After Fraud, the Fog Around Libor Hasn’t Cleared

The Libor market, we now know, was a fraud. There were few â€" if any â€" real trades backing the indicator.

The Dutch lender Rabobank settled charges related to the Libor scandal with authorities in the Netherlands, Britain, Japan and the United States.

This week the scandal claimed its second top European banker and treated us to more of those delightful emails and electronic chats in which traders discuss their deceptions.

“Don’t worry mate â€" there’s bigger crooks in the market than us guys!” wrote an official of Rabobank, the large Dutch lender, after he agreed to a request from one of the bank’s traders in 2007 to submit a phony rate for Libor rates in yen.

He was right about that. As more cases are disclosed, there will no doubt be more big fines and more assurances from senior executives that they had no idea what was going on.

Even without fraud, Gary Gensler, the chairman of the Commodity Futures Trading Commission, said this week in a speech at Harvard, Libor rates “are basically more akin to fiction than fact.”

Unfortunately, nothing fundamental is being changed. Libor lives on. Regulators who wanted to change that, most notably Mr. Gensler, have been outmaneuvered by those who did not want to risk damaging one of the biggest and most lucrative markets around.

This week’s penitent financial institution, Rabobank, showed just how international a fraud this was. The bank settled with authorities in the Netherlands, Britain, Japan and the United States. The authorities said the fraud was carried out by more than two dozen traders and managers at the bank’s offices in London, New York, Utrecht, Tokyo, Singapore and Hong Kong. The bank’s chairman resigned.

When the Libor scandal exploded last year, with Barclays as the initial villain, there was a narrative that made the violations seem understandable and perhaps provoked at least a little sympathy for the banks. They had lied about their borrowing costs during the financial crisis, concealing how difficult a time they were having. Perhaps they should not have done so, but who was really harmed?

It turns out that the financial crisis did not cause the fraud; it merely made it so obvious that regulators finally noticed. It had been going on for years, aided by an international culture that treated market manipulation as a matter of course. If a bank did not have its own good reason for manipulating the market, then a trader would agree to do so as a favor for a trader at another institution. Why not? Maybe he would need a favor on another day.

“You know, scratch my back, yeah, and all,” a Rabobank trader said after he agreed to a request from a “geezer at UBS” to submit a figure as low as possible. “Yeah, oh definitely, yeah, play the rules,” replied the broker who had relayed the request. The complaint filed by the C.F.T.C., which included the exchange, helpfully explained that the “geezer” was a senior yen trader at the Swiss bank. It did not give his age.

Libor â€" the London interbank offered rate â€" is supposed to represent the costs that each bank would face if it received an unsecured deposit from another bank. Each day, banks report Libor rates for maturities ranging from overnight to 12 months, in numerous currencies. The announced Libor rates are based on averages of bank submissions. In Europe, there is a similar Euribor. Banks cheated on both.

“In the U.S.,” Mr. Gensler said in his speech, “Libor is the reference rate for 70 percent of the futures market and more than half of the swaps market. It is the reference rate for more than $10 trillion in loans.”

Such a huge market created ample incentives to cheat. Sometimes traders wanted to influence the rate so that their derivatives positions would benefit. Other times banks knew that a lot of loans they had made had interest rates that would reset on a certain day, based on a particular Libor rate. Then they wanted to push that rate up, if only for one day.

At Rabobank, the people who submitted the Libor number each day were not even trained to determine what the real market rate was. If there was no request from someone at the bank to push rates up or down, the submitters were told to just repeat the previous day’s number.

All of this makes it appear as though Rabobank got off easy, even though it will pay more than $1 billion to settle with all the prosecutors and regulators.