The Expert Witness ...

LIBOR: The clue game for the new millennium

By Dr. John F. Sase, with Gerard J. Senick

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
—Adam Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations” (W. Strahan and T. Cadell, 1776)

“I sincerely believe, with you, that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”
 —Thomas Jefferson, in a letter to John Taylor (28 May 1816)

In this month’s column, we will address the subject of the British banking industry, specifically the charges leveled at numerous international banks doing business in the London market and allegations of their manipulation of the London Interbank Offered Rate (LIBOR).We find an interesting puzzle (or case) here that may intrigue attorneys and economists alike. In ways, it reminds us of the board game Clue (created as Cluedo in England in 1949) in which players must determine “Who” committed a crime, “How” they did it, and “Where” the crime was committed.

Under contract to the British Banking Association (BBA), business-data firm Thomson Reuters compiles the LIBOR on each business day. In actuality, this measure is a set of rates at which banks borrow funds from one another in the London interbank (between-bank) market. Therefore, we will treat the LIBOR acronym as a plural noun.

We assume that such rates measured by respectable banks stand above reproach. However, Barclays Bank was fined $450 million recently after an investigation into claims that several banks manipulated the London Interbank Offer Rate(s). British Prime Minister David Cameron stated that the management of Barclays Bank has ‘serious questions’ to answer as to how it manipulated lending rates between banks. Meanwhile, Chancellor George Osborne of the Financial Services Authority confirmed that other banks are under investigation, including the Hong Kong and Shanghai Banking Corporation (HSBC), the Royal Bank of Scotland (RBS), Citigroup, and Union Bank of Switzerland/Swiss Bank Corporation (UBS).

Why does such a seemingly minor banking event in London, one that has been eclipsed by the Summer Olympics, carry any relevance for John and Jane American? It could be because the LIBOR are among the most common benchmarks used for setting rates for more than $500 trillion of financial products throughout the world. Furthermore, the largest firms in the American banking oligopoly hold seats on the various committees that are involved in determining the LIBOR.

The British Bankers’ Association developed the set of LIBOR, which includes fifteen different rates to match the same number of maturities for interbank currency-borrowing. These maturities include the Overnight (or Spot Next, which matures on the third day); the One Week; the Two Week; and the One- through the Twelve-Month rates.

For each of these fifteen maturities, the BBA prepares separate versions of rates to guide interbank borrowing of each of ten major currencies. The Association releases rates for the U.S. dollar, the British Pound, the Euro, the Japanese Yen, the Australian Dollar, the Canadian Dollar, the New Zealand Dollar, the Swiss Franc, the Danish Kroner, and the Swedish Krona. In summary, the BBA publishes 150 LIBOR rates each business day-ten currencies times fifteen maturities. However, based upon the order of importance in London interbank transactions, the four primary currencies are the U.S. Dollar, the British Pound, the Euro, and the Japanese Yen.

The Six-Month LIBOR most directly impact the setting of variable-interest rates in worldwide capital markets. For example, about half of Adjustable Rate Mortgages (ARMs) in the U.S. are based upon the LIBOR. In addition, the LIBOR form the base for fluctuating credit-card rates and many private student loans as well as other variable-rate loans. Also, changes in the LIBOR lead to direct changes in fixed-rate consumer and business loans. As a result, the LIBOR have encompassing economic effects. Macroeconomically, as the LIBOR increase, they cause consumer demand to decrease. This decrease leads to a decline in the rate of economic growth that is accompanied by an increase in unemployment.

Lubricating the LIBOR in Foggy London Town
The Bankers’ Association begins by collecting sixteen interest-rate quotes that are received from participating banks on the reporting panel. The Association then ranks the quotes in order of size. In order to ensure transparency, quotes from all of the banks on the panel are made public. However, the subsequent calculation of the average rates ignores the upper and lower quartiles and takes the average of only the middle half.  The BBA asserts that this method of excluding the high and low quotes received and averaging the remaining ones prevents the LIBOR from being influenced by outlying quotes and by any individual bank. (In respect to this claim, we will address these points momentarily as they relate to Barclays Bank and its asserted role in the LIBOR manipulation of the past decade.)

In effect, the BBA averages multiple-rate quotes that are submitted by member banks. When users refer to “the LIBOR rate” as such, they generally mean ONE of the 150 average rates published on any specific business day. The LIBOR are announced and distributed once per day at about 11:45 a.m. (London time), rapidly flashing to 300,000 screens around the world.

