The world's most important number: How a web of skewed incentives, broken hierarchies and compliance cultures conspired to undermine LIBOR

Abstract

To many observers, the recent scandal involving the widespread and recurrent manipulation of the London Interbank Offered Rate (LIBOR) may go down as one of the most significant and far-reaching events associated with the global financial crisis. And for good reason: by most estimates, an estimated 350 trillion dollars' worth of global financial contracts ranging from mortgages to credit cards to corporate debt securities to countless financial derivatives hinge critically upon LIBOR to govern the cash flow positions and other obligations of contractual counterparties. This paper examines the incentives, hierarchies and organisational cultures among the various players involved and floats some hypotheses about how LIBOR may be most effectively reformed in light of these factors.