LIBOR Manipulation?

Rosa M Abrantes-Metz * Principal LECG LLC 675 Third Avenue, 26th Floor New York, NY 10017 Michael Kraten Assistant Professor of Accounting Sawyer Business School Suffolk University 40 Court Street Boston, MA 02108 Albert D Metz Vice President and Senior Credit Officer Moody’s Investors Service 7 World Trade Center at 250 Greenwich Street New York, NY 10007 Gim S Seow Associate Professor of Accounting School of Business University of Connecticut 2100 Hillside Road Storrs, CT 06269

Preliminary Comments are Welcome August 4, 2008
*

Contact author. E-mail: RAbrantes-Metz@lecg.com. Telephone: (212) 506-3981. The authors gratefully acknowledge the suggestions of Mukesh Bajaj, John Cochrane, John Connor, Guy Erb, George Judge, Cathy Niden, Sofia Villas-Boas, and the assistance of Marissa Rich, Shelly Yang, and especially Susan Press. The views expressed in this study belong solely to the authors and should not be attributed to the organizations with whom they are affiliated or their clients. 1

Electronic copy available at: http://ssrn.com/abstract=1201389

ABSTRACT On May 29, 2008, the Wall Street Journal (the Journal) printed an article that alleged that several global banks were reporting unjustifiably low borrowing costs for the calculation of the daily Libor benchmark. Specifically, the writers alleged that the banks were reporting costs that were significantly lower than the rates that were justified by bank-specific cost trend movements in the default insurance market. Although the Journal acknowledged that its “analysis doesn't prove that banks are lying or manipulating Libor,” it conjectured that these banks may “have been low-balling their borrowing rates to avoid looking desperate for cash.” In this paper, we extend the Journal’s study and perform the following analyses: (a) a comparison of Libor with other rates of short-term borrowing costs, (b) an evaluation of the individual bank quotes that were submitted to the British Banker's Association (BBA), and (c) a comparison of these individual quotes to individual CDS spreads and market cap data. We do so during the following three periods: 1/1/07 through 8/8/07 (Period 1), 8/9/07 through 4/16/08 (Period 2), and 4/17/08 through 5/30/08 (Period 3). We select these periods because three major news items were announced in the public press on August 9, 2007: (a) there was a “coordinated intervention” by the European Central Bank, the Federal Reserve Bank, and the Bank of Japan; (b) AIG warned that defaults were spreading beyond the subprime sector, and (c) BNP Paribas suspended three funds that held mortgage backed securities. Furthermore, on April 17, 2008, the Wall Street Journal first published the news that the BBA intended to investigate the composition of these rates. Individual Libor quotes are analyzed from January 2007 through May 2008, while the level of the Libor itself is studied from 1990 using Bloomberg data sources. After verifying that the patterns are essentially the same for the one month and three month Libor rates, we generally restrict our attention to the one month Libor. We also study data on other market indicators, both at aggregate levels and for the individual Libor banks. A few missing days are filled by linear interpolation. Our primary findings are that, while there are some apparent anomalies within the individual quotes, the evidence found is inconsistent with an effective manipulation of the level of the Libor. However, some questionable patterns exist with respect to the banks' daily Libor quotes, especially for the period ending on August 8, 2007, for which the intraday variance for banks quotes is not statistically different from zero.

Key words: LIBOR, LIBOR quotes, manipulations, conspiracies, collusion, CDS spreads, market cap. JEL classification: C10, C22, G14, G24, K20.

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Electronic copy available at: http://ssrn.com/abstract=1201389

I. INTRODUCTION On May 29, 2008, the Wall Street Journal (the Journal) printed an article that alleged that several global banks were reporting unjustifiably low borrowing costs for the calculation of the daily Libor benchmark (Mollenkamp and Whitehouse, 2008). Specifically, the writers alleged that the banks were reporting costs that were significantly lower than the rates that were justified by bank-specific cost trend movements in the default insurance market. Although the Journal acknowledged that its “analysis doesn't prove that banks are lying or manipulating Libor,” it conjectured that these banks may “have been low-balling their borrowing rates to avoid looking desperate for cash.” The British Banker's Association (BBA)'s website claims that “BBA Libor is the primary benchmark for short term interest rates globally. It is used as the basis for settlement of interest rate contracts on many of the world’s major futures and options exchanges (including LIFFE, Deutsche Term Börse, Euronext, SIMEX and TIFFE) as well as most Over the Counter (OTC) and lending transactions.” Thus, for transactions that utilize Libor as a benchmark for establishing borrowing costs, a slight understatement of the rate may generate sizable wealth transfers from lenders to borrowers. Subsequent to the publication of the Wall Street Journal article, other major financial publications voiced similar concerns. On June 2, 2008, for instance, The Financial Times agreed that “... the rate of borrowing in Libor has lagged behind other market-based measures of unsecured funding used by the vast majority of financial institutions. This has aroused suspicions that the small group of banks which supply the BBA with Libor quotes have understated true borrowing rates so as not to fan fears (that) they have funding problems.” (Mackenzie and Tett, 2008). The motivation of this study is to extend the Journal's analysis by employing a wider array of comparative statistical techniques and methodologies to gain a more thorough understanding of the issues underlying such speculations. While statistical methods alone do not prove that manipulation has occurred in a particular market, some questionable patterns do exist with respect to the banks' daily Libor quotes. Our analyses of these apparent anomalies within the individual quotes suggest that the evidence is inconsistent with an effective manipulation of Libor. Nevertheless, the analyses presented in this study demonstrate that distinct non-random patterns of reported borrowing costs did exist during distinct periods of time, patterns that go beyond the findings that were originally reported by the Journal. In particular, for the period ending on August 8, 2009, the intraday variance of individual quotes is not statistically different from zero, and the banks deciding group for the Libor includes almost the entirety of the sixteen banks for a period of over seven months.

