Libor Rigging Redux

Part 1 of a two-part article from the March/April 2021 issue of Dollars & Sense.  We will post Part 2 later this week.

By John Summa


Economics textbooks teach you that the London Interbank Offered Rate (known by the acronym “Libor”) is the rate at which big global banks make uncollateralized loans to each other. (An uncollateralized loan is backed solely by the perceived credit-worthiness of the borrower.) For years, Libor was considered a fair and efficient market rate of interest, reflecting money market supply and demand conditions, which gave it legitimacy as a benchmark. It is referenced by a wide range of financial products, including mortgages, student loans, and consumer loans, as well as structured financial products such as mortgage-backed securities and collateralized debt obligations (CDOs). However, in the wake of revelations that surfaced beginning in 2012 that became known as the “Libor rigging scandal,” the world learned that banks were unfairly setting the Libor benchmark at levels that were more profitable for them.


The manipulation of a benchmark interest rate is so abstract that, even if we recognize it as fraudulent behavior, it is hard for members of the general public to understand who was victimized and how much harm was done to them. Was it just the playboys of high finance picking each other’s pockets, or the pockets of their well-to-do clients? Or were they teaming up to pick ours, meaning the bank accounts of average working people? While none of these scenarios are mutually exclusive, my research reveals another dimension of the scandal—that banks may also have been stiffing homeowners by charging inflated Libor rates on their adjustable-rate mortgage loans.


The United Kingdom’s Serious Fraud Office (SFO, analogous to the United States’ Federal Bureau of Investigation), spent seven years looking into suspicions that a number of big banks were colluding to manipulate Libor for their own benefit. The investigation, which ended in November 2019, led to some mid-level traders who were employed by the banks being sent to jail. But it was disappointing to many observers of the scandal that the SFO did not take any further action with the case. When the investigation closed, we lost the opportunity to learn more about exactly what was afoot and how it was done.


One important underreported dimension to the Libor story, which never became part of the SFO’s investigation, is the link between Libor and adjustable-rate mortgage (ARM) loans, many recklessly made to often vulnerable and exploited borrowers in the U.S. mortgage market. The evidence that I amassed as an economic consultant to a Vermont-based independent litigator attempting to bring a class action lawsuit against Bank of America and Wells Fargo was damning enough to cause the banks’ lawyers to agree to discuss a potential settlement offer. Due to technical issues with the class action lawsuit, the case did not move forward. So the data and statistical results never ended up being fully presented in court. However, the Libor research suggests that manipulations designed to raise rates on adjustable-rate mortgages may have unfairly transferred billions of dollars from mortgage borrowers to banks, as well to other related parties involved in facilitating such transactions.


The Market That Was Not a Market and Is Still Not a Market

Libor was created in 1986 to provide uniformity in the pricing of a burgeoning global derivatives market. From its inception, Libor has remained an “argued” price, writes Alexis Stenfors, former UBS derivatives trader and author of Barometer of Fear, a book about the Libor scandal. It is often a “judgement” by banks, he writes, what banks argue the rate ought to be. It is not and never has been driven by actual supply and demand in an actual market.


Prior to the revelations in the Libor rigging scandal, Libor was entirely unregulated. This meant that conditions were in place for banks to abuse rate-setting in the interest of maximizing profits. Today, the Intercontinental Exchange (ICE) Benchmark Administration is responsible for managing the Libor benchmark and the entire process is regulated by the United Kingdom’s Financial Conduct Authority (FCA). Each morning ICE sends the following question to panel banks: “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m. London time?” [emphasis added]. The problem with this question is that it appears to be irrelevant to how the Libor panel banks actually function today. As Federal Reserve Chair Jerome Powell wrote in a Wall Street Journal opinion piece, “In essence, banks are contributing a daily judgment about something they no longer do.”


Thus, while more governance and oversight by regulators is certainly a good thing, it does little to change the fact that the rates submitted by panel banks are largely not those the banks are actually paying to borrow. So, there is still lots of room for potential tampering. A lawsuit filed in 2019 once again raises questions about manipulation of this important interest rate by banks, for banks.


Banks Manage to Delimit Investigations
The SFO wasn’t the only agency trying to get to the bottom of the Libor scandal. The U.S. Commodity Trading Futures Commission (CFTC), a U.S. government agency that regulates derivatives, investigated several of the Libor panel banks involved in rate rigging, including UBS. However, as David Enrich, financial editor at the New York Times, reports in his book about the Libor scandal, The Spider Network, the CFTC allowed UBS to “set the course of the unfolding investigation.”
Not only did the CFTC allow UBS and its high- powered legal team to unilaterally self “discover” all of the evidence related to the investigation, which included, according to Enrich, allowing UBS to do its own “sifting through millions of pages of records and interviewing witnesses, ” but it also agreed to refrain from issuing subpoenas to senior executives, and limited the scope of their inquiry to just formal board room minutes and other official pro-forma documents, eliminating emails, chat transcripts, phone calls, and handwritten notes. Enrich reported that UBS told the CFTC it had “destroyed all the recordings of employee phone calls in Tokyo,” where much of the investigation was focused (see the “Traders Become the Fall Guys” sidebar for more on former Citigroup and UBS trader Tom Hayes and Yen Libor rates), and the identities of certain people, presumed to be executives, were blacked out on the limited number of emails handed over to authorities. UBS thus managed to, according to Enrich, “confine the investigation to an isolated group of wayward employees who no longer work for the bank… .” In the end, a few employees became the scapegoats as defined by the entity under investigation, which destroyed incriminating evidence potentially implicating higher up executives. Rather than being punished severely, or having its license revoked temporarily or even permanently, UBS settled and paid a hefty fine, and business was allowed to go on as usual.

