The Mother of All Market Manipulations: the Libor interest rate

As the probe into the setting of the Libor interest rate continues, it is important to keep in mind that we are talking about the Mother of All Market Manipulations.

According to an article in the Financial Times, we are talking about approximately $350 Trillion worth of contracts, including securities, worldwide that, if the allegations are true, were manipulated by the large banks.

By way of comparison, the US Treasury market is less than $15 trillion.

Said another way, we think of central banks as setting interest rates across the yield curve, but their tools are crude and not nearly as effective as picking up the phone and colluding with your 'competitors' to set the Libor interest rate.

The manipulation of the Libor interest rate is an example of the self-serving activities undertaken by the large banks under the cover of opacity.

If banks were required to provide ultra transparency, they would not have been in a position where they could have manipulated the Libor interest rate.  With ultra transparency, banks would have disclosed their current liability details and Libor would be based off the actual cost of funds to the banks.

UK regulators and global banks are discussing a potentially far-reaching overhaul of the calculation and regulation of interbank lending rates, amid claims that the benchmark for $350tn contracts worldwide may have been subject to manipulation. 

The review comes as regulators in North America, Europe and Japan have expanded their year-long probes into alleged manipulation of the London Interbank Offered Rates, and other benchmark lending rates, which help set the price of financial products, including mortgages and credit cards. 

The Libor rate-setting process is not considered a regulated activity under the UK Financial Services and Markets Act, but US and European banks and interdealer brokers have suspended or fired more than a dozen traders in recent months following allegations of abuse....

Strongly suggesting that where there is smoke there is most definitely fire.

The British Bankers’ Association, which sponsors Libor, ... said in a statement: “As part of the normal reviewing processes of Libor, a number of contributing banks met today to consider future regulatory and market developments, such as the incoming liquidity rules, relevant to the parameters that Libor measure.” 

It added that “a technical discussion with interested groups including users of the rate will commence shortly”, and promised to keep the market and government officials updated. 

People familiar with what was discussed in the meeting said the review could encompass everything from revamping the way Libor rates are set to imposing new regulatory oversight and compliance requirements on participating banks.