The Libor Flap - A Tempest in a Teacup, But Another Payday for Government and Lawyers

2 Pages Posted: 13 Mar 2014

See all articles by William J. Dodwell

William J. Dodwell

Consultant to Financial Institutions

Date Written: December 19, 2012

Abstract

Reports of manipulated London Interbank Offering Rates (LIBOR) have caused quite a stir given the measure’s global benchmark status for determining short-term lending rates, including variable-rate mortgages and credit cards. But LIBOR itself is just an unaudited aggregation of estimated borrowing costs reported by only 16 banks for over thirty years. Minor falsification is as relatively innocuous as inequities arising from the protean Consumer Price Index (CPI) that governs cost of living adjustments.

Everyone subject to LIBOR is affected by any misrepresentation, and for banks that simultaneously borrow and lend the distortion is offset. On balance, net borrowers will benefit while net lenders will lose. To be sure, the unfair effect on isolated loans and securities is reprehensible, but the macroeconomic fallout is immaterial. Nevertheless, individual cases of LIBOR manipulation present a field day for lawyers and regulators who reap windfalls from settlements that substitute for damages that cannot be precisely assessed.

Keywords: LIBOR, macroeconomic fallout, CPI, TIPS

Suggested Citation

Dodwell, William J., The Libor Flap - A Tempest in a Teacup, But Another Payday for Government and Lawyers (December 19, 2012). Available at SSRN: https://ssrn.com/abstract=2408133

William J. Dodwell (Contact Author)

Consultant to Financial Institutions ( email )

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