What Was Learned: “Low-balling” and Other Bank Manipulation of Libor

There were two reported dimensions to the Libor rigging scandal. One was related to Libor “low-balling” by banks (which some Libor panel banks have admitted to doing as part of settlements reached with authorities), which resulted in unfair payments to some holders of derivatives indexed to Libor. This low-balling mainly took place during the early part of the financial crisis, and it reportedly benefited banks as credit-risk concerns mounted. Banks’ artificially lowered Libor rate submissions made these banks seem healthier than they actually were, and this would have buoyed their bank shares and lowered the cost of doing business overall because of lower apparent credit risk. They had to have acted as a collusive pack to make this happen, as is now known from some banks’ own admissions to regulatory authorities as part of settlement deals (see the “Barclays Settlement as Collusion Prototype” sidebar).


Barclays Settlement as Collusion Prototype
As the first Libor bank to come forward, Barclays admitted that from June 2005 through September 2007, and periodically in later submissions, it provided U.S. dollar Libor submissions to the British Bankers’ Association (BBA) that did not reflect actual interbank borrowing costs. Evidence largely consisted of emails produced during the Barclays settlement with the FSA, the CFTC, and the DOJ. The evidence is instructive because it provides a nice guide to the basic elements of potential collusion.
The Barclays case shows that there were four elements of collusion. The evidence showed: 1) collusion between traders and submitters of the same bank, who often sat at the same desk or nearby each other at banks, 2) collusion between bank management and submitters of the same bank, 3) “external” collusion between one bank’s submitter and another bank’s trader and, 4) external collusion between all banks and their submitters.
The fact that banks were able to share information and agree on rates submitted prior to submission made it possible to move rates around. According to evidence that came to light in the Barclay case and others, there was no firewall among bank submitters, traders, and management. According to Alexis Stenfors, bank submitters knew ahead of time what other banks were going to submit, and evidence suggests banks behaved as a “pack.” All the pieces were in place for them to effectively collude.
With no regulation of Libor, and little consequence for the abuse of insider information between the banks, there was nothing to prevent banks from exploiting their power to extract extra profit where possible. As The Telegraph reported in 2011, “senior bankers privately admit it is easy for banks to fix Libor at rates that are favorable to their own interests.” And interviews that Bloomberg News reporters did with money-market traders in March 2012 led them to report that staff responsible for Libor submissions of panel banks “regularly discussed where to set the measure with traders sitting near them, interdealer brokers, and counterparts at rival banks.”
Source: Jamie Dunkley, “UBS accused of manipulating Libor,” The Telegraph, March 15, 2011.

For example, on December 18, 2012, UBS settled a Libor-rigging case with the Department of Justice. As part of the settlement, the bank acknowledged that one of its traders had “requested that his counterpart traders at other Contributor Panel banks make requests to their respective Yen LIBOR submitters to contribute a particular LIBOR submission, or to move their submission in a particular direction (i.e., up or down).” UBS also admitted that this “trader made these requests to his counterpart traders at other Contributor Panel banks on many occasions.”


While this is just one example, the same process, assisted by broker “conduits” working with all panel banks, was no doubt at work elsewhere, such as in the setting of the U.S. dollar Libor rate.


For example, economists Connan Andrew Snider and Thomas Youle published an article in the online journal Social Science Research Network that used statistical studies of manipulated submissions driven by bank incentives as evidence of bank collusion to move rates up and down based on shared incentives.


Traders Become the Fall Guys:
Tom Hayes as the Poster Boy of “Wayward” Traders

While much of the attention in the Libor scandal was put on traders—who were the only ones to see jail time—there was clear evidence that the fraud went much higher. The case of former Citigroup and UBS trader Tom Hayes, who got a 13-year jail sentence (subsequently reduced to 11 years), suggests that much was left uncovered. At his trial, Hayes presented evidence of senior-level awareness of the rigging culture.
According to Bloomberg News, Hayes told prosecutors in 2013 that UBS distributed an “instruction manual on fixing Libor,” which was aimed at profiting from trading positions and gave detailed instructions for both “up and down” manipulation of Libor. Internal UBS messaging system communications presented at the trial revealed that high Libor rates were being requested by management, and as result, these rates were set higher by submitters.
Though the SFO was able to obtain a copy of the manual, Hayes has said that the SFO failed to follow through in its investigation and obtain emails of banking executives at UBS that contained proof of his claims. Partly as a result of this, Hayes switched from cooperating with authorities, with an expected guilty plea, to a not-guilty plea, a tactic that failed. Hayes served half of his sentence; he was granted early release and left prison on January 31 of this year.
As too often happens, playing the corruption game yields big rewards for executives, while lower-level employees are forced to pay the piper. For example, the CEO of Citigroup’s investment bank in Japan, Brian McCappin, remained at Citigroup, despite his reported awareness of Hayes and his efforts to manipulate Libor (McCappin had called him a “star” trader in his division when Hayes came over from UBS). And while Hayes went to jail, McCappin was promoted. McCappin was described by Citigroup as a “valued employee” at the time of his promotion, writes David Enrich in The Spider Network. His immediate boss, meanwhile, moved into the hedge fund world. Others around Hayes remained free and are mostly working for the same companies.


