In 2008, Donald MacKenzie expounded to LRB readers with admirable clarity the workings of Libor (the London Interbank Offered Rate), which establishes the benchmark terms on which hundreds of trillions of dollars are lent and borrowed across the world every day.[*] It sometimes comes as a surprise to the uninitiated to learn that Libor has never been based on transactions which have actually taken place but on the interest rates at which the participating banks say they could borrow money if they chose. This has meant, inevitably, that there is an incentive for the traders to manipulate their inputs in order to nudge the rate up or down to their advantage. There are mechanisms in place, including the systematic elimination of outliers – the lowest and highest quartiles of the estimated borrowing rates – which make it difficult; but it can be done.
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