The global investigation into the manipulation of the London interbank offered rate has so far done a good job of exposing how bankers corrupted one of the world’s most important financial indicators. Now authorities need to take a giant step further: make banks release the data needed to determine how much damage was done and who should bear the most responsibility.
Investigators are focusing on two kinds of manipulation. In one, bankers submitted false data to push Libor in a direction that would benefit their own traders. In the other, bankers intentionally lowered the reported rates, which are published daily, to make their institutions’ financial positions look better than they really were. In June, for example, Barclays paid about $450 million in fines after confessing that, during the 2008 financial crisis, it lowered its quotes below its true borrowing rates to keep them in line with those of other banks, which Barclays thought were fudging even more.
How long the lying went on, and how systematic it was, matters a lot. If, for example, underreporting caused Libor to be artificially depressed by 0.1 percentage point for only a few months, payments on more than $300 trillion in mortgages, corporate bonds, and derivatives tied to the benchmark might have fallen short by about $75 billion or so. If the problem lasted a few years, the shortfall could be close to $1 trillion.
To give a more complete picture of the misbehavior, and to establish what share of the compensation burden each Libor- reporting bank should bear, researchers need access to better data on actual borrowing costs. If they could get records of observable transactions, they could produce an independent estimate of how much the banks’ Libor quotes were off on any given day. Such an authoritative benchmark would have many benefits: Plaintiffs, for example, could use it to reach settlements with banks, avoiding legal wrangling that could weigh on the financial sector for years.
It’s up to the authorities investigating Libor to break the information blockade. In the U.S., for example, the Office of Financial Research, set up by the Dodd-Frank financial reform act, has the subpoena power needed to get the data and the brain power required to crunch the numbers. Ideally, it would also make the data public, so independent academics and journalists could check its work.
Shedding light on the extent of Libor manipulation is essential to restoring the market’s integrity. The point of justice, after all, isn’t only to punish the guilty. It’s also to establish the truth so we can draw the right conclusions, fix what needs fixing, and move on.