There was also a second dimension to the Libor scandal: Banks’ traders of Libor-indexed derivatives got caught working with the banks’ Libor rate-submitters to manipulate rates higher or lower. These day-to-day machinations worked in accordance with the trading of portfolios of derivatives and was driven by profit-making (and bonus-seeking) objectives. This type of apparently trader-led manipulation, which evidence shows took place as early as 2005, benefited banks’ derivative portfolios, which traders were managing or directing. Fraudulent lowering of Libor by the Libor panel banks, and connivance between bank traders and submitters, would become the basis for lawsuits brought by investors, some of which have been dismissed while others are still working their way through the court system.


While Barclays and some other banks had to pay large fines to settle cases following revelations of wrongdoing in 2012, in the end, these fines were relatively small in relation to what banks typically write off in loan losses each year, which is viewed as a normal cost of doing business. Since then, banks have managed to put the scandal largely behind them and no doubt view this ability to do so as a success, as their annual reports have suggested. And with Libor slated to be discontinued and replaced with another benchmark established by regulators after 2021, this chapter in banker malfeasance will have all but passed.


Part 2 of this article, which we will post later this week, looks at whether there was a third dimension to the Libor rigging scandal that authorities missed. 


JOHN SUMMA is an independent researcher, author, and economist. He has taught economics since 1989, most recently at the University of Vermont (2009–2017). He is currently working on a book about his teaching experience at the University of Vermont (chronicled at his blog,, titled Class Canceled: Silencing a Lone Voice of Dissent. He can be reached by sending an email to


SOURCES: Alexis Stenfors, Barometer of Fear: An Insider’s Account of Rogue Trading and the Greatest Banking Scandal in History, (Zed Press, 2017); Matt Taibbi, “Banks Sued for Libor Collusion—Again!” Rolling Stone, July 26, 2019 (; David Enrich, The Spider Network: How a Math Genius and a Gang of Scheming Bankers Pulled Off One of the Greatest Scams in History (Harper Collins, 2017); Black Knight, Inc., Mortgage Monitor Report, November 2017 (; United States Department of Justice, Criminal Division, Fraud Section and UBS AG, “Statement of Facts,” December 18, 2012 (; Connan Andrew Snider and Thomas Youle, “Does the LIBOR Reflect Banks’ Borrowing Costs?” Social Science Research Network, April 2, 2010 (; Caroline Binham, “US Woman Takes on Banks Over Libor,” Financial Times, October 15, 2012 (; Halah Touryalai, “Banks Rigged Libor To Inflate Adjustable-Rate Mortgages: Lawsuit,” Forbes, October 15, 2012 (; Martin Neil Baily, Robert E. Litan, and Matthew S. Johnson, “The Origins of the Financial Crisis,” Fixing Finance Series—Paper 3, The Brookings Institution, November 2008 (; Federal Housing Finance Agency, “Residential Mortgage Debt Outstanding—Enterprise Share, 1990–2010” (; Yuliya Demyanyk and Yadav K. Gopalan, “Subprime ARMs: Popular Loans, Poor Performance,” Federal Reserve Bank of St. Louis, April 1, 2017 ( Liam Vaughan “UBS Gave Out ‘Instruction Manual on Fixing Libor,’ Hayes Said,” Bloomberg News, June 18, 2015 (; Jerome Powell and J. Christopher Giancarlo, “How to Fix Libor Pains,” Wall Street Journal, August 3, 2017 (; Liam Vaughan, Gavin Finch, and Jesse Westbrook, “Life as LIBOR Traders Knew It Seen as Abusive,” Bloomberg News, March 15, 2011 (; Jamie Dunkley and Harry Wilson, “UBS accused of manipulating LIBOR,” The Telegraph, March 15, 2011 (; Sharon E. Foster, “LIBOR Manipulation and Antitrust Allegation,” DePaul Business and Commercial Law Journal (Vol 11, Issue 3, 2011); Annie Bell Adams, et al. v. Bank of America, et al., The United States District Court for the Southern District of New York, October 4, 2012.


DATA SOURCES: The Federal Reserve Board (; The Federal Reserve of St. Louis Economic Data (FRED database,; ICE Libor (; Black Knight, Inc. (; Mortgage-X Mortgage Information Services (; Federal Housing Finance Agency (

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