The loan-backed securities will be pegged to a new interest rate benchmark from Top officials, including the Bank of England governor, are pushing firms here to adopt a specific benchmark for dollar borrowing.
Officials at the state and federal level are writing fallbacks for some of the thorniest Libor-linked contracts into law. They might be inadequate. Bankers worried about the risks of the replacement for global borrowing benchmark. Congress must act on the only viable solution as benchmark is phased out. UK regulators want to smooth shift to alternative benchmarks. Former UBS and Citigroup trader was first to be found guilty in global conspiracy to manipulate benchmark interest rate.
Financial industry has been struggling to make the shift away from the US dollar rate. Financial institutions are under pressure to move faster on their switch from the scandal-hit benchmark.
Reform of lending rate embedded in everything from mortgages to derivatives poses huge challenges. Scandal-hit interbank lending rates need reform starting with greater accountability. Central bank makes it tougher to borrow against the tainted benchmark.
Setting a price would make it easier to run economic models and explain choices to voters. Banks have until September to stop issuing cash products linked to sterling benchmark.
Pegging is naturally centralised. Banker overseeing switch to Sofr says change is coming despite rate volatility. Anti-fraud agency criticised for not ending investigation sooner.
Manage cookies. If you think the same, join us. Libor scandal. Add to myFT Digest. Thursday, 4 November, Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years. Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.
With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree. Select Region. United States. United Kingdom. Miranda Marquit, Benjamin Curry. Contributor, Editor. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
Understanding Libor Libor provides loan issuers with a benchmark for the interest rates they charge on different financial products. How Is Libor Calculated? Libor Scandals and the Financial Crisis Libor is on the way out as a loan benchmark because of the role it played in worsening the financial crisis as well as scandals involving Libor manipulation among the rate-setting banks.
Libor and the Financial Crisis The use and abuse of credit default swaps CDS was one of the major drivers of the financial crisis. Libor Manipulation In , extensive investigations into the way Libor was set uncovered a widespread, long-lasting scheme among multiple banks—including Barclays, Deutsche Bank, Rabobank, UBS and the Royal Bank of Scotland—to manipulate Libor rates for profit. Will Libor Disappear in ?
Was this article helpful? Share your feedback. Send feedback to the editorial team. Rate this Article. Thank You for your feedback! Something went wrong. In the opaque, over-the-counter derivatives market, where there is no centralised exchange, brokers are at the epicentre of information flow. That puts them in a powerful position. Only they can get a picture of what all the banks are doing. While brokers had no official role in setting Libor, the rate-setters at the banks relied on them for information on where cash was trading.
Most traders looked down on brokers as second-class citizens, too. Hayes recognised their worth. He saw what no one else did because he was different. His intimacy with numbers, his cold embrace of risk and his unusual habits were more than professional tics.
Hayes instant-messaged one of his trusted brokers in the City to tell him what direction he wanted Libor to move. Typically, he skipped any pleasantries. Whenever one of the Libor-setting banks called and asked his opinion on what the benchmark would do, the broker said — incredibly, given the calamitous news — that the rate was likely to fall.
Libor may have featured in hundreds of trillions of dollars of loans and derivatives, but this was how it was set: conversations among men who were, depending on the day, indifferent, optimistic or frightened. When Hayes checked the official figures later that night, he saw to his relief that yen Libor had fallen. Hayes was not out of danger yet. Over the next three days, he barely left the office, surviving on three hours of sleep a night.
Hayes messaged an insider at ICAP and instructed him to skew the predictions lower. Amid the chaos, Libor was the one thing Hayes believed he had some control over.
He cranked his network to the max, offering his brokers extra payments for their cooperation and calling in favours at banks around the world. By Thursday, 18 September, Hayes was exhausted. This was the moment he had been working towards all week.
