LIBOR Manipulation: Maybe We Should Have Seen It Coming

The LIBOR manipulators have shocked the world, but maybe everyone shouldn’t be so shocked. Surely some studies were done, and while it seems no one found anything concrete enough to impact the system, there have been hints along the way, however immaterial.

A few researchers in particular questioned the honesty of the LIBOR system in a paper submitted in back March of 2009.

On May 29, 2008 the Wall Street Journal published an article alleging that several global banks were reporting Libor quotes significantly lower than those implied by prevailing credit default swap (CDS) spreads. While acknowledging that the ‘‘analysis doesn’t prove that banks are lying or manipulating Libor,’’ it nevertheless conjectures that these banks may ‘‘have been low-balling their borrowing rates to avoid looking desperate for cash.’’
In this paper we compare Libor with other short-term borrowing rates, analyze individual bank quotes, and compare these individual quotes to CDS spreads and market capitalization data during three periods:
1/1/07–8/8/07 (Period 1), 8/9/07–4/16/08 (Period 2), and 4/17/08–5/30/08 (Period 3). We find some anomalous individual quotes, but the evidence is inconsistent with a material manipulation of the US dollar
1-month Libor rate.

The full paper has all kinds of interesting data on LIBOR, CDS spreads, and the fed funds rate.