Mackenzie weighs in on Libor

March 13, 2012

Donald Mackenzie was quoted in this article on Bloomberg today: “Tainted Libor Guessing Games Face Replacement by Real Trades“.

“Libor, a gauge of how much it costs banks to borrow from one another, is so deeply embedded in the financial system it can’t be replaced without potentially voiding existing contracts, academics said. “


One Response to “Mackenzie weighs in on Libor”

  1. danielbeunza Says:

    Thanks Martha for the heads up. Your post led me back to Donald’s original piece on the LIBOR. It is, as he rightly puts it, part of the plumbing of the system, and wont be easy to improve. There are two paragraphs that are particularly revealing about the current problem.

    The calculation of Libor is co-ordinated by just two people, who work in an unremarkable open-plan office in London’s Docklands. I watched the process, which seemed utterly routine, a couple of years ago. Just after 11 a.m. on every weekday that’s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn’t sent in its estimates, and if the latter seem implausible – typos, for example, are fairly common – they’re checked, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? … Bit of a spread on the two month. Everyone else is coming in a good bit under that.’

    The obvious risk to the integrity of the calculation is that a bank on a Libor panel might make a manipulative input, trying to move Libor up or down so as to influence interest rates or the value of its swaps portfolio. That risk is the main reason for the exclusion from the calculation of the highest quarter and lowest quarter of inputs. Furthermore, once a day’s Libor rates are set, each input – and the name of the bank that has made it – is also disseminated electronically, and so attempts at manipulation would have to take place in what is in effect the public gaze. The inputs to Libor can be viewed around 45 minutes after they are made on more than 300,000 computer terminals worldwide, and they are thoroughly scrutinised.

    See the rest at:

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