July 12, 2012
Legal Scholarship on LIBOR
Posted by David Zaring

For being such an important baseline, LIBOR has not attracted a lot of attention from the legal academy - most of the articles about it reference it offhandedly, and are about tax.  But there are two papers out there worth your time.  Both were written before the big reveal of LIBOR fixing, making their authors prescient diagnosticians of the risks of the rate.

Andrew Verstein and Gabriel Rauterberg even have an innovative solution to LIBOR manipulation, and it is one they've been discussing since at least January (when I heard Andrew first give the paper). Index Theory: The Law, Promise, and Failure of Financial Indices is up on SSRN and has already been edited to reflect the emerging scandal:

[T]he obvious solutions to the Libor disruption – market-based contracting, litigation-based enforcement, and government control over the process – may be insufficient. We make an alternative proposal. In order to understand why indices fail, we offer the first scholarly view of the law—intellectual property law—governing indices as a business, and how it is intellectual property law that offers the most promising approach to preventing many forms of index dysfunction.

Consider also, the prescient Justin Wong's note in the NCBI - it is a fine introduction to LIBOR and shows that the suspicion of manipulation during the financial crisis is not new.

during times of financial instability, contributing banks have the incentive to report rates similar to other contributing banks to ensure that they do not stand out, thus giving the appearance of financial distress. Reporting high borrowing suggests that a bank is too financially strained to borrow money at a rate comparable to its peers. Thus, a bank may avoid this alarm-causing perception by under-reporting such rates.

 Justin T. Wong, Libor Left in Limbo; A Call for More Reform, 13 N.C. Banking Inst. 365, 372 (2009).

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