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II. THE POSSIBILITY OF COLLUSION AND MANIPULATION In 1984, the BBA sought to standardize rate terms on interest rate swaps between London based banks. Two years later, in 1986, the BBA introduced Libor to standardize rate terms on a wider variety of securities, including syndicated loans, futures contracts, and forward rate agreements. Today, Libor's primary function is to provide a point of reference for unsecured loans between London based banks. It is also used as a point of reference for a wide variety of securities contracts transacted across the globe. Libor rates are quoted daily on ten major currencies: Australian dollar, British pound, Canadian dollar, European euro, Danish krone, Japanese yen, New Zealand dollar, Swedish krona, Swiss franc, and US dollar. In this study, we focus on the US dollar Libor. The BBA selects only 16 banks to provide daily rate quotes for the calculation of Libor. The BBA website states that this “reference panel of banks ... reflects the balance of the market by country and by type of institution. Individual banks are selected within this guiding principle on the basis of reputation, scale of market activity, and perceived expertise in the currency concerned.” It is noteworthy that these factors do not include any consideration of net borrowing or lending positions. Because the "middle 8" quotes are converted into Libor through a simple arithmetic mean calculation, as few as 5 (of 16) banks, acting in concert, can conceivably affect the published Libor. What may motivate banks to artificially inflate or deflate rates? From a fiscal perspective, banks that are "net borrowers" would benefit from lower rates. Conversely, banks that are "net lenders" would benefit from higher rates. Although an analysis of the protocols employed to select Libor's 16 banks is beyond the scope of this study, the nature of the composition of this group might generate an opportunity for collusion if the majority of these banks tend to be “net borrowers” or “net lenders.”1 Collusion may generate non-fiscal benefits as well. The Journal has suggested that banks may use the Libor submission process to manage their perceived reputation and risk. In other words, they may use the Libor calculation process to signal to the market that their operating costs are lower (i.e. that they are more fiscally healthy) than they are in reality. Because Libor submissions are released to the general public, banks may also be able to utilize the process to signal to each other in much the same way as airlines use their online ticket reservation systems to communicate their pricing intentions.2 In addition, banks that operate in multiple global markets may be motivated to use Libor as a "hedge" (or, at a minimum, as an alternative financing resource) against rate fluctuations elsewhere. For instance, an American bank with operations in London might benefit by keeping Libor rates artifically low as compared to the Federal Funds Rate.

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See Mackenzie (2008) and Mollenkamp and Norman (2008) for recent critiques of the Libor methodology. See Konrad and Sandoval (2002) for a critique of systems such as American Airline's Sabre, Delta's Worldspan, and United's Apollo.

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the term “manipulation” refers to potential anticompetitive behavior by the 16 banks when acting on their own. II. Manipulation. On the other hand.e. Reputation is defined as a complex phenomenon that requires careful management. new banks that issue debt are monitored more intensely. the term “collusion” refers to behavior by the banks when acting as a group in a coordinated manner. LITERATURE REVIEW A. credit ratings. this excess discount declined over time as lenders observe defaults. though. Furthermore. and Section IV concludes with a discussion of implications and avenues for future research. This paper is organized as follows. He found that valuation effects are positively related to bank deposit size and capital ratios. Johnson’s findings are consistent with empirical findings for quality differentiation across 5 . as well as the empirical methods that are utilized to detect conspiracies and manipulations of different types. can manifest in many forms. The results imply that high-quality firms that need to raise external capital are motivated to develop relationships with large high-quality banks in order to avoid pooling with other bank loan customers or issuers of public securities in spite of deposit insurance. Henceforth. in this study. a valuable asset that provides an incentive for banks not to choose risky projects. credit ratings. Our goal in this brief review is to highlight the linkages between bank reputation. Section III discusses our methodology and findings. and are inversely related to loan loss provision ratios.. BANK REPUTATION. This declining interest rate corresponds to the formation of reputation. Johnson (1997) examined the effect of bank characteristics on changes in client firm value during bank loan announcements. To assess the importance of commercial bank reputation.This study presents an analysis that addresses the possibility of Libor manipulation and collusion by the 16 banks. and the cost of capital. CREDIT RATINGS. AND THE COST OF CAPITAL The banking literature is vast. i. and cost of capital studies. without any explicit coordination activities. Using a sample of initial bank notes offered by new banks during the American Free Banking Era (1838-1860). Bank Reputation in Securities Underwriting Market There is an extensive stream of literature on the reputational role of investment banks and auditors in establishing corporate securities' underwriting fees and quality. Section II presents a literature review of bank reputation. Prior to the establishment of reputation. Gorton (1996) documented larger discounts for the debt of new banks as compared to banks that have credit histories (but that are otherwise identical).

