LIBOR RIGGGGGED!!!!!!!!

James Griffith, an officer working in  Financial crimes cell of London Police, was having business as usual over a cup of coffee in his office till he got a call from his senior which moved the earth beneath his feet and his eyes were about to pop out as he muttered in his bewilderment  ’Oh my!!!! Go..........d!” It was bigger than anything he had handled earlier and his imagination failed to gauge the impact of reason of this amazement. To quote very conservatively it is a 15 digit number; 350,000,000,000,000, precisely 350 trillion USD and this humongous amount was riding on a rigged benchmark. Yes, It was none other than LIBOR the most prominent benchmark used globally on which the best of Investment banks and Hedge funds quote their Floating rates and premier banks fix their lending rates. This did not happen anytime soon but as early as 2006. This was indeed scandalous than many other recent scandals!

Read the below:

These are some of the mails between traders who betted on LIBOR and submitters who submitted LIBOR to British bankers Association (BBA) daily.

“WE HAVE TO GET KICKED OUT OF THE FIXINGS TOMORROW!! We need a 4.17 fix in 1m (low fix) We need a 4.41 fix in 3m (high fix)” (November 22, 2005, Senior Trader in New York to Trader in London);

“You need to take a close look at the reset ladder. We need 3M to stay low for the next 3 sets and then I think that we will be completely out of our 3M position. Then its on. [Submitter] has to go crazy with raising 3M Libor.” (February 1, 2006, Trader in New York to Trader in London); 

“Your annoying colleague again … Would love to get a high 1m Also if poss a low 3m … if poss … thanks” (February 3, 2006, Trader in London to Submitter); 

“This is the [book's] risk. We need low 1M and 3M libor. PIs ask [submitter] to get 1M set to 82. That would help a lot” (March 27, 2006, Trader in New York to Trader in London);… 

“Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot.” (September 13, 2006, Senior Trader in New York to Submitter)…” 

The fundamental principle underlying floating rates is to allow the market to determine borrowing costs. Customers who borrow on a floating-rate basis, if they are sensible, and institutions that loan money on a floating-rate basis, if they are ethical, therefore expect two things from a benchmark interest rate. First, the benchmark should reflect actual conditions in the financial markets. That means no random fluctuations -- money costs what it is worth. Second, the benchmark rate should not be easy to manipulate. No rational, informed borrower would borrow money at a variable rate of interest and then empower the lender to determine when and how the interest rate changed in the future.

So it is startling that Libor, the financial world's most important number, satisfies neither of these requirements. Libor is computed by the British Bankers' Association (BBA), a powerful trade association based in London that represents more than 250 financial institutions. These banks are located in 50 countries and have operations in just about every corner of the globe. But instead of using actual market rates, big banks estimate the interest rate that they think they would have to pay if they borrowed money from other institutions. That is different than reporting the actual interest rate at which they are really borrowing from other banks.

Each day, the BBA sets Libor rates for 15 loan maturities in ten different currencies. In the case of the dollar, 18 banks submit their hypothetical borrowing costs. The BBA discards the four highest and the four lowest submissions considered as outliers distorting the calculation, and then averages the remaining ten to come up with the Libor number. Thompson Reuters calculates all of these rates for the BBA, and then publishes the results, usually around 11:45 AM (CET).  

Rate setting desk were acceding to the traders request and sending the artificial low or high rates to BBA. A low rate quoted to BBA is aimed at keeping the rate so low that it’s taken as outlier and excluded from average rates. This resulted in a lower number forming part of average which would otherwise would have been excluded. Therefore the overall rate was lower than what it could have been with fair play. Though the average was impacted by few basis points, yet the mammoth magnitude of money riding on LIBOR made the outcome substantial.

There are plenty of reasons why banks would like to manipulate Libor rates. During the height of the financial crisis, regulators foolishly looked to Libor to determine the market's perception of the health of big banks. A big bank reporting a low Libor rate was thought to be able to borrow money from other banks cheaply and, therefore, was seen as a safe place to invest. Banks worried about attracting the attention of regulators may have submitted low Libor rates in order to try to deflect regulatory scrutiny. 

More nefariously, banks also manipulated Libor to make money or avoid losses on their trading portfolios. For example, when U.S. traders at Barclays wanted Libor to rise in order to draw a bigger profit on some of their financial products, they simply asked their colleagues at the rate-setting desk in London to push the numbers up or down to suit their needs. Barclays would then submit artificial bids and persuade their counterparts at other banks to do the same.