Why is No One Freaking Out About the LIBOR “Scandal”?

That’s the question Matt Taibbi asks at Rolling Stone.  Yves Smith calls the LIBOR scandal a “huge deal”.  And Robert Reich says this is the “scandal of all scandals”.   I’ve gotten very angry at some of the actions of the financial sector over the last 10 years, but I am having troubling finding a good reason to “freak out” over this.  I know it’s popular these days to get mad at banks every time they do something even remotely wrong, but I have a feeling the media is making a mountain out of a molehill here.  My reasoning is rather simple.

1)   If you compare the Fed Funds Rate and the overnight LIBOR rate you’ll find a 99.6% correlation between the monthly prices over the last 10 year period.  In other words, if these banks were colluding to manipulate rates then the world’s most important central bank was the key rate they were basing this grand “manipulation” off of – and the banks were doing a damn good job relaying the accurate overnight rate.  Of course, central banks are in the game of manipulating rates.  That’s their primary policy tool.  So it’s not surprising that the world’s largest banks were basically keying their rates off the Fed Funds Rate.  Either way, for a banking oligopoly these banks were doing a pretty good job submitting prices that were pretty much 100% in-line with the Fed Funds Rate.  If they were “manipulating” the rate themselves then they suck at manipulating prices.

2)  If Barclays was submitting prices that were substantially outside of the average price submissions then their prices would have been thrown out most of the time.  LIBOR is set by collecting the submitted prices and throwing out the top and bottom quartile.  It’s hard to “manipulate” the rate much when your price submission isn’t even impacting the actual rate.  Again, this appears entirely consistent with the data findings above.  Either Barclay’s was submitting what they claim were “realistic” prices or the other banks were averaging out to equal the Fed Funds Rate.  Which is just about exactly what the data shows and what one would expect to happen.

3)  There’s also a certain political hypocrisy in all of this.  On one side of the aisle you have Conservatives perpetually complaining about “manipulation” in overnight rates due to the Central Bank and on the Left you now have people complaining about “manipulation” over the LIBOR rate set by private banks.  One side generally hates financial capitalism and the other side generally hates capitalism manipulated by government intervention of any kind.  Maybe it’s time to just accept the fact that central banks manipulate rates and banks key their rates off this rate?   And according to the 10 years of LIBOR data they’re actually pretty damn good at it.

4)  Banks are not good with internal controls, disclosures and risk management.  Some of the reports on this scandal make that clear.  But what else is new?  Did we all just sleep walk through the last decade?  Granted, the disclosures and regulations needed to be tightened up here and the LIBOR scandal is more evidence of this, but it’s nothing we didn’t already know.

This all makes for tantalizing reading and it’s compounded when people throw out huge figures like “$800 TRILLION”, but the reality is that this scandal doesn’t tell us anything we didn’t already know.  Unless you’re digging for political footing or page views, the short answer to the LIBOR scandal is – no one is freaking out because there’s nothing new here that we didn’t already know.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Excellent analysis. That article succinctly explains why I haven’t been losing any sleep.

  2. Well, let me explain:
    1. As you obviously know just too well, the whole god-blessed fiat system is based on trust. There are certain idiotic rituals and procedures that should be performed well in order for the citizenry (muppets) to agree, as a minium, with something like increased credit card APR/decreased CD rate, or, as a maximum, to accept these weird pieces of paper from a stranger. And if we are talking about some bunch of guys somewhere in London, these rituals should be as strict as a chrismass in Vatican. And now we see that at least one important participant have been pissing in holy water for years…..
    2. This naturally comes to your second point. There is growing (and i bet correctly so) suspiction that Barclays was not alone, and other major players participated. Maybe even (G…d forbid!) the Fed itself was involved. This, in turn, rises legitimate question – if the market is not rigged, what would have happened to your corellation number? What was and is the real LIBOR? Are the risks priced? Should it be used such as now?….
    3. This point is even more alarming. If this particular idiotic ritual is broken, what about the others? What is the real situation? What should be the real trust in the current fiat system?

    Various people answer this differently. If it is a molehill to you, this is sort of bet, as anything else in investing. Subprime/CDO/shadow banking “rituals” also seemed small and insignificant at first to the broad consensus. Let’s see how this one develops.