Yi and Mullineaux (2006) examined whether credit ratings on syndicated loans convey information to capital markets. A second implication is that economic rents are earned on reputation. This effect is primarily associated with firms for which information costs are likely to be important. In Livingston and Miller (2000). Fridson and Garman (1998) noted that. terms. and banks to investigate the effect of banks' financial health on the cost of loans after controlling for borrower risk and information costs. An early study by Ederington. lower offering yields). Bank Reputation and Cost of Capital A bank’s reputation plays a major role in affecting its cost of capital. They found that low-capital banks tend to charge higher loan rates than well-capitalized banks. for instance. They also found that. 6 . and is negatively associated with its offering yield. Although initial loan ratings and upgrades are not informative. These results suggest that market participants base their evaluations of the creditworthiness of issues on more than bond credit ratings. Employing a sample of new corporate bond issues from 1990 to 2000. secondary-market spreads. and that the ratings provides incremental information to the market beyond what is contained in the set of accounting variables. and (c) ensure prudent choices of capital adequacy ratios. and other quantifiable factors. They demonstrated that: (a) bond ratings appear to be the most important determinant of yield spreads. Reputational benefits accrue through effective credit policies that (a) screen out high-risk loans.e. firms tend to hold more cash. Crabtree and Maher (2005) showed that the degree of predictability of a firm's earnings is positively associated with its bond rating. and thus such rents provide continued incentives for underwriters to maintain their reputation. for a sample of high-yield debt issues. Yawitz and Roberts (1987) reported that corporate bond yields are significantly correlated with: (a) their credit ratings and (b) a set of financial accounting variables on leverage and coverage ratios. 56% of the variance in risk premiums can be explained by ratings. and (c) rating agencies adopt 'through the cycle' evaluation criteria of default risk. (b) provide for rigorous monitoring of loan portfolios. They also found that the effectiveness of underwriters in presenting issuers to investors appears to materially affect pricing. (b) primary market efficiency and expected secondary market liquidity are not relevant explanatory factors of the cross-sectional variability of spreads. borrowers. One implication of this stream of research is that banks' underwriting decisions reflect reputational concerns and are thus informative of issue quality. bond underwriters with stronger reputations charged significantly lower underwriting fees and provided higher offering prices (i. Also.audit firms and investment bankers. Hubbard. when borrowing from weak banks. Gabbi and Sironi (2005) analyzed the spreads of Eurobonds issued by major G-10 companies from 1991to 2001. Kuttner and Palia (2002) used a matched sample of individual loans. and that investors' reliance on the judgment of rating agencies increases over time.

Ratings may. although screening activities cannot provide conclusive evidence of the existence (or absence) of anticompetitive market behavior. B. EMPIRICAL METHODS TO DETECT CONSPIRACIES AND MANIPULATIONS Empirical methods have been developed and applied to screen for “markers” that are associated with the existence of conspiracies and manipulations in various industries. More often than not. Collusion in bidding activities has also been observed from time to time.e. capture idiosyncratic information about recovery rates (as each of the agencies claims) or information about default prospects that is not otherwise available to the market. (c) declines in imports on substitutes. Price-Fixing Conspiracies Harrington (2006) asserted that certain “collusive markers” are more likely to occur when price fixing conspiracies exist than under a competitive setting. In the absence of bond market reputation. borrowers benefit from lower total issuance costs. This provides superior certification benefits in the form of higher issue prices relative to competing investment bank underwriters. but that these ratings are only partially predictable. Further. a strong private debt market reputation enables commercial banks to win underwriting mandates from loan clients. Nevertheless. (b) reduced price variations across customers. they demonstrated that ratings are related to loan rates. Of course. Additional evidence is provided by Narayanan. given the effect of other influences (i. as well as on punishment mechanisms for members who deviate from these terms of agreement. such markers periodically occur in the absence of anticompetitive behavior. Because this pricing benefit is not offset by higher underwriting fees. Rangan and Rangan (2007) about how commercial banks enhance their reputation by extending their bond underwriting activities to syndicated loans and private placements (i. private debt). They also found that borrower default characteristics explain cross-sectional variations in loan ratings. such techniques are applied to screen for collusion in the establishment of Libor. but not always. cartel members also agree on market share rates. In this study. it allows them to commit to investors in a credible manner against the opportunistic use of lending information. (d) prices that are strongly positively correlated across firms. The collusive markers for price that are typically utilized are: (a) higher than expected average prices. default risk. and agency problems) on yields. A price-fixing conspiracy is defined as an agreement between cartel members on one or more terms (most commonly. Furthermore. This suggests that ratings provide valuable information that is not reflected in financial reporting data. collusions and/or manipulations periodically occur in the absence of such markers. in fact. Likewise. they can be utilized to signal that pattern(s) of observed data are inconsistent with patterns that are normally expected to occur under conditions of market competition.e. information asymmetry.they find that downgrades are indeed informative. the price term) that is (are) fixed for a common product. (e) a high degree of 7 .

