ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The Love and Loathing of Libor

What lies at the heart of the interest rate fi xing in the Libor scandal? A survey of the growth of the Libor market and how the incentive to fi x rates grew with the explosion of derivatives.

For more than two decades, it was an object of veneration. Indeed, the London Interbank Offered Rate or the Libor was the axis around which the western financial universe revolved. It was the benchmark for all financial deals: loans, bonds, mortgages, credit cards, derivatives, swaps or what have you. These transactions are currently e­stimated to exceed $700 trillion. The Libor rate was deemed to be as immutable as the laws of gravity. But now with the fines imposed on the United Kingdom bank, Barclays, for rigging the Libor, the trust imposed in Libor is now in tatters.

Dramatic accounts of abuses of the L­ibor and charges of manipulation or rate rigging by major banks have been published in most of the pink papers which, until recently, were the apologists of the same system. Regulatory agencies on both the sides of the Atlantic have woken up to the serious threat posed to financial stability and investigated the allegations. Investigation has gone on for some years, especially after the eruption of the global financial crisis in 2008. The agencies include the UK F­inancial Services Authority (FSA), the US Commodity Futures Trading Commission (CFTC), the US Department of Justice (DOJ), the US Federal Trade Commission (FTC) and the US Securities and Exchange Commission (SEC).

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