6 july 2012, the bank-lash begins ?

LIBOR is something rather obscure I had the pleasure of using back in my days as a corporate lawyer; me and other thousands involved in the $400 trillion or so of contracts that use it as a reference. There are now many explanations of what it actually is and how its calculated, but it's actually quite a banal index that is used by many parties, including the banks, in contracts with each other. There seem to be two issues. In the first phase, some traders might have been trying to fix it for their own gain. They could conceivably have budged it, but only by the merest margins, although on the volumes traded, that might still have added up to a tidy sum. This is dishonesty, as deserving of prosecution as any other falsehood. The second phase though seems to have a macroeconomic element, in that no-one wanted to report the rates they were really borrowing at, as it would suggest they were in trouble, which in the febrile atmosphere after the lehman collapse would quickly have become a self-fulfilling phrophecy. Although the evidence is only now seeping out, there seems to have been senior management knowledge of this, and understanding, if not even encouragement, from the bank of england, who were desperate to avoid any further big banks going under. If anyone suffered, it would have been pretty evenly spread, as everyone uses libor as a reference, both debtor and creditor. It is unclear whether laws were broken, and I suspect we won't see successful prosecutions. Reputationally though, this is yet another disaster for the banks, whose credibility is absolutely shot to pieces; and maybe we will finally see the fight against them really taken on. They have few defenders.