and that these price patterns followed those of cost patterns more closely under competitive conditions than under collusive conditions. a common explanation for price changes in commodities markets. they all compare data patterns in an industry or market against a benchmark data set. Instead. and (b) market shares between firms that are negatively correlated over time. the collusive markers for quantity that are typically utilized are: (a) market shares that remain highly stable over extended periods of time. They found that the average price decreased by 16% and the volatility of this price as measured by its standard deviation increased by over 200%. Nevertheless. i. Nevertheless. Alternative explanations must be studied as well. Froeb. Additionally. and (b) they are not necessarily focused on maintaining a fixed price level. Market Manipulations Though the term “manipulation” commonly encompasses a wide variety of situations. a condition where a futures price is lower 8 .uniformity across firms in product price and other dimensions. even when these (and the following) methods detect abnormal behavior in the data. their goals might involve increasing price movements. Abrantes-Metz. though. At the present time. Various definitions of the term have been used in different situations.e. They also found that these changes in price could not be explained by changes in cost. Manipulations are. it has traditionally been applied to the commodities markets. Screening processes for manipulations are very similar to those for conspiracies. the findings should not necessarily be interpreted as a proof of wrongdoing. quite different from traditional price-fixing cartels in at least two respects: (a) they typically involve fewer members within the group than a cartel. but they are relatively more difficult to develop and implement because of the variety of forms that are utilized by manipulators. none of these empirical methods is capable of distinguishing conditions of explicit collusion from conditions of tacit collusion. They include searches for distortions in prices that cannot be explained by seasonality. they vary in terms of ease of implementation. one that has been developed within the same industry or market during a different period of time. Geweke and Taylor (2006). for instance. in general. many of these definitions share common features such as “causation” and “price artificiality” (Russo. There are several common approaches to detect manipulation markers. A very common “red flag” for manipulation in commodities futures markets is backwardation. and (g) abrupt changes in price that cannot be explained by demand and/or cost movements. Though any of these collusive markers can be used as a screening method. often just a single firm or individual. analyzed price movements around the collapse of a bid-rigging conspiracy in the frozen perch industry. or one that has been developed in a comparable (but different) industry or market during the same period of time. Harrington (2008) provides a comprehensive survey of the academic literature regarding cartel detection methods. 1983). In addition.. Abrantes-Metz and Froeb (2008) describe recent efforts by competition authorities worldwide in the development of screening devices. (f) low price variances.

Aggarwal and Wu (2003). We then search for possible explanations for any observed patterns by comparing them against patterns of other relevant benchmarks. by withholding critical information that is expected to influence stock prices prior to the granting of options. an inversion from the typical contango relationship. and by applying their model to a well-known episode of manipulation that occurred in the silver market in 1979 and 1980.g. Benford’s law has also been used to detect data tampering in taxes. we generally restrict our attention to the one month Libor. Manipulation in the stock market. Heron and Lie (2006) and Goldberg and Read (2007) present such screens. Newcomb (1881) and Benford (1938) developed a mathematical law that is based on the empirical observation that. we compute “but for” series which we then compare against the actual series. Finally. They hypothesized that manipulation induces noise in the market and distorts market expectations about future prices. Abrantes-Metz and Addanki (2007) developed a new method to screen for manipulations in commodities markets. While episodes of backwardation can occur in the absence of manipulation (e.than a spot price. and by disseminating misleading information and/or rumors while backdating stock options. testing for (any) material manipulation(s). they found that manipulation induced more volatile market forecasting errors regarding future prices. as in the commodities markets. In addition. Using these benchmarks. we review the level of similarity of individual quotes (when compared to each other) on a daily basis. insiders may take actions that influence stock prices through accounting and earnings manipulation. in many naturally occurring numerical data sets. For instance. METHODOLOGY AND FINDINGS The methodology applied in this paper is consistent with those that are typically used to investigate potential anticompetitive behavior by market participants. Recently. while the level of the Libor itself is studied from 1990 using Bloomberg data sources. Applications of this stream of research include Judge and Schechter (2006) and Nigrini (2005). Individual Libor quotes are analyzed from January 2007 through May 2008. the leading significant digits are not uniformly distributed but instead follow a logarithmic weak monotonic distribution. By using the futures price as the market expectation for the future spot price. and in survey data. We also study data on other market indicators. both 9 . as measured by the intraday variance of the quotes. such episodes generally do not last for a long time. We look into structural breaks in the series of interest rates and compare them against “reliable” benchmarks that are not suspected of manipulation. in financial ratios. After verifying that the patterns are essentially the same for the one month and three month Libor rates. when supply is unexpectedly unable to meet demand despite the presence of competitive market conditions). III. can assume various forms.

3 4 The effective rate is the weighted average of rates of actual exchange between banks. 2007 is evident and statistically significant. some questionable patterns exist with respect to the banks' daily Libor quotes. and (c) a comparison of these individual quotes to individual CDS spreads. A.3 Figure 1. the Federal Reserve Bank. separately identifying the mean spread within the subperiods 1/1/07 through 8/8/07 (Period 1).B is a similar presentation of the spread over the Fed Funds Effective Rate. If.B focuses on the period from January 2007.B are similar presentations of the 1 month Libor spreads. In short. and (c) BNP Paribas suspended three funds that held mortgage backed securities. we should not necessarily conclude that these spreads were unusual and/or suspicious in nature. 2008. Our primary findings are that. mean) level and variance.e. the same pattern of significantly wider spreads is apparent. This section contains the following analyses: (a) a comparison of Libor with other rates of short-term borrowing costs. it would appear there is a “structural break” on August 9. This same day.e.at aggregate levels and for the individual Libor banks. (b) an evaluation of the individual bank quotes. 8/9/07 through 4/16/08 (Period 2). less significant than these two breaks. Future researchers may wish to search for other structural breaks. the level of the Libor was manipulated downwards since January 2008 (i. A few missing days are filled by linear interpolation. We continue this analysis but focus directly on the spreads of Libor over other rates. Table 1 restates these time period definitions. It is clear from these exhibits that the Libor closely follows the other rate indicators for both maturities. Figure 3. (b) AIG warned that defaults were spreading beyond the subprime sector. and the Bank of Japan. Furthermore. Figure 3.A and 2. and we restrict our attention to the recent period beginning January 2007. during the period of analysis. while Figure 1. and 4/17/08 on (Period 3). the evidence found is inconsistent with an effective manipulation of the level of the Libor. the day when the Journal first published the news that the BBA intended to investigate the accuracy of these rates. though. there was a widening of spreads in terms of both average (i. LIBOR AND BENCHMARKS We begin by comparing the 3 month Libor against the 3 month Treasury and the Federal Funds Effective rate.A covers the entire period of 1990 through 2008. Three major news items were announced in the public press on August 9. 2007: (a) there was a “coordinated intervention” by the European Central Bank.A shows the spread of 3 month Libor over 3 month Treasury. 2007.4 While it is true that spreads significantly widened beginning August 9.A and 4. However. fall outside of the scope of this study. Figures 2. while there are some apparent anomalies within the individual quotes. and again we see a significant widening of this spread beginning August 9. as the Journal alleges. 10 . Any such additional breaks. Figures 4. An increase in the spread beginning August 9.B are analogous presentations of the 1 month Libor. we consider a second “structural break” on April 17.

