Lessons from LIBOR for Detection and Deterrence of Cartel Wrongdoing

Rosa Abrantes-Metz, Daniel Sokol, Nov 28, 2012

In late June 2012, Barclays entered a $453 million settlement with U.K. and U.S. regulators due to its manipulation of the London Interbank Offered Rate (Libor) between 2005 and 2009. The Department of Justice (DOJ) Antitrust Division was among the antitrust authorities and regulatory agencies from around the world that investigated Barclays.

We hesitate to draw overly broad conclusions until more facts come out in the public domain. What we note at this time, based on public information, is that the Libor conspiracy and manipulation seems not to be the work of a rogue trader. Participation in a price fixing conduct, by its very nature, requires the involvement of more than one firm. In this case, the conspiracy seems to have been organized across firms and required the active knowledge of a number of individuals at relatively high levels of seniority among certain Libor setting banks. Such collusion across firms is at the core of illegal antitrust behavior. The Supreme Court has deemed combating the pernicious effects of cartels so central to antitrust’s mission that it has stated that cartels are “the supreme evil of antitrust.”

The involvement of more than one bank in such a cartel is a significant corporate governance failure due to the coordination that such a cartel would have required among the various cartel members. It is perhaps even more surprising that the Libor cartel seems to have occurred in such a highly regulated industry after a wave of corporate governance reforms post-Enron and a push for greater internal compliance in the early 2000s. Yet, the very nature of the manipulation, in hindsight, seems rather obvious. The rate did not move for over a year until the day before the financial crisis of 2009 hit. Also, quotes by the member banks that were submitted under seal moved simultaneously to the same number from one day to the next during that time period. Had any member bank that sets Libor or any antitrust authority undertaken an econometric screen, they likely would have detected these anomalies, undertaken a more in-depth investigation, and discovered the wrongdoing.

This essay explores the use of econometric screens, either by enforcement authorities or firms themselves, as a tool to both improve detection of potential price fixing cartel behavior and police illegal firm behavior.

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