Libor Rigging: When a Benchmark Was Bent (2012) - QuickFinanceStories

Every morning, the world's biggest banks answered one simple question: "What rate would you pay to borrow money?" Their answers set Libor. The London Interbank Offered Rate. The benchmark for $350 trillion in financial products worldwide.

They were lying. This is the story of the Libor scandal. Libor was supposed to be honest.

Each day, major banks reported what it would cost them to borrow from other banks. Throw out the highest and lowest numbers. Average the rest.

That average became the most important number in global finance. Mortgages in America. Student loans.

Credit cards. Car loans. Corporate debt.

Government bonds. Trillions in derivatives. All tied to this one number.

If they could nudge Libor by even a fraction of a basis point, they could make millions on their derivative positions.

The system relied entirely on trust. Banks self-reported. Nobody verified.

And that was the problem. Traders discovered something powerful. If they could nudge Libor by even a fraction of a basis point, they could make millions on their derivative positions.

So they started asking their colleagues who submitted the rates for favors. "Can you set 3-month Libor a bit lower today?" "Would really help my position." "I'll buy you a coffee." These weren't whispered conversations in dark alleys. They were emails.

Bloomberg chat messages. Recorded phone calls. Traders were bragging about it.

And it went on for years. During the 2008 financial crisis, it got even worse. Banks deliberately lowballed their submissions to look healthier.

If your borrowing rate looks high, the market thinks you're desperate. So every bank pretended to be fine. They all lied together.

When investigators from the U.S. and UK finally started looking, they found a decade of systematic manipulation. Barclays was fined first - $450 million. Then UBS - $1.5 billion.

Deutsche Bank - $2.5 billion. Royal Bank of Scotland. Rabobank.

Lloyds. All guilty. Total fines exceeded $9 billion.

Several traders went to prison. Barclays CEO Bob Diamond was forced to resign. And Libor itself was eventually phased out and replaced.

The scandal proved something deeply disturbing: The most important number in global finance was whatever the banks wanted it to be. Trust nothing. Verify everything. Especially when the people setting the rules are also playing the game.