7. Likewise.A. 2008). Because this rate is usually applied to overnight loans.e. Once again.C show the cross-sectional means. it briefly increases and then trends downward through the remainder of the period. given the FFE rate for Periods 1. our results are presented in Figure 5.B and 7. given a “but for” condition that rates were not manipulated. B. it represents a short term rate of borrowing between banks. a structural break that begins on August 9. we must form an estimate of what the Libor would have been “but for” this alleged manipulation.B and 6. A similar pattern emerges for the intraday coefficients of variation as well. the empirical evidence is not consistent with the supposition that the level of Libor has been effectively manipulated downwards. the standard deviations. The intraday mean of the Libor (both 3 month and 1 month) is generally constant throughout Period 1. Clearly.C are analogous for the 1 month Libor. Figures 6. The Federal Funds Effective (FFE) rate is the interest rate at which banks (and other depository institutions) lend balances through the Federal Reserve Bank to other depository institutions. this rate should represent an effective “but-for” estimate of the Libor during the test period. distinguishing the entire set of 16 banks from the “deciding group” of 8 which determines the actual Libor. thus.A.during period 2). an examination of the level of the Libor against a suitable “but-for” predictor). the relationship between this Libor and the FFE is very strong during the estimation period. a period covering two major cycles in the economy. 6. INDIVIDUAL BANK QUOTES According to the Journal (Mollenkamp and Whitehouse. we extend the Journal’s analysis of individual quotes by reviewing 2007 data. 11 . They also investigated the credit default swap (CDS) market and developed estimates of the banks' individual Libor quotes. the Journal noted that the intraday variances for the bank quotes was unusually small as compared to the intraday means since January 2008. To test for this effect. 2 or 3. 2007 is evident. 2 and 3 as previously defined. and by studying other potentially relevant indicators. the actual Libor rate is not statistically different from its predicted values in either Period 1. However. In this section. and suggested that this is evidence of a pattern of manipulation. Similar results were found when studying the 3 month Libor rate series. the Journal did not present an analysis of the type we conducted above (i. the spreads of Libor over one or more of these other benchmark rates would have been significantly or unusually low. but instead examined patterns among the individual bank quotes. the 16 banks may “have been low-balling their borrowing rates to avoid looking desperate for cash. by investigating CDS spreads for each bank. In particular.” However. In other words. Figures 7. We first project the 1 month Libor on the FFE rate from 1990 through 2006. making it a suitable benchmark for our study. the intraday variance for these quotes significantly increases during Period 2. During Period 2. and the coefficients of variation of the individual 3 month Libor quotes. We then use this estimated relationship to predict what the 1 month Libor should have been.

Nevertheless. a somewhat stunning result emerges: a vast majority of the banks join the deciding group more than 95% of the time. and UBS AG. during Period 3.It appears that the individual quotes were very compressed in Period 1 relative to the later periods. HSBC. and (d) how often each submitted a quote that was less than or equal to the median quote on each day. To test the stability of the deciding group in each Period. while the rates of Citigroup and the Royal Banks of Canada and Scotland increase. we ask the question. a period with many instances when more than 8 banks participate because of identical quote submissions. Lloyds. once again. for any given reference bank. This nearly perfect participation rate is followed closely by a second group: HBOS. Citigroup. BTMU. The Royal Bank of Scotland participates least often. the BBA ranks the quotes from 1st to 16th and then calculates the Libor as the average of the 5th through 12th quotes. Although JPMChase and West LB continue to experience relatively high participation rates. In particular.e. while the rate of Deutschbank plummets to approximately 21%. (b) how often each submitted a quote higher than the deciding set. Table 4 reports summary statistics on rates of inclusion in the deciding group by period. The Libor is established as the simple average of the intermediate set of 8 quotes submitted by the 16 participating banks. 2007 and until August 8. It should be noted that. “when this bank joins the deciding group. if the data produced during Period 2 is believed to be evidence of manipulation. We report (a) how often each bank joined the deciding group. which participates about 50% of the time. Barclays. more than 8 banks on any given day may join the deciding group. i. The participation rate of JPMChase declines significantly. the participation rate of the Royal Bank of Scotland soars to approximately 60%. In other words. we did not find any evidence that the level of the Libor significantly differed from what it “should have been. JPMChase. then Period 1 would appear to contain far greater manipulation as far back as January 2. Royal Bank of Canada and CSFB are in the deciding group on virtually each day. West LB. we now explore the joint (pairwise) inclusion of banks. (c) how often each submitted a lower quote. These patterns change. the very low variability in the intraday quotes during Period 1 also appear anomalous. The composition of the deciding group becomes less stable. This group is distantly followed by a single bank. if several banks submit identical quotes. These patterns change significantly during Period 2. more than 8 banks may produce quotes that are tied for 5th place or 12th place. In other words. this resulted in the very low intraday variance mentioned above. 2007. Although it is not clear why the banks might have manipulated their quotes for such an extended period. During Period 1. due to the significant number of identical quotes that were submitted. at a rate of approximately 5%. In other words. how often do each of the other banks join the group?” 12 .” given the FFE rate. they are significantly reduced from their rates in Period 1. It would thus appear that the composition of the deciding group is relatively constant during Period 1. Conversely.

