Last summer it was Barclays admitting LIBOR manipulation, now it’s UBS. Yes, there is incriminating email and IM traffic so clearly inappropriate stuff was going on. Yet, I expect the zero sum nature of the derivatives that price to LIBOR will become an issue.
The fact that, as one email reported, a one basis point change could benefit UBS $2 million in one day implies that other entities stood to lose $2 million that day. It is not a stretch to believe among those losing would be some of the other 15 participants on the LIBOR panel. Their interest would be to act against that loss through either of two routes: exiting markets relying on LIBOR or pushing back against manipulators.
Were UBS consistently winning at the expense of others, any consistent losers could have exited the market. That they stayed with LIBOR for years (press reports state that the history of manipulation dates at least to 2005) suggests that although potentially flawed, LIBOR rates were not systematically adverse to the interests of those participating–the LIBOR panelists especially.
If a market exit isn’t possible, the other route is to push back against any manipulators. I expect some did and eventually we’ll see a defendant argue that they knew other panel participants were manipulating rates and, needing to protect their interests, they had to push the other way.
The cure for all this is setting LIBOR rates based on actual transactions rather than basing the rate on subjective views of interest rates. The CFTC is to be commended for insisting on a transparent means for determining LIBOR submissions. Late yes, this should have been done long ago, but better than never.