LIBOR Manipulation?

On May 29, 2008, the Wall Street Journal (the Journal) printed an article that alleged that several global banks were reporting unjustifiably low borrowing costs for the calculation of the daily Libor benchmark. Specifically, the writers alleged that the banks were reporting costs that were significantly lower than the rates that were justified by bank-specific cost trend movements in the default insurance market. Although the Journal acknowledged that its "analysis doesn't prove that banks are lying or manipulating Libor," it conjectured that these banks may "have been low-balling their borrowing rates to avoid looking desperate for cash." In this paper, we extend the Journal's study and perform the following analyses: (a) a comparison of Libor with other rates of short-term borrowing costs, (b) an evaluation of the individual bank quotes that were submitted to the British Banker's Association (BBA), and (c) a comparison of these individual quotes to individual CDS spreads and market cap data. We do so during the following three periods: 1/1/07 through 8/8/07 (Period 1), 8/9/07 through 4/16/08 (Period 2), and 4/17/08 through 5/30/08 (Period 3). We select these periods because three major news items were announced in the public press on August 9, 2007: (a) there was a "coordinated intervention" by the European Central Bank, the Federal Reserve Bank, and the Bank of Japan; (b) AIG warned that defaults were spreading beyond the subprime sector, and (c) BNP Paribas suspended three funds that held mortgage backed securities. Furthermore, on April 17, 2008, the Wall Street Journal first published the news that the BBA intended to investigate the composition of these rates. Individual Libor quotes are analyzed from January 2007 through May 2008, while the level of the Libor itself is studied from 1990 using Bloomberg data sources. After verifying that the patterns are essentially the same for the one month and three month Libor rates, we generally restrict our attention to the one month Libor. We also study data on other market indicators, both at aggregate levels and for the individual Libor banks. A few missing days are filled by linear interpolation. Our primary findings are that, while there are some apparent anomalies within the individual quotes, the evidence found is inconsistent with an effective manipulation of the level of the Libor. However, some questionable patterns exist with respect to the banks' daily Libor quotes, especially for the period ending on August 8, 2007, for which the intraday variance for banks quotes is not statistically different from zero.