The smoking gun that Libor was manipulated (hint: it’s a chart!)

July 11, 2012

As I mentioned in my explainer last week, the London InterBank Offer Rate (or Libor), which Barclay's and other banks stand accused of manipulating both before and during the financial crisis, is an average of the rates at which London banks lend to each other. In 2008, a competitor, the New York Funds Rate (NYFR) emerged, which did much the same thing with interbank lending in New York.

The main difference is that the rates from which NYFR is calculated are submitted anonymously. The idea is that the main reason for banks to artificially raise or lower their rate reports, especially during a nascent financial crisis is to signal their institution's strength, which is impossible if the reports are anonymous. The Center for Geoeconomic Studies at the Council on Foreign Relations has thrown together a chart comparing the two throughout 2008. Most of the time, they're extremely close to each other. Then they diverge at the exact point in time that banks are alleged to have manipulated Libor:

Interestingly, the economists Connan Snider of UCLA and Thomas Youle of the University of Minnesota released a paper two years ago, well before the scandal broke, using the NYFR-Libor discrepancy to argue that Libor was being manipulated to improve bank trading positions. Way to beat the Justice Department to it, guys.

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Sarah Kliff · July 11, 2012