  3. A few thoughts:
    1. Correctly, LIBOR does follow ST rates. What point 1 above fails to mention is that the .4% of the time is what matters from a risk management perspective. LIBOR is essentially a barometer of financial STRESS in the financial system among banking institutions. To claim 99.6% of the time it’s not manipulated because it follows the FFR is missing the point. The value of LIBOR is as a pricing mechanism for the market to price their own Interest Rate Risk and understand counterparty risk among a few. Also, point 1 fails to notice how broken LIBOR is today. Anyone who claims today’s LIBOR rate accurately reflects the true cost of Interbank lending TODAY when ECB President Mario Draghi says “the interbank market is dysfuctional.It’s not working” in early June, really needs to substantiate the claim. Since 2008, Interbank lending in the Euro area has shrunk by 60% from $4.8T to $2.1T. Do we really think LIBOR at .25bps reflects this? Is that why the ECB has done trillions in LTRO? Quandary of LIBOR: Is the rate priced accurately if no banks use it because there is no actual market for a LIBOR loan? ie. shows no stress

    2. Barclay’s is clearly not the only institution involved in this.

    3./4./5. Manipulation, Lack of Internal Controls, Bad Risk Management, everything we already knew. So lets just continue on and protect what is broken because of people continue to find out how broken this thing is, I will not be able to make my large compensation package off all you muppets. Only the people who want to protect wrong doing don’t see what is wrong with LIBOR Manipulation in 07/08 and today.

    I’m open to being corrected. 18 years in and still learning everyday.

  4. By Sallie Krawcheck http://www.economist.com/node/21558260?fsrc=scn/tw_ec/banksters

    Sallie was only an All Star Banking Analyst at Bernstein, CFO at Citigroup and Head of Wealth Management at Smith Barney. But, what does he know.

    Not the biggest fan of hers but, on this, she makes a lot of valid points.

    -for the banking industry’s credibility is shot, and without trust neither the business nor the clients it serves can prosper.

    – A similar picture of widespread collusion emerges from documents related to the Canadian investigation. This bit of the LIBOR scandal looks less like rogue trading, more like a cartel.


  5. A trillion dollar molehill is still a mountain to the average.

    also, it may be a molehill, but they are still a$$holes.

  6. Break the trust and you weaken the relationship. True with personal relationships and institutions. It does not matter if LIBOR has been tightly correlated to to Fed Funds. People already have much distrust in our financial system, evidenced by low volume levels.

  7. I agree that this is a huge trust issue. From a man on the street perspective, this story of regulators and the banks colluding to manipulate the rate reads as a rotten to the core story. If the banks do need another bailout at some point and a Paulson figure comes on TV and says the sky will fall if we don’t bail them out, then there may be a whole lot of people screaming to just let the sky fall this time.

    A point of ignorance – Please help with a response:
    The FED rate us set by the Central bank, but the LIBOR rate is supposed to reflect the actual rate at which banks are lending to each other. If there were huge liquidity issues going on, and there was danger of collapse, and there was reported wide distrust between banks because they didn’t know what toxic assets were on each other’s balance sheets, shouldn’t the rate at which banks are lending to each other be quite different than the Fed Funds Rate?
    Is it because the banks could get the funds from the Fed and that they were not actually getting loans from each other, therefore the LIBOR rate was low?

  8. “Maybe it’s time to just accept the fact that central banks manipulate rates and banks key their rates off this rate?”

    Hear, hear!

    Words of wisdom. Ignore them at your peril.

  9. Yes, but isn’t the point that they were mis-reporting (lying about)) the rate that they were actually using.

  10. Amazing clarity in writing you have Cullen. Wish regulators and governments had half that wit and wisdom. But as speculators you don’t care who is driving, your aim is to bet on the crash or the winner….trying to do my two bit to this thru http://www.bubbleshort.blogspot.com

  11. Hi Cullen –

    Minor points:
    1. Even if Barclays price submissions were the bottom quartile and they got ‘thrown out’, that would still pull the average down. Theoretically if Barclays ‘true submission’ would have been higher, then someone else’s relatively higher submission would have got thrown out – and the avg LIBOR set would have been higher. Since Barclays submitted lower than fair rates, its rate got thrown out and some other banks low submission got included in the avg – an dit shouldnt have been.
    2. The impact gets larger, if more than one bank were artificially low-balling their numbers.

