Libor founder: rate built on 'honesty and trust'

The Guardian reports that according to the Greek banker credited with inventing the Libor interest rate that

without the key ingredients on which it was built – honesty and trust – the formula was doomed to fail.

 And what mechanism was there to ensure that bankers acted in an honest and trustworthy manner?

Manipulating the system, or indeed any unscrupulous behaviour, would have been unthinkable, [Minos] Zombanakis says, because the system was based not only on the probity of men in bowler hats and pinstripe suits but on something more important still: an unwritten code of conduct inspired entirely by fair play. 

"It was a matter of behaviour," the former banker said. "You always worked in the market with the assumption that you were dealing with gentlemen, and you assumed that people acted honourably because they couldn't afford to act otherwise." 

He insisted that "the whole international banking system was based on the fact that people trusted each other", adding that no bank would have wanted to cut itself out of the loan market by sullying its reputation. 

"Their primary goal was to secure the loan," he said. "If they quoted unreasonable rates, they might lose the opportunity to work again."

Please note that manipulation of Libor appears to have originated from bank trading desks and not from their lending operations.

This is an example of why the capital markets use a much stronger enforcement mechanism than an unwritten code of conduct.

It is recognized in the capital markets that they are a zero sum game.  Either the buyer or seller makes money on the trade.  As a result, there is a premium placed on being sure that the buyer has access to all the useful, relevant information in an appropriate, timely manner so they can assess the deal and make a fully informed investment decision.

In short, the enforcement mechanism to ensure everyone acts honestly in the capital markets is transparency.