More or Less: Who are the Libor losers? (WS)

Summary

More or Less: Who are the Libor Losers? (WS)

Podcast: More or Less
Host: Tim Harford, BBC Radio 4
Date: July 14, 2012

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Overview

This episode of More or Less dives deep into the Libor scandal, moving beyond headlines about Barclays’ $450 million fine for manipulating the benchmark interest rate. Tim Harford and guests break down what Libor is, how it is calculated, how manipulation could take place, and—most critically—who suffered as a result. The show draws on archival reporting inside Libor calculation offices and interviews with finance, legal, and journalistic experts to clarify a complex, impactful topic.

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Key Discussion Points and Insights

1. What is Libor and Why Is It Important?

• Definition: Libor (London Interbank Offered Rate) is “the benchmark figure intended to summarise how much interest banks have to pay when they borrow money from other banks” (Tim Harford, 01:55).
• Scale: Contracts referencing Libor are “worth somewhere between 150 and $160 trillion” (John Ewen, 01:35).
• Calculation Timing: Every day at 11am, a group of banks report what their hypothetical borrowing rates would be across multiple currencies and durations.

2. How Libor Is Calculated

• Process:
  • Banks submit their rates.
  • Highest and lowest quartiles are excluded.
  • Libor is the arithmetic average of the remaining quotes.
• Reasoning: This is designed “so that no one bank can put undue influence over the rate and you get a straight average” (Brian Martin, 03:31).

Memorable Explanation—How a Single Bank Might Influence Libor

• Tim Harford demonstrates with a simple four-bank example that discarding top and bottom values does not preclude manipulability:

  “By moving from being the lowest quote to the highest quote, Barclays influences which other numbers will count. Libor will be the average of 3% and 4%. In other words, it's moved from 2.5% to 3.5%.” (Tim Harford, 03:39-04:57)

3. Actual Scale of Manipulation

• Pre-crisis Stability: Libor historically moved within a “narrow range,” limiting manipulation impact.
• Magnitude: Even successful attempts “really found evidence…of it moving it by, you know, sort of half a basis point, 1 2/200th of a percent. Yeah, so it's really small, small amounts.” (Jonathan Rosenthal, 04:58)
• Collusion: Manipulation may be more severe if “a few banks acting in concert,” as indicated by trader email exchanges. (Jonathan Rosenthal, 05:40)

4. Who Are the Libor Losers?

• Potential Losers: “The potential pool of losers is vast…it could range from big companies, in certain instances, individuals, pension funds, insurance companies, note holders…” (Leanne Craig, 06:24)
• Case Example: The City of Baltimore, leading a class action suit, was “on the wrong side of hundreds of millions of dollars of interest rate swaps and so has potentially suffered astronomical losses as a result of the downward manipulation of Libor by the banks.” (Leanne Craig, 06:50)

5. Why Did the British Bankers Association Not Act Sooner?

• In 2008, BBA officials did not believe Libor manipulation was a problem, arguing their contributor selection made the process reliable:

  “That hasn’t actually been a problem for us ever.” (John Ewen, 08:27)

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Notable Quotes and Memorable Moments

• On Libor’s Importance:

  “That’s a one followed by 12 zeros, which is why we take such a great deal of care in making sure that the figures are accurate every day.”
  — John Ewen, 01:48

• On Manipulation’s Limits:

  “If one looks at what the FSA has accused Barclays of doing, they've really found evidence, in fact, of it moving it by, you know, sort of half a basis point, 1 2/200th of a percent.”
  — Jonathan Rosenthal, 04:58

• On Swaps and Losses:

  “The City of Baltimore was on the wrong side of hundreds of millions of dollars of interest rate swaps and so has potentially suffered astronomical losses as a result of the downward manipulation of Libor by the banks.”
  — Leanne Craig, 06:50

• On Regulatory Oversight:

  “We try very hard when we are sorting out the banks that contribute to the fixing process to make sure that we have the biggest, best capitalized, most liquid banks. So that hasn't actually been a problem for us ever.”
  — John Ewen, 08:27

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Important Segment Timestamps

• [01:35] – Trillions at stake: Libor’s reach explained.
• [03:17-03:39] – Calculation methodology and rationale for discarding extremes.
• [03:39-04:58] – Example: how a single bank can move Libor.
• [04:58-06:02] – Scale of manipulation and evidence of collusion, from Jonathan Rosenthal.
• [06:24-07:13] – Who is hurt by manipulation, with Leanne Craig.
• [08:11-08:45] – Questioning the BBA in 2008 about the potential for dishonesty.

