In the recent controversy about manipulation of LIBOR by Barclays and other big banks, and whether this was being done with a nod and a wink from the financial authorities, I have been amazed by the number of pundits opining on the subject who don’t even know what the acronym ‘LIBOR’ stands for. It is, as most of us learned upon entering the business world years ago, the London Interbank Offered Rate. As with anything else in markets, rates require both a bid and an offer. LIBOR did not merely set overnight rates; these are usually so low and differ by so few basis points that announcing them would be tantamount to solemnly repeating the official Greenwich time every ten seconds. LIBOR is concerned with an amalgam of short-term rates from overnight to one year, and is different for each of the quoted currencies.
The mechanism by which LIBOR is set may be ‘technical’ (although one may intelligently ask, what rate quotation is not? Does any rational businessman go out and offer enormous sums of money at a rate chosen at random?) but its uses are not technical at all. Hundreds of thousands of loans are based upon LIBOR, not simply involving inter-bank transactions, but also commercial paper, corporate bonds, options and commodities contracts, and even, if I recall aright, many adjustable mortgages. The spreads are often very significant—”LIBOR plus two percent,” “LIBOR plus 575 basis points”—but these rates will go up and down depending upon what LIBOR happens to be on specific dates. There is nothing arcane about its uses, and they affect most participants in the economy one way or another.
Those who would publish commentary—even in respected financial news sources—would do well to spend more time with a dictionary. Getting these things wrong greatly erodes one’s credibility.