In its early years, Libor was a growing but still adolescent rate, employed for a steadily increasing number of contracts. In 1986, at age 17, it hit the big time: Libor was taken in by the British Bankers Association, a trade group described later by The New York Times as a “club of gentlemen bankers.”
They effectively made it the basis for virtually all the business they conducted. Libor was the interest rate that banks themselves had to pay, so it offered a convenient base line for the rates they charged customers who wanted to borrow cash to buy a home or issue a security to finance a business expansion.
Libor became a number punched into almost any calculation involving financial products, from the humble to the exotic. The British banks used it to set rates for loans across the industry, whether denominated in dollars, British pounds, euros or Japanese yen. Never before had there been such a benchmark, and Libor’s daily movements were the very heartbeat of international finance.
But as Libor approached middle age, troubling health problems began to emerge.
By 2008, regulators in the United States and Britain began receiving information that banks’ rate reports were amiss. Because Libor relied on self-reported estimates, it was possible for a bank to submit a rate that was artificially high or low, thus making certain financial holdings more profitable.
Soon, news media reports cast doubt on Libor’s integrity, and investigators ultimately uncovered blatant misconduct in the rate-setting process. In one email released by regulators in 2012 as part of an investigation into Barclays, a trader thanked a banker at another firm for setting a lower rate by saying: “Dude, I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger” — a reference to the Champagne producer.
The scandal grabbed international headlines, from the Financial Times to The Wall Street Journal to The New York Times. Before long, Libor was the butt of jokes on “The Daily Show.”