LIBOR Manipulation Scapegoat

Trigger

Today (10/30/2013), I read another article (German language) about the alleged manipulation of the all-important LIBOR interest rate by commercial banks. This time it is about e-mails exchanged between traders etc. of the Dutch Rabobank and other banks involved.

Since the so called LIBOR scandal surfaced, I have read numerous articles about it. Therefore, I wanted to write a blog post about this subject. In this blog post, I will try to summarize instead of supporting every argument with facts etc.

Prosecutors And The General Public Have No Clue About Traders

Yes, the language used in those published emails is very suggestive of all kinds of malfeasance. Simple minded people like many prosecutors jump to conclusions when they read stuff like this.

Traders are very peculiar people not unlike philosophers or poets, but quite different. They too live in a different world. Most of them are fairly young people. I don’t want to excuse any trader, but I suppose the language is something like vent for their stress at work or a kind of can do attitude or else. I could probably say more about the psyche of traders, but for sake of brevity I leave it at that.

Everybody Knew For Many Years That The LIBOR Was Prone To Manipulation

The method that, I believe is still employed, to determine the LIBOR rate of the day is very primitive and is based on the participation of a selected number of banks. It relies on submitted quotes at a particular time of day.

The Method To Determine LIBOR On A Daily Basis Was Totally Outdated

Why in the 21st century, everybody still relied on such an outdated method is simply incomprehensible. For at least a decade, exchange rates are quoted round the clock even in sub-minute intervals. Even amateur individual traders can get real time quotes delivered to their home computer at any time of the day.

One could have simply sampled these quotes multiple times a day to come up with close of day LIBOR rate, which would have been much less subject to any manipulation.

Opportunity Makes The Thief/Trader

It follows from the discussion above that this totally outdated method was an opportunity for traders to potentially manipulate the LIBOR. However, the financial industry is highly competitive, though over regulated and over supervised by big government, that any extensive manipulations in one direction or so over possibly an extended time period are quite impossible to persist.