    But agree with you that the net impact on banks is going to be negligible.

  12. The molehill is probably pretty big to the legal departments of the banks involved. The lawsuits over this could be huge, and will grind on for years and years. But Cullen is right that there is no immediate impact on the economy.

  13. So market manipulation on the 500 TRILLION on interest rates related derivatives is OK. (God knows how many billions in profit banks got using this scam)



  14. Major new media is reliant on their customers but still want to satisfy(keep)their core intact. The consumer isn’t the typical customer but the advertisers are. Interesting business model that makes the media walk a tightrope every day. The Libor scandal is no different.

    Mark may be right that the media is making a mountain out of a molehill. I think the larger issue is the why. I don’t believe that it is just for sensationalism. If you wanted to warn people that things you’ve supported in the past are breaking down, (i.e.: the economy, consumer debt, consumer spending, etc.)then it makes sense that someone would pick a straw man, in this case a situation not easily understood, and blow it out of proportion.

    So it’s not the fact that the news media has it wrong but that they are reporting it in such a sensational fashion that is more telling.

    Whether I’m right or wrong it’s worth observing.

  15. Sorry Cullen,

    I meant to say that you may be right about the mountain out of the mole hole… That’s the problem when I think faster than I type.

  16. Here is the deal, the banks were not authorized to arbitrage the difference in the central bank manipulation and their own. It is criminal, and it is a huge skim like the mob skimming the casinos in the old days.

  17. 1. Yes, most of the times LIBOR follows short term rates. Except for the brief period of time in late 2008 where LIBOR went through the roof. Because banks didn’t trust each other.
    2. Interest rate derivatives to the tune of $ 800 trillion do matter. when the credt quality of a debtor goes through the floor then those rate derivatives DO matter. Because then e.g. a company needs to pay more interest to the bank.
    3. And that 0.4% “tailrisk” that’s where the socalled Black Swans emerge.

  18. First of all, it is a crime in the UK for a bank to submit a price that didn’t reflect it’s actual cost of interbank borrowing, but hey, banks breaking laws? Tell me something I don’t know.

    Also, the Bank of Engalnd may be complicit in this. If the investigation reveals that the BoE was “encouraging” Barclays to submit low bids, they most likely were encouraging others. Which would mean it was central bank policy to suppress LIBOR. Why would they want that?

    LIBOR is a key global benchmark for risk pricing. Also, remember with historically low interest rates, a basis point has a much larger proportional impact than during “normal” times.

    What it means to me is that even with the enormous intervention and bailouts, risk is much, much higher than what was commonly thought. This is going to have a lot of impacts. What should LIBOR have been? No one knows, so now risk is transforming into uncertainly.

    While that may not be much news to those of us who already believe the system is corrupt, as a now public revelation, it will be interesting to see how this gets papered over, and how the markets react as they realize how non-transparent they have become.

  19. Roche’s and Merkel’s analysis clearly shows that there wasn’t manipulation in this data. So even if Barclays was submitting false prices then it didn’t really matter much if at all. Should they be punished? Yes. Should we all make a bigger deal of this than it is? No.

  20. No, there is. As I and many other people mentioned, the main issue here is trust in banking system, and in fiat system in general. Libor gate is yet another huge damage to it. Do we have a formula (or maybe a beloved regression) telling us how much damage can this trust withstand? I do not, but maybe you do… To me any new scandal of this proportion might be the straw on camel’s back.

  21. This analysis is void, because as of now we do not know what percentage of the banks supplied false data. If majority colluded, especially with BoE permission, then, obvioulsy, LIBOR did not correspond to the contractual terms, and we have a classic fraud case.

  22. The volumes in the financial markets are so huge that you only need manipulate a few basis points here and there to skim off billions. So we’re supposed to overlook this because the deviations are small?

  23. “If Barclays was submitting prices that were substantially outside of the average price submissions then their prices would have been thrown out most of the time”

    Yes. Except if all of them pricemakers were quoting prices that were substantially lower than the real prices.

  24. So if they were incompetent criminals they were not criminals?

    That defense doesn’t work for the guy who steals $50 from the gas-and-go.