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Conclusion

This episode provides listeners with deep, statistical insight into the mechanics and consequences of Libor manipulation, demystifying how seemingly tiny tweaks to this benchmark can have massive ripple effects. The conversation is technical yet accessible, moving from how Libor is set each day to the real-world impact felt by cities, companies, and ordinary people. The episode closes with a subtle critique of regulatory oversight, referencing direct questioning of the British Bankers Association in 2008.

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Presented in the curious, skeptical tone of Tim Harford, “More or Less” continues to illuminate the statistical stories behind the financial headlines.

Transcript

[BBC Announcer]

Thank you for downloading from the BBC. For details of our complete range of podcasts and our terms of use, go to bbcworldserveys.com podcasts

[Tim Harford]

hello and welcome to More or Less on the BBC World Service. A statistical rainbow. Amidst a downpour of dubious numbers over the past fortnight, one number has been grabbing all the attention on the dance floor of news.

[Jonathan Rosenthal]

Libor.

[John Ewen]

Libor.

[Jonathan Rosenthal]

Libor.

[Tim Harford]

Libor.

[Jonathan Rosenthal]

Libor.

[Tim Harford]

Libor.

[John Ewen]

Libor. Libor.

[Jonathan Rosenthal]

Libor. Libor.

[Tim Harford]

You probably know the following. Libor is a financial number, it's important and Barclays bank has been fiddling it and has been fined $450 million for doing so. But judging from your emails, you want us to go a little deeper than that. And in fact, this isn't the first time that more or less has wrestled with the mighty Libor. Back in late 2008, as the world was still reeling from the collapse of Lehman Brothers more or less talked its way into the office in London's Canary Wharf where Libor is calculated every morning. We were the first journalists to do so.

[Reporter]

We've just walked into the Thomson Reuters offices, which is the front end of the operation that gathers the Libor numbers. Standing with us are Brian Martin of Thomson Reuters and John Ewen of the British Bankers association, which employs Thomson Reuters to collect these Libor figures. John, what's the value of these contracts that are linked to Libor?

[John Ewen]

Well, the contracts that are between banks and large financial institutions we think are worth Somewhere between 150 and $160 trillion.

[Reporter]

150 or $160 trillion.

[John Ewen]

That's right, yes. So that's a one followed by 12 zeros, which is why we take such a great deal of care in making sure that the figures are accurate every day.

[Tim Harford]

Let's just remind ourselves of the basics. LIBOR is not what bankers do at dinner parties, but the London Interbank offered rate. It's the benchmark figure intended to summarise how much interest banks have to pay when they borrow money from other banks.

[Brian Martin]

It's just coming up to 11 o', clock, so the banks have got a 10 minute window to contribute their Libor rates.

[Reporter]

Brian Martin is just dialing through to the remote office.

[John Ewen]

Hello?

[Brian Martin]

Hey guys, how's it going? You're now being taped.

[John Ewen]

Okay, okay. Yep.

[Reporter]

Just got a microphone in front of the speakerphone connected to the treasury team, which is in a town about 150 miles away and we can't say where it is.

[Tim Harford]

When we went to Thomson Reuters, they made quite a noise about their off site backups. Anti terrorism contingencies, uninterruptible power supply and so on. But for all that fuss, the way all these Libor rates are calculated is pretty simple. At 11am, banks call the Libor office to report how much interest they'd have to pay if they were to borrow money that morning in several currencies and for different loan durations. It's hypothetical. You don't actually have to borrow money. You're reporting what those loans would cost you if you did. All those reported interest rates are then averaged, although, and this is important, the top and bottom quartiles are excluded.

[Reporter]

Is Libor simply an average of the rates you receive, or do you discard some of the data before you take the average?

[Brian Martin]

Yes, we do. We discard the upper and lower quartile.

[Reporter]

What's the thinking behind that way of calculating it?

[Brian Martin]

The thinking is that there's no one bank can put an undue influence over the rate and you get a straight average.

