The Barclibor scandal doesn’t seem to be going away, so it might be productive to try to figure out how much outrage is the right amount of outrage and express it in dollars. You can be all “what a bunch of crooks, with the emails, and whatnot” and sure, but there are lots of crooks in the world and for you to expend your energy being mad about particular crooks should require a considered judgment as to whether they are petty crooks or massive, massive crooks. And despite the $800 trillion notional size of the market they were monkeying with, the range of answers given to this question is unusually broad, from a dismissive “it’s still not clear just what the big harm was in the Libor scandal” to a mouth-foaming “this is the mega-scandal of mega-scandals.”

So start with the question of who got hurt by the basic horse-trading fixing where Barclays increased its fixings to make money on its contracts: derivative trader called submitter, said “hey [raise | lower] me some Libor because I have some contracts fixing today,” and the submitter did in exchange for champagne or just a manly pat on the ass. Here who got hurt is sort of messy and boring: you got hurt if you borrowed floating-rate money, or paid floating on a swap, and Barclays pushed your relevant Libor up on a fixing date for your contract; and you got hurt if you lent floating-rate money, or paid fixed on a swap, and Barclays pushed your relevant Libor down on a fixing date for your contract. And in expectation probably neither happened, for you personally.

More relevantly, you get the very strong sense from the Barclays emails that the traders manipulating Libor often thought they were shooting against other banks doing equal and opposite manipulations, so it’s not clear that it worked. In fact in some sense you have to hope that they were right and this was a systemic problem: if it was just Barclays then they actually manipulated rates,* while if it was everyone then probably no one managed to manipulate rates for their own advantage – unless there was some systemic reason for the Libor submitter banks to manipulate Libor in one direction prior to the financial crisis, on which more later.

The second question is who got hurt by more systemic fixing where Barclays – and maybe others – and maybe at the BoE’s oblique suggestion – systematically pushed their Libor submissions down to make themselves appear healthier than they were. This struck me as potentially a bigger deal (dollarswise) yet somehow more forgivable, and The Economist is with me: Read more »