Why was LIBOR rigged?
This blog post dovetails a BBC documentary dated April 2017 which I had Tweeted about.
There seems to have been two motives for LIBOR rigging. One was financial stability and the other was profit.
Motive #1
Here's what happened. Banks agreed to lend to one another at lower than fair market interest rates, something called "low-balling."
For example, a LIBOR trader who knew that borrowing banks out there were riskier than perceived would bid a lower interest rate at which he was willing to lend out his own bank's capital.
This signaled the following to third parties: The borrowing bank's creditworthiness was sounder than it actually was.
This in turn signaled the following:
- The banking system was more stable than it actually was.
- Things were closer to normal than they really were.
In my opinion, the intent of all this signaling may have been to prevent something like a bank run and system-wide financial collapse.
Motive #2
Barclays Bank set up an investment fund named the Ricardo Master Fund. This was under CEO Bob Diamond, the very CEO who has denied knowing anything about LIBOR rigging at his bank. This fund stood to profit if LIBOR fell. Barclays itself invested $100Mn in this fund and made a $100Mn profit, according to the BBC documentary.
There is strong evidence of LIBOR rigging dated Sept 2007 and October 2008, according to the same documentary. However, according to @davidenrich's Spider Network book, LIBOR was widely known to be manipulated to suit banks' positions as early as 1991.
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