The Association developed these 150 rates as benchmarks for the short-term borrowing of cash (one year or less). These rates are for various currencies moved between banks in the form of unsecured loans, ones in which the borrower does not provide any collateral to the lender. Due to these conditions and to the varying levels of risk among banks, a bank doing business in the London market is not guaranteed of borrowing funds at one of the specific LIBOR because the rates are calculated from quotes submitted by a panel of banks with superior credit ratings. Therefore, any bank of lesser standing may need to pay a risk premium on top of a published BBA rate.
In addition to the rate-reporting panel of the Bankers’ Association, Currency Panels of banks exist for each of the ten currencies for which the BBA calculates the LIBOR. Presumably, the Association selects banks to serve on a Currency Panel. Selection is based upon specific merits that include credit standing, reputation, activity, and the expertise in transactions involving the specific currency. Each Currency Panel tends to maintain a membership of six to eighteen major banks. In recent years, the panel for U.S. currency has included Bank of America, Barclays Bank, Citigroup, Deutsche Bank, HSBC, JPMorgan, Royal Bank of Canada, and a number of others.

On one of its Web sites (, the British Bankers’ Association provides an illustrated description of the information flow in its daily offered-rates activity. Essentially, the information moves within a network among five major entities:  the contributor banks of the rate-quote panel, the business-data provider Thomson Reuters, the Foreign Exchange & Money Markets Committee (FX&MM) of the BBA, the registered company of BBA LIBOR Ltd., and the open financial market.

On any business day, the life of the LIBOR begins when individuals at contributor banks determine their quotes for that day and then submit them through Thomson Reuters at just past 11 a.m. (London time). Applying BBA governance and scrutiny protocols, Thomson Reuters combines the data, calculates the average rates and statistics, and reports through LIBOR Ltd. to the FX&MMC and the LIBOR Board during the hour. Then, the company of LIBOR Ltd. assumes the responsibility for passing instructions from the FX&MMC and LIBOR Board to Thomson Reuters and ensures that it follows these instructions. Later in the hour, Thomson Reuters distributes the data for the day through its own networks, user companies, and other LIBOR distribution channels simultaneously. At this juncture, Thomson Reuters communicates the data directly to the FX&MMC, the entity that has the responsibility of further scrutinizing the data for quality.

After distribution, Thomson Reuters stores the data of the day in its historical database and makes it directly accessible to the FX&MMC. The Committee combines this data with market intelligence and views from stakeholders and uses the sum of information to improve the governance and scrutiny regime, design, and operation of LIBOR. Meanwhile, LIBOR Ltd. communicates with, and receives input from, users, clients, regulators, and other stakeholders. Then, the company performs analysis as instructed by the Board and the FX&MMC. LIBOR Ltd. itself has the responsibility for monitoring the quality of LIBOR data-inputs along with the performance of its independent contractor, Thomson Reuters, and for informing the Board and the FX&MMC of market conditions.

The LIBOR Manipulation Suspects, or “Everyone Knows It’s Windy”

At its core, the British Bankers’ Association is THE trade association for the UK banking and financial-services sector. However, the Association represents over 250 members that are headquartered in 50 countries and that have operations in 180 countries worldwide. Collectively, the member banks provide the full range of banking and financial services and make up the largest and most powerful banking association in the world.

Nevertheless, Barclays Bank was called to task a few months ago about its alleged manipulation of the LIBOR during 2006. After an investigation into claims that several banks manipulated the LIBOR, Barclays was fined $450 million (considering that their assets are $2.4 trillion, this fine appears miniscule). On 27 Jun 2012, the BBA issued a statement about investigation of the LIBOR by the United Kingdom Financial Services Authority. In a press release, the Association stated, “This is an announcement with extremely serious implications which need to be carefully considered and the investigation findings will be fully included in the current review of LIBOR. This review was announced earlier this year and the authorities are fully engaged with it. Today’s statement by the Financial Services Authority is the strongest possible confirmation that the LIBOR contributions and processes followed by the contributor banks must meet the necessary regulatory obligations and observe the highest standards in ensuring the accuracy of the rate.” Following this action, Barclays Bank lost most of its senior management team within a 48-hour span between 1 July and 3 July. Chairman Marcus Agius, CEO Bob Diamond, and COO Jerry del Missier resigned over the scandal that implicated their bank in the manipulation.

However, evidence exists that suggests that the LIBOR has been manipulated at least thrice in the past twenty-five years. Relying upon data from the Bank of England and the BBA, we find obvious drops of the Twelve-Month LIBOR to levels below the United Kingdom Base Rate. UK Banks establish this Base Rate in order to price loans and to reflect the state of the market. Similar to the Prime Rate in the United States, the Base Rate represents the minimum rate of interest paid by the highest-grade borrowers.

