News Column

Love's Labor's Lost on Libor

July 16, 2013

Kevin Horrigan

libor

Last week it was announced that the British Bankers' Association had sold Libor to NYSE Euronext, the company that operates the New York Stock Exchange. The news brought a lump to my throat.

Until 2008, I was painfully ignorant of Libor. Then suddenly, as the world economy was brought to its knees by the subprime mortgage crisis, I realized why I wasn't cruising the Greek islands in my yacht.

I figured that if I said "Libor" often enough, someone might give me a yacht. I would walk around the office saying things like, "Libor is up 10 basis points" or "Commercial paper is frozen. Libor's too high."

I had only the vaguest notion of what any of this meant, but one thing the newspaper business teaches you: If you can just pick up the jargon, everything else comes easy.

For a while I was capitalizing LIBOR, because it's an acronym. It stands for London Interbank Offered Rate. But all your big-shot financial publications were going with proper-name Libor.

I was charmed by the notion that promptly at 11 a.m. each weekday, a dozen bankers in black suits and bowler hats, like that guy in "Mary Poppins," would march out of their offices in the City of London carrying umbrellas. They would meet for tea and decide how much to charge each other to borrow money.

Banks being (in those days) the safest possible customers, this would become the basic measurement of soundness of the world financial system. If they thought it was sound, they would set a low Libor rate. If they were nervous, Libor would go up. Libor became the benchmark for everything. That is if you consider hundreds of trillion dollars everything.

If the bank-to-bank Libor rate on Tuesday was 3 percent, then the bank-to-business rate that day might be 3.5 percent. And the credit-card-to-shady-customer rate that day might be 20.5 percent. Everything was indexed to Libor. Student loans. Car loans. Municipal bonds. Huge international development projects. Everything.

In my view, these 12 bankers would be paragons of probity because, after all, this was London and the world needed proper standards.

I believed in them like I believed in the clock at the Royal Observatory in Greenwich. If the Royal astronomers said it was 12 noon Greenwich Mean Time, it was by-God noon.

It turned out Libor wasn't quite that simple. In the first place, there are dozens of different Libors, all set by different panels of bankers in different currencies for different maturity periods. You can get your overnight dollar Libor or your three-month yen Libor. The lords of the British Bankers' Association would throw out the high and low quotes and settle on the mean rate of the ones in the middle. They met by phone or email and didn't wear bowler hats.

Also, some of them were crooks.

The whole thing was rigged. The first official hint came in April 2008 when the Wall Street Journal reported that a whistle-blower at Barclay's Bank had told the New York Fed that Barclay's wasn't posting an honest Libor rate.

The temptation to cheat was enormous. A move of 50 basis points (half a percent) up or down could dramatically affect a bank's loan position on any given day. Billions of dollars could be made or lost.

Naturally, as soon as Timothy Geithner, then the president of the New York Fed and later treasury secretary, heard the news, he raised an alarm. Never mind the possible panic in the markets, he said, everyone deserves to know.

No, just kidding. He quietly informed British banking officials that they might have a problem. The Brits kept it under their hats (not bowlers) and sent the equivalent of a Very Stern Note to member banks.

By 2011 the scandal was in full flower. Emails showed traders had been angling for, and getting, favorable Libor positions. The Justice Department opened a criminal investigation. Britain's Financial Services Authority had its own investigation going, as did other governments. Municipal and state governments, which had been ripped off on bond rates, went ballistic. Nearly everyone who had a loan for anything was affected.

Now, because nobody really trusts Libor any more, the Brits have sold the right to run it to Americans (like we don't have any scam artists), though British authorities will oversee it (since they did such a fine job before).

NYSE Euronext is being acquired by IntercontinentalExchange of Atlanta for $8.3 billion. The Atlanta firm runs exchanges that trade financial derivatives, which are made-up instruments worth only what people think they're worth, tied to the squishy number called Libor. No conflict of interest there. The world's central banks ought to be setting that number.

The nice thing about the Libor scandal is that hundreds of sleazy bankers went to prison.

No, that's ridiculous. Banks paid billion-dollar criminal fines, and a few big-shots had to resign. If you want to go to prison, rip off a 7-Eleven. If you want to sail the Greek isles in your yacht, learn about Libor when you're young.

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ABOUT THE WRITER

Kevin Horrigan is a columnist for the St. Louis Post-Dispatch. Readers may write to him at: St. Louis Post-Dispatch, 900 North Tucker Blvd., St. Louis, Mo. 63101, or email him at khorrigan@post-dispatch.com.

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