Manipulation of LIBOR

If you haven’t been following the story on the banking industries manipulation of LIBOR rates, I don’t blame you. However, you should. Manipulation of LIBOR is a big deal. Why?

First, The entire adjustable mortgage market is based on the LIBOR rate. The Eurodollar contract ($GE_F) at the CME is the futures contract for those rates where banks hedge. When banks manipulate the settlement price of the contract, that settlement price causes waves to roll through the entire financial marketplace. Overnight Repo rates change and Treasury prices are affected. Even currency prices are impacted since so much of that business is done on margin, and margin borrowing costs are affected by the LIBOR rate.

Second, The LIBOR rate reflects the health of the interbank borrowing markets. Higher rates mean higher risk. Lower rates, lower risk. In the 2008 crash, rates should have skyrocketed reflecting the amount of risk in borrowing from bank to bank.

Proving it will be tough. Along with LIBOR manipulation, traders are sensing manipulation in other markets, especially cash settled commodity markets.

Craig Pirrong has a very good analytical piece on the whole Barclays fiasco. He understands the commodity marketplace better than most economists working today. Click the link and you will understand in depth what went on, and what it will take to prove other frauds in the marketplace.

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