[Tim Harford]

Let's stop the tape there. At first glance, you might think it's impossible for a single bank to influence Libor, because when Thomson Reuters ring round and get their quotes, they discard the highest and lowest ones. But when you think about it a bit more, you realise a single bank can move the rate. Just to keep it really simple, imagine there are four banks. Barclays quotes 1%, bank 2 quotes 2%, bank 3 quotes 3% and bank 4 quotes 4%. Now, the top and the bottom quotes will both be discarded. Libor will be the average of 2 and 3%. In other words, 2.5%. Now, let's say Barclays wants to get Libor up. Instead of quoting 1%, it quotes 5%. Assume all the other banks quote the same as before. Now Barclays quote will be discarded again. But by moving from being the lowest quote to the highest quote, Barclays influences which other numbers will count. Libor will be the average of 3% and 4%. In other words, it's moved from 2.5% to 3.5%. In reality, what an individual bank can do is likely to have quite a subtle effect, measured in basis points, which are 100th of a percentage point. But with enough cash on the line, that's sufficient for a trader to make money. Here's Jonathan Rosenthal, banking editor of the Economist.

[Jonathan Rosenthal]

Up until the financial crisis, Libor actually moved in a really narrow range and all of the bids were in a pretty narrow rang. So it would have been quite difficult to move Libor by very much. And one really does end up talking about you know, potentially a basis point or so or even less. And if one looks at what the FSA has accused Barclays of doing, they've really found evidence, in fact, of it moving it by, you know, sort of half a basis point, 1 2/200th of a percent. Yeah, so it's really small, small amounts. Where it becomes slightly more complex is we do know there were at least attempts by banks or traders at banks, I should say, to act together. So there have been emails between sort of a trader at Bank A to a trader at Bank B saying, can you also get your submitter to fiddle the rate? And in fact, in one of those emails, one of the traders says, let me tell you how you do this. You don't do it alone. So I suppose it becomes complicated once you have a few banks acting in concert, then the potential to move libel by slightly larger amounts is possible.

[Tim Harford]

So who might actually have lost as a result of the Libor manipulation? I spoke to Leanne Craig, a partner in the law Firm Hausfeld and company. Housefeld's U.S. sister company is taking a leading role in a class action lawsuit against the banks on behalf of companies, individuals and even municipalities such as the City of Baltimore who think they've lost money. Who better to state the case for the prosecution?

[Leanne Craig]

Well, the potential pool of losers is vast and as you say, it could range from big companies, in certain instances, individuals, pension funds, insurance companies, note holders, entities, and individuals like that.

[Tim Harford]

The City of Baltimore is at the vanguard of this class action suit. So what did they do? Why did the Libor manipulation hurt them?

[Leanne Craig]

Essentially, the City of Baltimore was on the wrong side of hundreds of millions of dollars of interest rate swaps and so has potentially suffered astronomical losses as a result of the downward manipulation of Libor by the banks. What the resulting damage then is as a result of a manipulation of Libor? That remains to be ascertained.

[Tim Harford]

If you're wondering why anyone sensible might be trading these obscure sounding financial instruments, it's pretty simple. Imagine trying to protect yourself against rising interest rates. Instead of getting a fixed rate mortgage, you strike a deal with a bank where they pay you if general interest rates rise and you pay them if general interest rates fall. But instead of general interest rates, which is a vague term, the deal will connect all these payments to a Libor rate. Back in 2008, when more or less visited the Libor offices, it was already suspected by many people that the Libor numbers were a bit iffy. So here's one final question you might like to think. Why didn't the British Bankers association, which manages Libor Act. The answer, it seems, is that unlike many observers, they didn't suspect there was a problem. Here's me in 2008 in the Libor offices with John Ewan from the British Bankers Association.

[Reporter]

If I was a bank and people decided they didn't want to lend me any money at any price because they were worried about my balance sheet, why would I tell Thomson Reuters the truth about my cost of funds?

[John Ewen]

We try very hard when we are sorting out the banks that contribute to the fixing process to make sure that we have the biggest, best capitalized, most liquid banks. So that hasn't actually been a problem for us ever.

[Reporter]

You're sure?

[Tim Harford]

Perhaps fortunately for John Ewan, that's all we have time for this week. Please keep your questions, comments and suggestions coming in to more or lessbc.co.uk and we have a brand new website with print versions of our best stories. It's BBC.co.uk moreorless please check it out and perhaps subscribe to our chart topping podcast. More or Less was presented by me, Tim Harford, the undercover economist at the Financial Times. The producer was Richard Knight and the editor, Richard Varden. Until next week. Goodbye.

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