Practical analysis for investment professionals
12 July 2012

Understanding the LIBOR Scandal: Recommended Reading

The scandal surrounding LIBOR, the London Interbank Offered Rate, continues to sweep through global finance — so much information, so little time for investment professionals to assess the facts.  Lost in the scandal discussion the last several years are the invisible costs of numerous investment professionals that used LIBOR as the basis of their costs of capital and all of the decisions made based on a faked rate.  Ouch!

Here are some recommended reads to help you home in on the essentials of this still-unfolding imbroglio concerning the global benchmark:

  • The PenaltiesFines were finally assessed by a regulator (EU) for LIBOR manipulation to the tune of €1.71 billion. Not small change, but not proportionate to damages either. Makes me want to holler!
  • The Scandal: In “The Rotten Heart of Finance,” the Economist provides a foundational overview of the major details of the scandal, its importance to global markets, and a description of possible ramifications.
  • The Size: In “The Law Catches Up with LIBOR,” a writer for the Guardian newspaper says that up to $250 trillion of SWAPs use LIBOR as a reference rate.
  • Some Alternatives: In “Barclays Rate-Fixing Scandal: LIBOR Alternatives Analysed,” the International Financial Law Review asked lawyers in the United Kingdom, Europe, and the United States about alternatives to Libor. Interestingly, 90% of the attorneys polled by the publication said that the Libor probe should not mark the end for this benchmark rate. As one respondent put it, “If Boeing and Airbus were found to be colluding on jet aircraft prices, would we abolish jet aircraft?”
  • What’s Still Missing: When I managed a mutual fund, I used LIBOR as one of my benchmark rates for valuing securities. So in addition to all of the contracts around the world that explicitly use LIBOR in their calculations of value, there are trillions of dollars of decisions, essentially hidden from view, that have been made based on a consciously manipulated number. Yikes!
  • Assessing Damages: Not surprisingly, market participants (and their lawyers) have quickly turned their attention to quantifying the value in the form of damages. In “Wall Street Bank Investors in Dark on LIBOR Liability,” Bloomberg interviews several attorneys, including one who contends that Barclays’s liabilities alone could range from the “hundreds of millions into the billions.” Another attorney says that bank industry liabilities on the whole could well run into the tens or hundreds of billions of dollars if lenders are found liable. For more particulars on the lawsuits, and the challenge of proving damages, read Dealbook‘s “Rate Scandal Stirs Scramble for Damages.”
  • CFA Institute Members’ Feelings: In a poll of CFA Institute members about LIBOR, 70% felt that the submission process should become a regulated activity. Additionally, 56% felt that LIBOR should be determined by an objective, market-based system rather than by a subjective consensus of estimates made by individual banks.

Survey: Which one of the following options do you believe to be the most appropriate methodology for the setting of LIBOR?

Note: This piece originally ran 12 July 2012 but is frequently updated to reflect events still unfolding. Last updated 4 December 2013.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: ©iStockphoto.com/hatman12

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, is a content director at CFA Institute, where he tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor. Jason also ran a successful blog titled What My Intuition Tells Me Now. Previously, Voss was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund. He holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: jason.voss@cfainstitute.org

8 thoughts on “Understanding the LIBOR Scandal: Recommended Reading”

  1. Mohammed says:

    Thank You Jason

    i was looking for a concise primer on the Libor Scandal .This post was what i was looking for .

    Regards,

  2. Thanks Jason

    your post definitely helps in better understanding of the LIBOR imbroglio.
    We also recently covered basics of LIBOR here;

    http://www.finmarketguru.com/understanding-libor-london-interbank-offer-rate/

  3. duangduannakrungthep says:

    Dear Sir,

    The article above very useful. Pls allows my sharing this.

    Regards,

    1. Hello!

      Thank you for your kind words. You are welcome to share the article, please just make sure you let people know where you got the article : )

      Yours, in service,

      Jason

      1. duangduannakrungthep says:

        thank you, sir..

        duangduan

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