  25. On the whole, the prices weren’t misquoted (or if they were they were off only very marginally). Did your read the post?

  26. Since the correlation happens to be to the rate from which all overnight loans are pegged.

  27. The central bankers know how the rates are set. They know multiple commercial banks must fudge their rates to push the overall rate down and keep it down. ALL of these banks played this game. This will be explained away as just another policy tool of the central banks and we’ll go on down the road.

    Understand this was done as a way to keep the eurodollar/fed funds spread from cracking wider as we’ve see more and more tightness in these markets. The TED spread was a fire alarm for the public, but now a new one will need to be found.

  28. What one can learn from this Cullen Roche post.

    #1. A fair amount of comments understand the ramifications of the LIBOR scandal.

    #2. Too many commentators / prognaticators / PTB which Americans follow don’t understand the information being told to them is coming from the mouths of Wall St. “Shills”.

  29. Cullen,

    1. If Barclays submitted incorrect data, it is the poisoning of the whole sample. And if many other banks did the same, the whole sample base would be useless, even if the result would not be far off the truth. And if these rates were affecting a large money base, the real impact would not be minimal. But no one knows the real impact, so no one is freaking out.

    2. Your chart compresses the timeline too much to see the details, as you are talking about the daily rate.

    But your other comments are usually intelligent and enlightening.

  30. If there is a major effect on trust of banks, I don’t see how that directly affects the economy in the near term. Trust of banks by the public, and trust by banks of their customers is already at a cyclical low, and no one is less likely to lend or borrow simply because trust is diminished from an already low level. Now, a total collapse of trust could have a POLITICAL impact, but that is a different issue. Already there are articles about the UK mulling over a restoration of their version of Glass-Stegall, and the same could happen here.
    But I can’t yet see which Presidential candidate is favored by such a collapse of trust – the incumbent President who is in the pockets of the Banksters, or his opponent who came from the financial industry (but not from a bank). Resolving that is what campaigns are for, I guess.

  31. Off topic, but here’s Randy Wray trying to use your name and credibility to push MMT:

  32. I was not saying anything about “near-term” effects on economy. Yet, if you remember recent history, subprime crisis also did not have any visible “short-term” effects. First it was nothing at all, then some hedge funds blew up, but who would care! And then came Lehman. That indeed had some “near-term” effect. But this time, most certainly, nothing of that magnitude would happen.
    Regarding your mention of Glass-Seagal, can you imagine what effect would it have on economy if re-introduced?

  33. 1. The impact would be marginal in most cases.

    2. The daily chart doesn’t change the correlation much. In fact, it probably tightens it since there will be more variables and less deviation in the data.

    I think the most important point here is that there was a failure to properly disclose the info. It’s a big problem. But it’s been a big problem. Anyone who is just realizing this or shocked by this has been out to lunch. Regardless, Barclays deserves to be fined and sued like crazy for this.

  34. Good points. Jim Willie at MarketOracle also thinks this is a much bigger crime scene of the “fascist business model”:

    “The LIBOR price rig has enabled virtually free funds for the IRSwap that supports the vast 0% USTBond tower.

    “The next connection will soon be revealed. The IRSwaps are fed by the deep source fountain of LIBOR, at virtually free cost. … Too much attention is given to the adjustable rate mortgage feeder process. Not enough is given to the derivatives that are abused by the financial sector in unregulated shadow systems. The big banks have sold too many multiples of Credit Default Swap insurance, to the point that both counter-parties are dead.

    “The story will come out soon enough, how the LIBOR rate was rigged extremely low in order to facilitate management of the ultra-low 0% Fed Funds rate, and to enable the IRSwaps to do their magic in keeping down the long-term USTBond yield.”

  35. Cullen,

    I have to strongly disagree with your stance here:

    1) “why is no one freaking out….” Uh, there are LOTS of people freaking out, especially in England. A few heads of banks have already lost their jobs BECAUSE some people are freaking out. You need to define your “no one” population much more specifically.

    2) If “no one is freaking out”, then how can you say the media is “making a mountain out of a molehill”?? which is the very definition of “freaking out”.

    3) There is a huge difference in “freak out” depending on which side of the Atlantic you are talking about. Are you being “US-centric” in your statement?? (less freak out in US media than in British media??)

