The way that global financial markets worked for decades is that trillions of dollars of floating-rate loans and interest-rate derivatives were indexed to Libor, the London interbank offered rate. And the way Libor worked was that someone — at the time relevant to our story it was the British Bankers’ Association — would call up a group of big international banks and ask them “how much would you have to pay right now to borrow dollars for one month,” and they’d answer, and the BBA would take some trimmed average of their answers, and that was one-month dollar Libor. And there were other Libors for other currencies and tenors, computed in the same way.
Most important financial benchmarks do not work this way. The S&P 500 index is not calculated by calling some banks and saying “hey how much would you pay for these 500 stocks” and averaging their answers. The S&P 500 index is calculated based on the last trade of each stock on a public stock exchange. Most indexes are based on actual trades. But Libor was invented because it was very useful, for the floating-rate loan business, to have an index of banks’ unsecured borrowing costs, and unsecured short-term bank debt did not really trade on a transparent public exchange. It traded in an informal, telephone-based interbank market, and the easiest way to find out what trades banks were doing was to call them.