Masters in Business

The World's Most Important Number

Libor was vulnerable to being tweaked in self-serving ways.

How is it possible that a few clerks at a handful of London banks determine what some call the world’s most important number? This is the topic examined with this week's Master in Business guest, journalist David Enrich of the New York Times, and author of the new book, “The Spider Network: How a Math Genius and a Gang of Scheming Bankers Pulled Off One of the Greatest Scams in History.”

The world's most import number is, of course, a reference to the London interbank offered rate, or Libor, which is used to set interest rates on everything from certain home mortgage loans to obscure derivative contracts. The basic problem with Libor is that it isn't a rate set by market forces, but is a number banks pretty much make up on their own. Traders ended up pressuring their banks' own clerks to nudge Libor up or down a tick as it suited their trading positions. With billions or even trillions of dollars riding on Libor, a basis point or two could make an enormous difference for a bank's profits.

Enrich's book has been optioned for a future film or television show. He won the prestigious Loeb Award while covering the subject for the Wall Street Journal.

His favorite books are cited here; our conversation transcript is available here.

You can stream/download the full conversation, including the podcast extras on iTunesBloomberg and Overcast. Our earlier podcasts can all be found on iTunesOvercast and Bloomberg.

Next week, we sit down with Matthew Kadnar of Grantham Mayo Van Otterlook & Co., where he is a member of the asset allocation committee.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Barry Ritholtz at britholtz3@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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