The Lessons from Libor for Detection and Deterrence of Cartel Wrongdoing

In late June 2012, Barclays entered into a $453 million settlement with UK and U.S. regulators due to its manipulation of Libor between 2005 and 2009. Among the agencies that investigated Barclays is the Department of Justice Antitrust Division (as well as other antitrust authorities and regulatory agencies from around the world). Participation in a price fixing conduct, by its very nature, requires the involvement of more than one firm. We are cautious to draw overly broad conclusions until more facts come out in the public domain. What we note at this time, based on public information, is that the Libor conspiracy and manipulation seems not to be the work of a rogue trader. Rather it seems to have been organized across firms and required the active knowledge of a number of individuals at relatively high levels of seniority among certain Libor setting banks. Collusion across firms is at the core of illegal antitrust behavior. The Supreme Court has deemed the pernicious effects of cartels so central to antitrust’s mission that it has stated that cartels are “the supreme evil of antitrust.” The involvement of more than one bank in such a cartel is a significant corporate governance failure due to the coordination that such a cartel would have required among the various cartel members. That the Libor cartel seems to have occurred in such a highly regulated industry after a wave of corporate governance reforms post-Enron and a push to greater internal compliance in the early 2000s is perhaps even more surprising. Yet, the very nature of what may have occurred regarding Libor manipulation, in hindsight, seems rather obvious. The rate did not move for over a year until the day before the financial crisis of 2009 hit. Also, quotes by the member banks that were submitted under seal moved simultaneously to the same number from one day to the next during that time period. Had any member bank that set Libor or indeed any antitrust authority undertaken an econometric screen, they would have detected these anomalies, undertaken a more in-depth investigation and discovered the wrongdoing. This essay explores the use of econometric screens as a tool to improve detection of potential price fixing cartel behavior as a method to police the firm from illegal behavior either by enforcement authorities or via firms themselves