CONSISTENCY OF BANK QUOTES AND CDS SPREADS In this section of our analysis. From these tables. though.B. if the CDS market is segmented. that the standard deviations of CDS spreads began to increase prior to August 9. there may be additional (and evolving) liquidity premia associated with a CDS contract.The results are presented in Tables 5. The two parties may also possess different sensitivities to market risk. They are significantly greater in Periods 2 and 3 than in Period 1. i. It should be noted. when BTMU is in the deciding group. Figure 8. though. consistent with the trend of the Libor quotes. though any specific results should be interpreted with these caveats in mind. we can identify groups of banks that tend to cluster together in each of the three periods in order to form the deciding group. C. Of course. Furthermore. 13 . According to the Journal. thus serve as a useful indicator of the cost of borrowing. that Period 3 contains significantly fewer days than Periods 1 or 2.A plots the CDS spreads from January 2007 onwards. we see many joint inclusion rates in excess of 90% during Period 1. Note that this matrix is not symmetric. Figure 8. 2007. the spreads were much more compressed in Period 1 than in later periods. there are many reasons why significant discrepancies may exist between CDS spreads and short-term borrowing costs. when we fail to see a single pairwise inclusion rate of 100%. Period 3. As expected. the average pairwise inclusion rate is evidently reduced in comparison to Period 1.A through 5.” we indicate that. It should be noted. but (s)he may doubt its ability to meet its obligations over the next five years. according to the Journal. and thus may command different (and differently evolving) risk premia.B presents the cross-sectional standard deviations.4% in row “BTMU” and column “Bank America. The prices of CDS contracts are also presumed to be a function of financial strength and. For example. These (and many other) observations notwithstanding. for instance. is more mixed. the borrowing costs of banks are presumed to be a function of their perceived conditions of solvency and financial strength. Bank of America joins the group 93. the time horizons of interest may be different. though. but is greater in comparison to Period 2. we investigate the Journal's presumption that CDS spreads serve as effective benchmarks for assessing the reasonableness of Libor quote data.4% of the time. These rates fall significantly in Period 2.” we can note that each time Bank of America joined the group. by reviewing the row “Bank of America” and column “BTMU. Figure 9. In addition.e. a similar pattern to those found in the banks' intraday quotes. For instance. when we report 93. a creditor may believe that a bank is fully able to meet its obligations over the next 30 days and thus may lend to it at a low rate during that time. it is evident ceteris paribus that a “more risky” bank should have higher borrowing costs and CDS spreads than a “less risky” bank.B plots the same data only through August 2007 to illustrate Period 1 in more detail. Apparently. including several that exceed 99%. BTMU did so as well.

Citigroup’s quotes were low 100% of the time. Bank of America is quite similar. In other words. their Libor quotes were essentially always less than or equal to the median but their CDS spreads were never less than or equal the median. very large banks appear to have borrowing costs that are low in relation to their CDS spreads. Specifically. Although this issue falls beyond the scope of our analysis.1% of the time.8% of the time. for Period 1.6% of the time. 5 6 An exploratory analysis for West LB produced results that were consistent with (albeit less significant than) the results that were generated by these other banks. similar examples continue during Period 3. the low borrowing costs of JPMorgan and Citigroup provide a potential explanation for the disparities found when comparing their CDS spreads with their quotes. BTMU served as an outlier on the “high side. Our results are presented in Table 9. but their CDS spreads were only low 8% of the time. as shown in Table 10. We are interested in “outliers. Other explanations. but its CDS spreads were only low 0. For instance. the rate quotes of Citigroup and HBOS were low 93% and 54% of the time. but its CDS spreads were only low 32. with “low” Libor quotes 97% of the time but “low” CDS spreads only 2. Why is this true? One explanation is that larger banks may be able to obtain “volume discounts” and thus may be able to borrow at lower rates than smaller banks.We also compare the ordinal content of the CDS spread data with the individual Libor quotes. During Period 1.” defined as banks that consistently offered “low” Libor quotes while featuring “high” CDS spreads. but its CDS spreads were low only 3. we compare for each period (a) the percentage of time each bank’s CDS spread is less than or equal to the median spread. are possible as well. this cross-sectional analysis reveals that banks with low rate quotes do not necessarily enjoy low CDS spreads during Period 1. and Deutschbank meet this criterion.” Its quotes were high 36. These results suggest that either (a) CDS spreads are not effective ordinal indicators of borrowing costs. it should be noted that many of the “outlier” banks are relatively large as defined by their market caps. For example. JPMChase. or (b) this sample of banks is unusual and atypical in some manner that is not easily identified. of course.1% of the time. Interestingly. 14 .5 In sum. The rate quotes of West LB were low 66. respectively. and deserve additional study in future research work. Similar examples continue during Period 2.7% of the time.7% of the time. but its CDS spreads were low 98% of the time. And the rate quotes of JPM Chase were low 85.3% of the time.6 Once again. The quotes produced by West LB were low 36.6% of the time. CSFB. with (b) the percentage of time each bank's Libor quote is less than or equal to the median rate.2% of the time. but its CDS spreads were only low 1.