The LIBOR hovered at two-thirds of the Base Rate from 1988 to 1994. Then, during an extended below-Base window between 2001 and 2006, the LIBOR dropped as low as one-third of the Base in 2003 and 2004. For a third time in the past quarter-century, the LIBOR fell to one half of the Base during the latter half of 2007 and most of 2008. These repeated extreme lows suggest significant rate-quote manipulation because the LIBOR should reflect the market Base Rates.

The Parlor Game of LIBOR

Now we have a brief of the nature of the beast called the BBA/LIBOR as well as a systems analysis of how it works. Next, let us consider the specific accusation of rate manipulation that was laid at the door of Barclays Bank. This is a good time to open our game of Clue or Cluedo. Here are a few clues and questions to start us on our way.

1. The London Interbank Offered Rates are interest rates set in London by about eighteen major banks, including Bank of America, Barclays, JPMorgan, Deutsche Bank, HSBC, and all of the other usual suspects. As of 1 March 2012, Barclays ranked seventh among the largest banks in the nosebleed world in which the top ten banks each hold assets of between $2.2 and $2.8 trillion. Collectively, these top ten banks that contribute to the calculations of the LIBOR control more than $25 trillion in combined assets (in comparison, the 2012 U.S. Gross Domestic Product [GDP] is expected to be approximately $15.7 trillion).

2. British banking regulators emphasize that they are not involved in the setting of LIBOR rates. However, how clean are their hands? U.S. Treasury Secretary Timothy Geitner testified that the New York District Federal Reserve Bank was aware of the risk in the design of the LIBOR system that created both the incentive and the opportunity for banks to underreport. Subsequently, the Fed shared its information and recommendations with British regulators (WSJDigitalNetwork, 25 July 2012). What did these regulators learn about this problem? When did they learn about it? How did they respond, if they did?

3. Barclays is not the largest bank at the table. Furthermore, if they had fabricated low rates, its quotes may have fallen into the excluded lower quartile and out of the calculations. Also, we may ask if the quotes from one bank could cause the average of data from eight banks to drop to less than half of the Base Rate for an extended period of years-a simple math problem. Was Barclays merely the scapegoat, the fall guy, or the patsy in an affair of finance that runs much deeper?

4. Could Barclays, alone or in collusion with a few other banks, manipulate the rates covertly for periods as long as five years without detection from the Foreign Exchange & Money Markets Committee? We should remember that the FX&MMC has the prescribed duty to review the sum of information provided in order to improve the governance and scrutiny regime, the design, and the operation of LIBOR. Furthermore, how long could manipulators avoid detection by LIBOR Ltd? The company maintains the responsibility for monitoring the quality of data-inputs into LIBOR, as LIBOR Ltd. carries out analysis as instructed by its Board.

5. Similar to the game of Clue, multiple “rooms” exist in which the crime could have occurred – the contributor banks, Thomson Reuters, the FX&MMC, LIBOR Ltd., the LIBOR Board, and the open financial market. However, unlike the game of Clue, the “Where” may well be in a multiplicity of locations.

As we are writing this column, the game is afoot: J.P. Morgan Chase has received subpoenas and requests for documents from the Department of Justice; the Commodities, Futures, and Trading Commission; the Securities and Exchange Commission; the European Commission; the United Kingdom Financial Services Authority and other regulatory authorities and banking commissions. Attorney generals in at least five U.S. states are conducting investigations of alleged manipulation of the LIBOR. On 8 August 2012, U.S. District Judge Naomi Reice Buchwald of the federal court in New York City announced that she is suspending any new lawsuits involving the LIBOR until she sorts through the issues from earlier related lawsuits.

With the preceding background, we hope that we have provided our readership with a start to provide hours of fun with family, friends, and colleagues in solving this game of mystery. Though it may not be Colonel Mustard with the candlestick in the library, this game has higher stakes, greater complexity, and an international cast of thousands. Let us end with a memorable quote by Baby Herman in “Who Framed Roger Rabbit” (Touchstone Pictures, 1988):  “[T]he whole thing stinks like yesterday’s diapers.”


A PDF copy of this article has been posted at We continue to post videos related to our monthly column on
Dr. John F. Sase has taught Economics for three decades and has practiced Forensic and Investigative Economics since the early 1990s. He earned an M.A. in Economics and an MBA at the University of Detroit and a Ph.D. in Economics at Wayne State University. He is a graduate of the University of Detroit Jesuit High School. Dr. Sase can be reached at 248.569.5228 and by e-mail at You can find his Economics videos of interest to attorneys at

Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a Supervisory Editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication and gives seminars on writing and music. Mr. Senick can be reached at 313.342.4048 and at You can find some of his writing tips at