What’s in a Number? | Donald MacKenzie on the Importance of Libor | LRB

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What’s in a Number? | Donald MacKenzie on the Importance of Libor | LRB

Donald MacKenzie’s 2008 London Review of Books essay on Libor provides some fascinating detail on the setting of the rate and the remarkable faith in the self-regulating market, but the dangers are clear. But are the regulators now hoping that a fine and reputation damage will be enough?.

“The current British Bankers’ Association system for calculating Libor, involving a fixed procedure and predetermined panels of banks that change only infrequently, was set up in 1985, and has worked remarkably well, which is why the participants in financial markets are prepared to have $300 trillion indexed to Libor.

The obvious risk to the integrity of the calculation is that a bank on a Libor panel might make a manipulative input, trying to move Libor up or down so as to influence interest rates or the value of its swaps portfolio. That risk is the main reason for the exclusion from the calculation of the highest quarter and lowest quarter of inputs. Furthermore, once a day’s Libor rates are set, each input – and the name of the bank that has made it – is also disseminated electronically, and so attempts at manipulation would have to take place in what is in effect the public gaze. The inputs to Libor can be viewed around 45 minutes after they are made on more than 300,000 computer terminals worldwide, and they are thoroughly scrutinised. On one occasion, well before the recent problems, a banker showed me the day’s inputs into three-month sterling Libor, pointing with suspicion to a bank that had reduced its input – by a single basis point – from the previous day’s, while all the others had either increased theirs or left them unchanged. The brokers see and hear a lot. An input wildly at odds with what their screens show would be obvious, and word of persistent attempts at manipulation would quickly spread as brokers chat with their clients. The ultimate sanction – used in the past, I was told, but not recently – is a bank’s removal from a Libor panel. In the current climate, that would deeply damage the bank’s reputation.”

The strength of these long-standing fortifications around Libor’s status has been questioned over the course of the last twelve months.


It’s also an illusion to think that indices based on transactions can’t ever be manipulated. ‘Closing prices’ – the average of the day’s final deals on an exchange – are widely used as indices, but there’s then sometimes an incentive to ‘bang the close’, in other words to trade aggressively in the final minutes or seconds so as to influence the closing price.”

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Donagh is the editor of Irish Left Review. Contact Donagh through email: dublinopinionAtgmail.com