Despite Scandal, Wall Street Lines Up To Bid For LIBOR
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On Wall Street, many things are bought and sold, including, occasionally, interest rates. That happened today. The owner of the New York Stock Exchange bought LIBOR, a hugely influential benchmark rate that is set in London. LIBOR is used to set many other interest rates, from credit cards to derivatives contracts.
NPR's Jim Zarroli reports that British officials decided to unload LIBOR following a scandal that has ensnared three major banks.
JIM ZARROLI, BYLINE: LIBOR may have been tainted by scandal but that didn't stop a lot of very important players on Wall Street from lining up to bid for it, says James Cox of Duke University law school.
JAMES COX: NYSE was only one of a pack of bidders, which included also Michael Bloomberg, and they were bidding fairly high.
ZARROLI: The reason has to do with the role that LIBOR plays throughout the financial markets. LIBOR stands for London Interbank Offered Rate, and it's calculated by surveying banks about the interest rates they're paying. It's operated by the British Bankers Association. Last year came revelations that some of the banks surveyed had been secretly manipulating their numbers to their own advantage. U.S. and British regulators have levied some two and a half billion dollars in fines against three major banks, with more expected to come.
But Cox says despite the scandal, LIBOR still plays an indispensable role in the markets.
COX: This is a terrific branding. And the one thing we've discovered, in the wake of the LIBOR scandal, is that there was no immediate replaceable product for it.
ZARROLI: Under the terms of the deal announced today, LIBOR will be operated starting next year by NYSE Euronext, the company that owns the New York Stock Exchange. NYSE says it hopes to be able to restore credibility to LIBOR.
Not everyone is thrilled by the deal. Bart Chilton, a member of the Commodities Futures Trading Commission, notes that NYSE is about to be sold to a company that operates financial exchanges; and so it makes money off derivatives trading. So he says letting the NYSE operator LIBOR, which plays such an important role in the derivatives industry, could amount to a conflict of interest.
BART CHILTON: I'd feel a lot more confident if it was a third party that was restoring the credibility, rather than somebody that had a profit motive. That said, the jury is still out; need to know more about it.
ZARROLI: Chilton says there are a lot of unanswered questions about how LIBOR will be run and what safeguards will be set up to prevent manipulation. Adding to the uncertainty is the fact that LIBOR will be regulated by a new British agency called the Financial Conduct Authority.
Again, James Cox.
COX: We have yet to see what kind of ability they'll have for oversight and that's going to be crucial here.
ZARROLI: For now, at least, LIBOR has survived to the scandal that has plagued it. And it will live on, albeit under new management.
Jim Zarroli, NPR News.