for that matter. CONCLUSIONS AND FUTURE WORK The analyses that were presented in this study screened for markers that are associated with the existence of conspiracies and manipulations in various industries. and other observable characteristics may emerge to provide alternative explanations for trends in rate quotes and CDS spreads as well. and others. Stress measures. There can always be alternative explanations for the presence of markers in competitive markets. many of these markers were readily available for review by market analysts on a contemporaneous basis.IV. Interestingly. such markers may indeed occur in the absence of anticompetitive behavior. these patterns shifted again. conversely. In addition. net borrowing or lending positions. many of the bank quotes actually decreased while the spreads on a wide variety of instruments increased. For instance. event studies may identify further structural breaks in the statistical time line. we do present statistical evidence of patterns that appear to be inconsistent with those that are normally expected to occur under conditions of market competition for certain of the periods under study. and explain part of the behavior found. CDS spreads began to increase several months before the market entered Period 2. and yet individual rate quotes remained unchanged. although this study does not provide conclusive evidence of the existence of anti-competitive market behavior (or. future research studies may choose to explore such explanations for these anomalies. As previously noted. Finally. any effective manipulation of the Libor rate) on the part of the banks. Nevertheless. commercial paper ratings and other alternative proxy measures of short term borrowing costs may prove to be more effective than CDS spreads for the group of banks studied within the designated time periods. 15 . All of these. Then. collusions and/or manipulations may occur in the absence of such markers. are recommended as subjects of future research. when allegations of potential manipulation were published on April 17.

00 Libor 3m.00 4.A 16 2/1/07 8/9/07 4/17/08 . Fed Funds Effective Rate and Treasury-Bill 3m Fed Funds Effective FIGURE 1.00 0.10.00 8.00 7/13/1990 7/13/1991 7/13/1992 7/13/1993 7/13/1994 7/13/1995 7/13/1996 7/13/1997 7/13/1998 7/13/1999 7/13/2000 7/13/2001 7/13/2002 7/13/2003 7/13/2004 7/13/2005 7/13/2006 7/13/2007 Treasury-Bill 3m Libor 3m 2.00 6.00 12.

00 1/1/2007 2/1/2007 3/1/2007 4/1/2007 5/1/2007 Libor 3m 6/1/2007 7/1/2007 8/1/2007 9/1/2007 10/1/2007 11/1/2007 12/1/2007 1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6/1/2008 4/17/08 8/9/07 Fed Funds Effective 1. Fed Funds Effective Rate and Treasury-Bill 3m 17 Treasury-Bill 3m .B Libor 3m.00 2.00 3.00 5.00 6.00 7.0.00 4.00 FIGURE 1.

00 7/13/1990 7/13/1991 7/13/1992 7/13/1993 7/13/1994 7/13/1995 7/13/1996 7/13/1997 7/13/1998 7/13/1999 7/13/2000 7/13/2001 7/13/2002 7/13/2003 7/13/2004 7/13/2005 7/13/2006 7/13/2007 Treasury-Bill 1m Fed Funds Effective Libor 1m 2.A Libor 1m.00 FIGURE 2.00 8.10. Fed Funds Effective Rate and Treasury-Bill 1m 18 2/1/07 8/9/07 4/17/08 .00 6.00 12.00 4.00 0.

00 2.00 6.00 7. Fed Funds Effective Rate and Treasury-Bill 1m 19 Treasury-Bill 1m .B Libor 1m.00 4.00 FIGURE 2.0.00 3.00 5.00 1/1/2007 2/1/2007 3/1/2007 4/1/2007 5/1/2007 Libor 1m 6/1/2007 7/1/2007 8/1/2007 9/1/2007 10/1/2007 11/1/2007 12/1/2007 1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6/1/2008 4/17/08 Fed Funds Effective 8/9/07 1.

50 2.50 1.00 2.0.00 8/9/07 0.00 1.A Spread: LIBOR 3m over Treasury-Bill 3m 20 1/ 1/ 20 08 2/ 1/ 20 08 3/ 1/ 20 08 4/ 1/ 20 08 5/ 1/ 20 08 6/ 1/ 20 08 9/ 1/ 20 07 10 /1 /2 00 7 11 /1 /2 00 7 12 /1 /2 00 7 4/17/08 .50 1/ 1/ 20 07 2/ 1/ 20 07 3/ 1/ 20 07 4/ 1/ 20 07 5/ 1/ 20 07 6/ 1/ 20 07 7/ 1/ 20 07 8/ 1/ 20 07 FIGURE 3.

