of the New York Stock Exchange, which rebranded it “ICE LIBOR.” Since February, 2014, ICE LIBOR has been “the world’s most widely used benchmark for short-term bank borrowing rates.”

Every day, by 11:40 a.m., a panel of 18 of the world’s biggest banks tells ICE how much they estimate they’d have to pay to borrow from other banks, by answering the following question:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”

LIBOR was originally created during a time when banks were borrowing a lot of cash from each other. Beginning in the nineties and early 2000s, however, banks began to use other venues, like the Treasury Repo market, to obtain financing when needed. Interbank lending tapered off.

Because of this, for years and years, when banks on the LIBOR panel submitted numbers, they were apparently just submitting guesses based on what they believed it would cost to borrow, if they actually were borrowing.
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In other words, banks were guesstimating. Why? After the crash, regulators sniffed out two motives for manipulation.

The first cases involved suppressing LIBOR in 2008 and 2009, to create an artificial impression of market stability during the crisis. In one incident, the Bank of England was accused of asking Barclays chiefs to “just do it” and push LIBOR lower, so as to reassure the public.

In a second, more grotesque form of corruption, individual traders at various banks goaded LIBOR submitters to move rates to protect certain investments. In an infamous case involving the Royal Bank of Scotland, traders were nabbed in texts offering LIBOR submitters everything from sex to “sushi rolls from yesterday” to drop LIBOR “like a whore’s drawers.”
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Two years ago, we learned LIBOR was probably not based on reality, an assertion that by now is not even really controversial (witness Bloomberg describing LIBOR last month as “just a made up number, or an aggregate of made-up numbers”).

The new concept: LIBOR is not just made up, but has been kept systematically low to tilt the entire lending landscape in favor of megabanks. It’s hard to conceive of a settlement broad enough to compensate for years of that kind of activity.

LIBOR is set to be phased out in 2021. If you read the financial press closely, you’ll note occasional semi-panicked comments to the effect that no one has a good plan for replacing the rate written into trillions of dollars of contracts.