David Merkel analyzes LIBOR submissions from the crisis.
My initial diagnosis is this: whether formally or informally, you have two groups of banks submitting rates for LIBOR. One group is trying to pull LIBOR up, the other is trying to pull LIBOR down. Statistically, if I add up their intercept terms from the first table, they both sum to 0.23%, one positive, the other negative. Even if LIBOR were a simple average, which it is not, this is a colossal game of tug of war, with two equal teams.
As it is, LIBOR excludes the outliers, and calculates an average off of those that remain. It’s a difficult measure to manipulate. There may have been attempts to manipulate LIBOR, and even two groups of banks trying to pull LIBOR their own way, but successful systemic manipulation of LIBOR is unlikely in my opinion.
One thing I didn’t fully understand when I was reading about the scandal was what would motivate these traders to want to influence the submissions. How could they benefit?
Could it be that half of these banks were on one side of a giant credit trade and half on the other? Talk about a zero-sum game!