Libor: The Rise and Fall of ‘The World’s Most Important Number’

  • A history of the once-ubiquitous benchmark interest rate
  • For fifty years Libor has been a constant presence in markets

FCA's Bailey Says No Market to Support Libor

For half a century, the London interbank offered rate -- better known as Libor -- has been a constant presence in financial markets. After starting as a simple interest rate used in syndicated loans, its importance ballooned when banks began using it to determine the floating leg in derivatives contracts.

Before long it was a feature in everything from sub-prime mortgages and student loans to the $1 trillion in bailouts given to US banks during the financial crisis.

The rate is based on a survey, and scandal struck when it emerged in the aftermath of the financial crisis that traders around the world had been lying about borrowing costs in a bid to nudge the rate to suit their trading positions. At the same time, senior managers ordered staff to low-ball their banks’ submissions to give the impression they were healthier than they were.

Nearly a decade later, authorities around the world are still trying to wean markets off Libor in favor something less prone to manipulation. Andrew Bailey, the chief executive of the Financial Conduct Authority, says he wants to scrap Libor by 2021. Here are some of the key moments in the benchmark’s chequered history.

In 2015 former UBS and Citigroup trader Tom Hayes became the first trader to be convicted of rigging Libor.
Photographer: Simon Dawson/Bloomberg
  • 1969: A Greek banker named Minos Zombanakis struck a pioneering deal whereby a group of lenders would provide the Shah of Iran with an $80 million loan whose interest rate would be recalculated every few months based on the banks’ funding costs at the time. It was one of the first syndicated loans and (probably) the first to charge a variable rate of interest that was determined by a survey, laying the groundwork for an explosion in corporate lending.
  • 1986: As syndicated lending grew, so did demand for a standardized, universally accepted rate, and in 1986 the British Banker’s Association formulated LIBOR. Each morning, the BBA asked a panel of the world’s biggest banks how much it would cost them to borrow in various currencies and for periods ranging from overnight to a year. It then calculated an average for each and published the figures at midday. The BBA would later describe Libor as “the World’s Most Important Number.”
  • 1997: Libor’s use grew exponentially with the explosion of interest-rate swaps in the late eighties and early 1990’s. When the Chicago Mercantile Exchange opted to adopt Libor to calculate the value of its ubiquitous Eurodollar futures contract in 1997, it became the most-watched number on the trading screens of thousands of traders around the globe.
  • 2008: The first public signs of trouble for Libor came in the early days of the financial crisis, when the Wall Street Journal published an article suggesting banks were low-balling their figures to avoid the perception they were having trouble borrowing. The BBA denied it, but insiders knew that the market for interbank lending had dried up, meaning banks were essentially making up their figures each morning.
  • 2012: Barclays became the first bank to settle with the authorities over allegations it rigged Libor. In addition to low-balling, the settlement documents made clear that traders had been nudging the rate up and down for years to boost their profits. Cue public outrage and the resignation of the bank’s CEO Bob Diamond. In the years that followed, close to a dozen banks and brokers were implicated in the scandal, paying out $9 billion in fines.
  • 2015: Tom Hayes, a former UBS and Citigroup trader dubbed “rain man” by his peers, became the first trader to be convicted of rigging Libor. He was given 14 years in jail (later cut to 11) after a trial that dominated the business pages for weeks. Only a handful of other bank employees have faced criminal charges globally. Hayes maintains his innocence and has launched an appeal to have his case re-considered. Several of his alleged co-conspirators were acquitted.
  • 2017: The FCA’s Andrew Bailey calls time on Libor. The regulator says the era of expert estimates for benchmarks has come to a close and he seeks to implement a new system based on actual transactions by the end of 2021.
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