But is it possible that the manipulation actually had an upside?
As analysts assess the fallout, there has been a lot of fog and little clarity about the precise impact on the global economy, markets, investors and average consumers. While many lost because of the rigging, many others, aside from the banks, may have benefited.
“Sorting out the winners and losers in terms of following the money and how it nets out is going to be tremendously complicated,” said Stephen Bainbridge, a professor of business law at the University of California at Los Angeles.
Barclays was found to have reported sometimes artificially low rates, so consumers whose mortgages, auto loans or student loans were linked to Libor may have paid less. On the other hand, investors who were paid interest based on the benchmark rate, which included investment funds and municipalities, would have lost out.
Perhaps the most difficult question about the scandal is whether violating the public trust — especially when much of the illegal activity occurred in the credit crisis of 2008 — helped prop up the financial system overall.
In part because it was often reporting lower borrowing costs, Barclays was treated in the crisis as one of the world’s strong banks. In fact, officials at the Federal Reserve and elsewhere tried to get Barclays to buy Lehman Brothers as it was collapsing.
Some analysts speculate that for this reason, the Fed may not have pushed aggressively to stop the rigging of Libor, even though it had evidence in 2007 that the rate was aberrant.
“There is a tension, and they opted for the path of least resistance . . . which is to acquiesce in the rigging of the Libor rate,” said Cornelius Hurley, a law professor at Boston University and former Fed lawyer. “That just happened to coincide with what they were trying to do — which is free up the credit crisis.”
On multiple occasions during the financial crisis, federal regulators, including the Fed, weighed whether to overlook the enforcement of regulations in order to protect financial stability. In some cases, they sidestepped rules; the Fed has faced congressional allegations of doing so, but no definitive proof has emerged.
With Libor, officials say they responded promptly to what they learned, alerting the appropriate authorities in the United States and Britain.
“The United States, to its credit, set in motion at that stage a very, very powerful enforcement response, the first of which you’ve now seen,” Treasury Secretary Timothy F. Geithner, head of the Federal Reserve Bank of New York at the time Libor was being rigged, said this week at a conference. “And there’s more to come.”
Central bankers, who have been under fire, are planning to meet to discuss alternatives to Libor. Geithner will face sharp questions on Libor in Congress next week.