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The Canary Wharf headquarters of Barclays Bank, which have been fined millions for manipulating the LIBOR inter-bank lending rate, in London, England.

This week Britain’s main financial regulator will unveil plans to overhaul what has been called “the world’s most important number.” It’s a benchmark, or a reference point, for global interest rates called LIBOR,  or London Interbank Offered Rate.

And it is a very important number -- or set of numbers -- indeed.  More than $350 trillion worth of transactions are tied to it: mortgages, student loans, consumer finance and complex financial instruments .

But LIBOR has been discredited. The British bank Barclays has admitted rigging LIBOR rates. And at least a dozen big international banks are now under investigation for the same offence.

Emails have emerged exposing what has been going on. One trader wrote to an official at his own bank: “Please set three month LIBOR as high as possible today.”

And another wrote gratefully: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bolinger."

LIBOR was vulnerable to rigging because of the way the rates are calculated. They’re  based on a daily assessment. A number of  chosen banks estimate  how much it would cost them to borrow from other banks -- but this is only an estimate.

Hugo Dixon, founder of the financial website Breaking Views, says that opened LIBOR to abuse. Within the banks that were making those interest rate estimates, there are traders betting heavily on which way LIBOR would go.

“They would go to their colleagues who were submitting these estimates and saying: 'Can you nudge it up a bit today or nudge it down a bit today?' so they could then profit from their trading positions," Dixon says.

Ruth Bender of the Cranfied School of Management claims the banks would only need to nudge LIBOR by a few fractions of a per cent. “When you have trades that are in the hundreds of millions of dollars," Bender says, "a fraction of a percentage either way ends up as big money."

Lawyers are circling; multi-billion dollar lawsuits are  looming. Trust in the financial system has taken another battering, and LIBOR will have to be replaced or changed.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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