    4) Where is your opprobrium in relation to the traders e-mails?? Just the cost of doing business??

    5) Correlation between LIBOR and Fed Funds rate does nothing to address the issue that what was done was illegal. Are you saying “no big deal” cuz big banks do illegal stuff all the time? There is evidence that LIBOR was reported artificially low in order to keep the British TBTF banks from failing during the crisis. I thought this was antithetical to you?

    6) Are you in favor of going back to the 1/8, 1/4, 1/2 bid/ask spread, because that’s the way it happened for years and the system worked?

    7) Let’s take this into a different realm where trust is also involved (Medicine). If you, as a patient, found out that 15 medical labs, in which i had a proprietary interest in one or more, had conspired to elevate or depress lab values slightly, in order to support my prescribing pills to you based on that slightly altered lab value, would you be upset? Do you get upset when you hear about kickbacks from pharma companies to physicians? Hey, I gotta pay my bills, too, just like Mr. Diamond.

    I can accept that banks manipulate rates, but that is not really the whole issue here. It is the deception.

    For people paying attention, no, there is nothing new here. But that doesn’t make it legal, or ethical, or “right”…


  36. Best to ignore this sort of stuff. MR and MMT actually have a fair amount in common. I know we’ve been critical at times in describing why we’re different, but that’s not personal. It’s just clarifying the differentiation so others can see where we disagree and decide for themselves who is right and who is wrong.

    Sometimes it sounds like they’re just trying to get a rise out of people so they can get attention. It’s the wrong approach. Unfortunately, a lot of people fall for it (I have in the past), but it’s always a mistake to get involved in these sorts of back and forths with people who have no interest in reasonable or honest debate. As Marc Lavoie said, MMTers like to insult even the people who are closest to them. And I am certainly much closer to them than mainstream economists so while we disagree, I don’t see the purpose of a back and forth regarding this sort of stuff. Best just to agree to disagree and move on.

    MMTers made a great call on the Euro. No doubt. Congratulations. Their framework is useful and I would recommend that everyone learn it because it can be extremely eye opening and helpful in understanding the monetary system. I am not here to take away from what they’ve done. I just don’t agree with it entirely. But I don’t understand the point behind Wray’s article. He dogs me for complimenting him??? Can’t win I guess. Moving on.

  37. I think the disclosure & conflict of interest issue is enormous. But it has been for years. There’s nothing new here that we didn’t already know. In fact, Barclays publicly acknowledged they’d been fixing the rates 4 years ago. http://www.bloomberg.com/apps/news?pid=newsarchive&refer=home&sid=aMSoLbYpbHWk

    But here the media is trumping this up to get a rise out of people with scary numbers and scare mongering over banking activities. There’s nothing new here. Just a new story for the media to run with and get people riled up over.

  38. Agreed. I don’t want to take away from the fact that people did something wrong here.

  39. OK, Your clarification helps…….i.e. “conflict of interest and disclosure IS enormous”. I was worried you’d lost your ethical center for a moment. Maybe that giant halibut whacked you in the head or summpin’. Still think you should clarify “no one” category. Too broad……..



  40. Yes, I am probably being a bit too general in my critique here. Clearly, people aren’t getting fired and fined for nothing. But let’s not blow things out of proportion….

  41. My friendly advice to you would be to sever all ties with MMT. I’ve seen Wray and some of the others evolve into very angry and practically delusional in the face of some criticism. If you associate MR with MMT at all they will drag your work down. That’s my perspective as a witness to recent developments.

  42. This is a terrible analysis from which to draw the conclusion you did. 1. You do need to use the daily rate and 2. You need to correlate the daily change. I expect the results will look much different.

  43. Now calculate the daily change and run a correlation using the change instead of absolute values.

  44. A download of daily FFR and daily overnight LIBOR results in a 99.2% correlation, similar to your monthly correlation. Good. But when calculating and correlating the daily change over the same time, correlation drops to 23%. Why is that?

  45. I could inflate the rate by 5 bp over the Fed Funds rate and have a perfect correlation, but the rate would still be inflated. Really sloppy work.

