Economic Outlook: Libor rated

The London interbank offered rate or Libor is likely to see some serious changes soon.

It has become a major pain in the neck. As more about the process of arriving at an international Libor becomes known, the shakier it looks.

One bank, JPMorgan Chase, reported 1 percent as its one-year Libor for every day in June, The New York Times reported Friday.

That oddity is so glaring, rubber-stamping a rate that changes every day, that JPMorgan lawyers might as well start discussing a settlement for a case against the bank, which would be the equivalent of a softball for regulators.

On the other hand, an argument could be made that JPMorgan was not manipulating anything. They were making a flawed system rife with guesswork easier to manage. Or they were just using a rough average and 1 percent was close enough.

But the Libor underpins $360 trillion in loans worldwide and if a bank were to pick a number out of a hat, why wouldn't they pick one that made the highest profit or at least made the bank look good. If a bank is borrowing money at low rates, it appears healthy. On one level, its borrowing costs go down. On a second level, the bank looks as if other banks trust it enough to offer them low borrowing rates.

Are investors studying bank borrowing rates to determine the health of that bank? Probably not.

Regulators, however, know just where to look, which brings the argument to the point that regulators are certainly aware that JPMorgan, by example, is turning in the same Libor day after day as if it was calculated by an executive secretary just before a coffee break. Why didn't regulators point out troubles with the Libor all along?

It turns out, they did. Former Fed Gov. Timothy Geithner, now secretary of the U.S. Treasury, discussed his concerns over the Libor -- the numbers are sent in to the British Banking Association and averaged there -- with Bank of England Gov. Mervyn King in May 2008 in Basel, Switzerland, the Times reported.

That discussion led to conversations between Geithner and BOE deputy Paul Tucker, who in turn called Barclays former Chief Executive Officer Robert Diamond, who e-mailed his former Chief Operating Officer Jerry del Missier, who testified in Parliament last week he never would have approved of his junior management's Libor submissions had he not interpreted the e-mail from Diamond to mean regulators had requested the Libor be lowered.

So, maybe this is all Geithner's fault -- a pretty slim argument there.

This week, King and Tucker said their discussions with Geithner never included any specific names. They discussed general problems with the process, not any fraudulent behavior by any particular bank, the Times said.

Barclays, nonetheless, agreed to pay $450 million to settle claims that it had manipulated its Libor submissions in a case that looks weaker in hindsight than it did on the day it was announced. Bankers and regulators had seen this coming, but the culture of the financial industry did not give way to any immediate hysteria, which is what happens when bank fraud jumps from back room discussions to breakfast table headlines.

The Libor was never a perfect calculation. But now that this is public knowledge, a banking problem has become a corporate crime.

In international markets Friday, the Nikkei 225 index in Japan fell 1.43 percent while the Shanghai composite index in China shed 0.74 percent. The Hang Seng index in Hong Kong rose 0.42 percent while the Sensex in India lost 0.7 percent.

The S&P/ASX 200 in Australia gave up 0.18 percent.

In midday trading in Europe, the FTSE 100 index in Britain slipped 0.75 percent while the DAX 30 in Germany slid 0.99 percent. The CAC 40 in France lost 1.51 percent while the Stoxx Europe 600 lost 0.95 percent.