Did bank greed cause the crash?

On May 29, 2008 the Wall Street Journal published an article “Study Casts Doubt on Key Rate” substantiating its doubts published on April 16, 2008. In it they questioned why the rates of 5 of the 16 banks used for the calculation of LIBOR differed significantly from rising default insurance costs.

At that stage, the authors speculated that one of the possible causes was that the banks were lying.

Now we know that for Barclays that was the case. Interestingly, Barclays was not among the five banks originally exposed in the research, being ranked further down the list.

The two components making up an interest rate are the risk free rate and the borrowers risk premium. Not only were the banks benefitting financially from the misstatement, they were misrepresenting the market’s assessment of their risk, at a time when this was critical.

Immediately after the article on April 16 was published, the anomaly disappeared. LIBOR rose dramatically, and the shocks of 2008 started to take effect.

Did the banks cause the crash or were they just the catalyst?

Either way, they have some questions to answer.

 

 

 

More at: Move Over Subprime? Financial Institutions and Brokers Face Increasing Concerns Over Allegation of Improper Libor Manipulation
LIBOR Manipulation: A Brief Overview of the Debate
Study Casts Doubt on Key Rate

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