  46. Illegality is not a big deal… The sort of thinking that got us here and is stopping us from getting out of here and getting deeper into shit (even if Cullen keeps posting how great the US economy is and how much ‘growth’ it has).

    And if the media is doing a big fuss about it, about fuckin time? Media is constantly defending and hiding bank thievery and corruption, good for a change they actually report stuff.

  47. You could arbitrarily inflate/deflate the libor data in the series by tens of basis points and still maintain near perfect correlation; its a flawed analysis as presented.

  48. You’re making a huge mistake assuming your own clarity on this is widely shared.

    Most capitalists either don’t know the game is rigged, or, if they do, want to blame the rigging on anything but the game itself.

    Your commentary reminds me of the old Lone Ranger and Tonto punchline:

    Who’s “We” paleface?

  49. this is rubbish and sorry Cullen you’re missing the point as a couple of people have rightly pointed out. I agree though that it is being blown out of proportion but that also distracts from the real problems now facing reckless unaccountable governments. A few traders moved a rate and we hang them up ..Blair lies and send thousands to their deaths and walks away a multi millionaire with lifetime protection .. justice

  50. My take is rather simple and straight forward, as always. Every professional trader I know has assumed the “FIX” was in for the last 20 years or so; it’s a LOT worse than what has been exposed. The public doesn’t know what your talking about or care and the professionals assumed it was happening. Besides, nothing really happens to the thieves anyway. There aren’t any morals left, they’ll probable keep doing it. Nothing surprises me any longer and I assume the public is of the same mind.

  51. My U Chicago business school profs argued in class that insider trading should be allowed because market prices would adjust faster. They never put that one in writing, but I compared notes with other classmates.

    Crony Capitalism is alive and well.

  52. At last a voice of reason. – this Libor scandal is so misunderstood by almost everyone that its actually a little bit embarrassing. There is a non-stiry there gettign a lot of publicity and a real story usually being missed.

    The non-story. The adjusting of Libors to gain an advantage on daily fixings: If you set your Libor too high or too low, you are kicked out the fixing for that day. the highest and lowest quartile fixings are rejected and the average of the rest is used. – Thus the ability to influence the rate by raising and lowering Libor is almost nil or marginal at best. Also in the process of setting Libors there is actually a little wiggle room. – I.e. Interbank funds are often offered at banks in a tight range not necessarily at one fixed price. I.e On most days banks could borrow with a leeway of around 2-3bps. I.e. A bank may receive funds at say both 5 5/32 (5.156) and 5 3/16 (5.187) on a particular day, depending on the preference of the lenders and the borrowing needs of the banks. There is not one fixed rate. – Then lower quality banks and banks with big funding needs at that time may need to pay a little higher, and good quality and well funded banks may pay a little lower. – Thus there is a little wiggle room. – Thus the fixing of Libor to suit individual traders is a non-story. – It is wrong, and immoral, but it is to what diving is in soccer, a misdemeanor which should not really happen, and no one really benefits from it anyway, despite what they think.

    The story was however what happened in 2007 when banks deliberately underpriced LIBOR. And even this is misunderstood by many. They assume that banks were engaged in this to cheat the public and borrow cheaper than they otherwise could, whilst ripping off the public. – Actually by underpricing Libor compared to where they borrowed money they were costing themselves money. – Libor is where they fix loans to customers, in other words they were keeping this lower than it should have been, which was in the customers favour and against themselves, since they could not actually borrow funds to lend customers in the interbank market. – However, don’t be mistaken, this was not an altruistic venture on behalf of the banks, far from it, this was an attempt to hide the depth of the interbank funding crisis which threatened at the time to undermine the entire global banking system. Barclays was in my mind the most extreme example here. – Effectively there was no interbank market, the market had ceased to function, interbank lending did not exist to all intents and purposes. I recall at the time that many banks stopped bidding for interbank funds, 1) they could not could receive them anyway. 2) It would drive the implicit offer higher. – the exception as I recall was Barclays who were paying through the Broker market well above the Libor rates they were issuing, and still not receiving funds. – This was the real problem, they were paying one level and then implying the were receiving at another level. – In other words they became a law unto themselves. – In Black and White this is the real issue, the TBTF banks have in many respects become a law unto themselves – They have left themselves wide open here, an own goal (To use another soccer analogy).