The FT reports:
Regulators in the US, Japan and UK are investigating whether some of the biggest banks conspired to “manipulate” the benchmark interest rate used to calculate the cost of billions of dollars of debt.
The investigation centres on the panel of 16 banks that help the British Bankers’ Association set the London interbank offered rate, or Libor — the estimated cost of borrowing for banks between each other.
In particular, the investigation was looking at how Libor was set for US dollars during 2006 to 2008, immediately before and during the financial crisis, people familiar with the probes said.
So much for competition and the power of the market then.
Actually, as always, it's about rigging the system to ensure monopoly power rules at cost to ordinary people.
Adam Smith said so long ago. He was right.
Those of us who say so now are right.
That's why regulation - and a confident state willing to enforce it - are essential to well-being.
And yes - before you shout, I know it's just an investigation right now. But it's not as if we haven't seen such things before. And yet still the rolls say the market delivers optimal results when all the evidence is it doesn't - unless the state intervenes.
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The investigation does not centre on whether banks conspired to raise the value of LIBOR and thereby push up the borrowing costs to their customers, but whether individual banks (UBS and possibly others) understated the value at which other banks were willing to lend to them on an unsecured 3 month basis by approximately 20-30 bp.
If UBS had quoted the (alegedly) higher true value of interbank borrowing their quote would likely have been excluded as one of the outlying quotes (as is normal BBA practice) but it would have been damaging to their business (not that that excuses their action, merely explains it).
As it turns out UBS (et al.)’s actions actually lowered LIBOR (very fractionally) making the cost of borrowing marginally lower for every one, but at the expense of some loss of information on the market perception of the financial state of thos banks.
Adair Turner commented in detail about rent extraction by banks recently – here
http://treasureislands.org/adair-turner-answer-to-financial-failure-tax-banks/
@Alex
Ah, that’s all right then
Deliberate misinformation to a market is fine, of course!
But doesn;t it shatter your belief in:
a) markets
b) optimal outcomes
since both rely on
1) perfect information
2) rationality
and neither is on show here?
@Richard Murphy
I didn’t say it excused their behaviour, but I did say that it had negligible impact on LIBOR and the cost of finance for the wider economy. I have long had a low opinion of UBS and this doesn’t change anything.
As it happens, the LIBOR fixing mechanism seems to be generaly robust and the market keeps the banks honest.
UBS’ behaviour, if as alleged, is quite rational.
To add to what Alex says above;
You can’t trade Libor – it is a fixing. A 3 month unsecured deposit *isn’t* the same thing during a credit crisis.
Why? Simply put, the counterparty credit risk assumed for Libor is homogenous. In a credit crisis real credit risk isn’t. Some banks might pay below Libor, and some banks well above. I doubt UBS did anything more than remove some of the outliers from their credit calculations before submitting Libor, which would indeed lower their level.
Remember Libor is contributed and published daily, and each bank’s submission is known. It’s a pretty dumb place to try and do anything funny.
@Tyler
But the suggestion is that they definitely did undertake manipulation. In that case are they just dumb, or is there something more significant that we should be worried about? The latter is my suggestion, and you have not answered that allegation – which hints at greater issues behind-the-scenes