It seems bizarre that something so central to the global markets – $360 trillion of deals are pinned to Libor – should have such a strong element of invention or guesswork. The potential for abuse is immediately apparent. As MacKenzie prophetically said, ‘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.’
Surprise! After the crisis, when investigators were taking an energetic interest in Libor, it turned out that that was exactly what had been happening, not just at one or two banks but across an entire swath of the industry. It’s not a difficult scene to picture. In a small office with no windows, a pointy-headed, glasses-wearing Libor ‘submitter’ – that’s the name of the people who tell the BBA what the notional lending rate is that day – sits in front of a keyboard.
In a large open-plan office with windows on all sides, a roomful of shouting, swearing, meat-eating traders would be able to make enormous amounts of money by betting on Libor if only, if only, they had some way of finding out that day’s rate. If they had some way of actually influencing the rate, it would be even better. They could bet big on it going up, and then help it to go up.
So a sweary, red-meat-eating trader picks up the phone, or fires up his email, or strolls down the hallway towards the submitter’s office and … but wait! The traders are not allowed to talk to the submitters! That would be wrong! And dividing them is an impenetrable barrier, that sacred and potent thing, profoundly respected inside banking, a ‘Chinese wall’. So nothing like this can ever happen! Except that here we would all do well to bear in mind something an experienced Wall Street investor told Michael Lewis: ‘When I hear “Chinese wall” I think “you’re a fucking liar.”’
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