Finance on Trial: The Properties of Libor and Its Moral Implications

Benchmarks are, with ratings, one of the most recent developments that support the financialization of capitalism, in order to have better information of the market situation (Carruthers, 2015). I will focus here on one particular benchmark, the Libor, which has been at the center of an important financial scandal in the recent years. The moral implications of the Libor have not been fully grabbed yet, and this presentation will be dedicated to fill that void. I propose precisely in this paper first to analyze the Libor as a device which plays an important role in financial markets, then to study the controversies around the rate that took place during the trial of the first trader judged in United Kingdom in relation with the manipulation of Libor. Too few studies have been dedicated to public situations where such devices are publicly discussed, even though it offers some important and heuristic possibilities to grab their moral implications.

The Libor or London interbank offered rate is an interbank rate used by banks to evaluate the borrowing possibilities between banks. It has been created in the middle of the eighties by an association dedicated to represent the interests of British banks (the British Bankers’ Association or BBA), in the broader context of financial markets’ deregulation in the United Kingdom, especially marked by the Big Bang’s reform promoted by the government of Margaret Thatcher. Every day in London and until the scandal, this rate was calculated for fifteen maturities and ten different currencies. Selected banks by the BBA were asked to answer a relatively simple question: ‘At what rate could you borrow funds, were you to do so, by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 a.m.?’ This question implies a strong and important dimension of judgment and appreciation of the economic situation. As such, Libor can be viewed as a central ‘market device’ (Callon, Millo, Muniesa, 2007) daily used in financial markets. It is implemented within the social organization of banks, as different actors and institutions are dedicated to submit and publish the rates, and also within the financial industry by the countless products referenced on it. Indeed, in 2012, the total value of contracts and products linked to the Libor was estimated at 300 trillions of dollars (Wheatley, 2012). In this massive sum, one can find derivative products such as options or swaps, but also products dedicated to households like mortgages or students loans.

The scandal of the manipulation of Libor started in 2008 with journalistic revelations of the ‘abnormal’ or ‘irregular’ level of the rate — expressions that, in themselves, reveal how such devices support the truthfulness of the numbers involved in financial markets. In July 2012, it was announced that both British and American authorities were engaged in criminal investigations related to the manipulation of Libor. The reasons advanced for the ‘manipulation’ of rates range from individual explanations (a trader seeking to increase his positions and related bonuses) and collective arguments (the banks wish to appear solvent in a credit crisis where the capacities of borrowing are becoming increasingly rare). The banks involved, American, British or European, have all signed agreements to avoid criminal prosecution. For instance, Barclays has paid a fine of 453.6 million dollars, Rabobank of 774 million dollars, and UBS 1.52 billion dollars. The collective responsibility of banks now recognized, it is the individual responsibility of traders, brokers and managers which is formally debated in the courtrooms.

This presentation, which takes place in a broader investigation on financial irregularities and their legal treatment since the beginning of the crisis, will be based on the following structure.

Firstly, I will analyze how the Libor is calculated and the way it is intertwined in the usual practices of the financial industry. Building on the sociology of quantification (Desrosières, 2008; Espeland, Stevens, 2008) and looking at the role of numbers in the making and shaping of social reality, I will identify and detail the five principal properties of the Libor and their related material and moral implications. These properties are: the collective dimension of its calculation; its anticipated character; its relative institutional guaranty; the large surface of the contracts and products linked to it; and finally the way it represents the pretension to auto-regulation of the banking industry. Libor can indeed be seen as a strong sign of the privatization of the regulation of financial markets.

This analysis of the Libor and its calculation will allow me, secondly, to study the debates related to Libor since the beginning of the scandal in 2012. It is indeed an important dimension of scandals to engage the sense of justice and injustice of actors, and to elevate their level of reflexivity (Boltanski, 2012; Thompson, 1999). Building on such work, I will focus on the debates that took place during the first trial of a trader accused of having manipulated the Libor and judged in London, based on the original and ethnographic investigation I made during the summer 2015. By following the hearings and by giving a special attention to the official description of financial markets by academics called as witnesses, to the presentation of the evidences and their related framing, and finally to the question of rules, their interpretation and their transgressions, I will show the different moral implications attached to the Libor.

Finally, looking at these debates and their moral implications through an ethnographic investigation will not restrict the presentation to a micro-level analysis. As we shall see, it is precisely this focus that will allow me to show and outline the relation between the credit crisis and the Libor, and to defend the idea that macroeconomic and systemic conditions — and even crisis — also rest upon micro-level foundations (Beckert, 2013).