If Libor jumped today, all his puppeteering would have been for nothing. For the umpteenth time since Lehman faltered, Hayes reached out to his brokers in London. Whatever you want, all right? The yen rate had fallen 1 basis point, while comparable money market rates in other currencies continued to soar. He pulled off his headset and headed home to bed. First and foremost he was a market-maker, providing liquidity to his clients, who were mostly traders at other banks.
From the minute he logged on to his Bloomberg terminal each morning and the red light next to his name turned green, Hayes was on the phone quoting guaranteed bid and offer prices on the vast inventory of products he traded. Hayes prided himself on always being open for business no matter how choppy the markets. It was his calling card.
Hayes likened this part of his job to owning a fruit and vegetable stall. Buy low, sell high and pocket the difference. But rather than apples and pears, he dealt in complex financial securities worth hundreds of millions of dollars. His profit came from the spread between how much he paid for a security and how much he sold it for.
In volatile times, the spread widened, reflecting the increased risk that the market might move against him before he had the chance to trade out of his position. The thing that really set Hayes apart was his ability to spot price anomalies and exploit them, a technique known as relative value trading.
It appealed to his lifelong passion for seeking out patterns. During quiet spells, he spent his time scouring data, hunting for unseen opportunities. If he thought that the price of two similar securities had diverged unduly, he would buy one and short the other, betting that the spread between the two would shrink.
Everywhere he worked, Hayes set up his software to tell him exactly how much he stood to gain or lose from every fraction of a move in Libor in each currency. Each time Hayes made a trade, he would have to decide whether to lay off some of his risk by hedging his position using, for example, other derivatives. He liked to think of it as a living organism with thousands of interconnected moving parts.
It covers about everything there. This book started with a series of articles you did for The Wall Street Journal several years ago. He was accused, at the end of , of being the central figure in this scandal by both American and British prosecutors. Right around that time, I started to get to know Tom Hayes really well personally. I got to know him really well, his wife really well, and the rest of his family as well. And that gave me this interesting glimpse into the world in which Hayes was operating.
Knowledge Wharton: Was it surprising to you that you had such free access to the guy who essentially started this whole scam? I was stunned by the serendipity of the thing.
This all got started because Hayes was the central person who had been accused by prosecutors. Not a whole lot was known about him, so I started talking to some of his friends and former business school classmates. Not even the Justice Department knows the full story. He offered to meet me the following morning at a really busy train station in London outside a Burger King.
He ended up canceling the next morning because his wife had somehow seen his text messages to me, and his wife was a lawyer and thought this was a really bad idea. It was much more a story about a financial system run amok, and how the overall banking system encouraged, more or less, this type of behavior not just from Hayes but from a really wide range of people, including a lot of his superiors who ended up not suffering particularly severe consequences from that.
Every day around lunchtime in London, some of the worlds biggest banks, including a bunch of American ones, estimate how much it would cost them, theoretically, to borrow money from another bank.
They then take that number, and zip it over in an email to the British Bankers Association, which is basically a lobbying group in London. The BBA tosses out the high and low estimates, and then averages the rest. Then — presto! But the bigger issue is that when companies borrow money, the interest rate they pay is often based on LIBOR. And if towns or cities or pension funds or university endowments are looking to protect themselves against swings in things like interest rates, they often use instruments that are tied to LIBOR.
So if LIBOR is being skewed by banks, it has the potential to ripple through the financial system in a way that almost no other type of manipulation has the power to do. Knowledge Wharton: How did Tom Hayes, with his mathematical background, fit into this puzzle? Was it because he was able to gauge what these markets were going to do, and what the impact was going to be so that potentially the banks could profit? Enrich: Well, yes. He was really building on the important work done by some of his predecessors.
Because starting about 20 years ago, when LIBOR became increasingly prevalent in the financial system, a lot of traders at banks realized — and these are guys, by the way, that are transacting in huge volumes of derivatives that are based on LIBOR. So they stand to gain or lose a lot of money based on very small movements in LIBOR up or down, on a daily basis.
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