00 -0.00 0.50 2.0.50 1/1/2007 2/1/2007 3/1/2007 4/1/2007 5/1/2007 6/1/2007 7/1/2007 8/9/07 8/1/2007 9/1/2007 FIGURE 3.B Spread: LIBOR 3m over Fed Funds Effective Rate 21 10/1/2007 11/1/2007 12/1/2007 1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6/1/2008 4/17/08 .00 1.50 1.

50 1/ 1/ 20 07 2/ 1/ 20 07 3/ 1/ 20 07 4/ 1/ 20 07 5/ 1/ 20 07 6/ 1/ 20 07 7/ 1/ 20 07 8/ 1/ 20 07 FIGURE 4.50 1.A Spread: LIBOR 1m over Treasury-Bill 1m 22 1/ 1/ 20 08 2/ 1/ 20 08 3/ 1/ 20 08 4/ 1/ 20 08 5/ 1/ 20 08 6/ 1/ 20 08 9/ 1/ 20 07 10 /1 /2 00 7 11 /1 /2 00 7 12 /1 /2 00 7 4/17/08 .0.00 8/9/07 0.00 3.00 2.50 2.50 3.00 1.

50 2.00 -0.B Spread: LIBOR 1m over Fed Funds Effective Rate 23 10/1/2007 11/1/2007 12/1/2007 1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6/1/2008 4/17/08 .00 1.50 1/1/2007 2/1/2007 3/1/2007 4/1/2007 5/1/2007 6/1/2007 7/1/2007 8/1/2007 8/9/07 9/1/2007 FIGURE 4.00 0.50 1.0.

00 4.00 3.17 Slope = 1 R-Squared = 0. based on Fed Funds Effective Rate 7.00 5.00 Constant = 0.00 8/9/07 4/17/08 9/1/2007 10/1/2007 11/1/2007 12/1/2007 1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6.FIGURE 5 Actual and Predicted Libor 1m.98 1.00 1/1/2007 2/1/2007 3/1/2007 4/1/2007 5/1/2007 6/1/2007 7/1/2007 8/1/2007 6/1/2008 Actual Libor 1m Predicted Libor 1m 95% Confidence Interval 95% Confidence Interval 24 .30/5/08 Model: Regress Libor 1 month onto Fed Funds Effective Rate 2.00 Estimation Window: 7/13/90 .31/12/06 Projected Window: 1/1/07 .00 0.

00 4.2.50 3.00 1/2/2007 2/2/2007 3/2/2007 4/2/2007 5/2/2007 6/2/2007 7/2/2007 8/9/0 8/2/2007 2.50 6.00 All 16 Banks 9/2/2007 10/2/2007 FIGURE 6.50 4.A Libor 3m: Cross-Sectional Mean for Banks Quotes 25 Deciding Group 11/2/2007 12/2/2007 1/2/2008 2/2/2008 3/2/2008 4/2/2008 5/2/2008 4/17/08 .00 3.50 5.00 5.

02 0.03 0.04 0.01 0.03 0.05 0.FIGURE 6.00 1/2/2007 2/2/2007 3/2/2007 4/2/2007 5/2/2007 6/2/2007 7/2/2007 8/2/2007 9/2/2007 10/2/2007 11/2/2007 12/2/2007 1/2/2008 2/2/2008 3/2/2008 4/2/2008 5/2/2008 4/17/08 Alll 16 Banks Deciding Group 26 .01 0.B Libor 3m: Cross-Sectional Standard Deviation for Banks Quotes 0.02 0.05 8/9/0 0.04 0.

00 0.00 0.01 0.01 8/9/0 0.01 0.01 0.01 4/17/08 0.FIGURE 6.C Libor 3m: Cross-Sectional Coefficient of Variation for Banks Quotes 0.00 1/2/2007 2/2/2007 3/2/2007 4/2/2007 5/2/2007 6/2/2007 7/2/2007 8/2/2007 9/2/2007 10/2/2007 11/2/2007 12/2/2007 1/2/2008 2/2/2008 3/2/2008 4/2/2008 5/2/2008 All 16 Banks Deciding Group 27 .

50 3.00 3.A Libor 1m: Cross-Sectional Mean for Banks Quotes 28 Deciding Group 4/ 2/ 20 08 5/ 2/ 20 08 4/ 2/ 20 07 5/ 2/ 20 07 6/ 2/ 20 07 7/ 2/ 20 07 8/ 2/ 20 07 9/ 2/ 20 07 10 /2 /2 00 7 11 /2 /2 00 7 12 /2 /2 00 7 1/ 2/ 20 08 2/ 2/ 20 08 3/ 2/ 20 08 4/17/08 .50 4.2.50 5.00 8/9/07 2.50 6.00 5.00 4.00 1/ 2/ 20 07 2/ 2/ 20 07 3/ 2/ 20 07 All 16 Banks FIGURE 7.

01 0.FIGURE 7.B Libor 1m: Cross-Sectional Standard Deviation for Banks Quotes 0.06 8/9/07 4/17/08 0.03 0.04 0.02 0.00 4/ 2/ 20 07 5/ 2/ 20 07 6/ 2/ 20 07 7/ 2/ 20 07 8/ 2/ 20 07 9/ 2/ 20 07 10 /2 /2 00 7 11 /2 /2 00 7 12 /2 /2 00 7 1/ 2/ 20 08 2/ 2/ 20 08 3/ 2/ 20 08 1/ 2/ 20 07 2/ 2/ 20 07 3/ 2/ 20 07 4/ 2/ 20 08 5/ 2/ 20 08 Alll 16 Banks Deciding Group 29 .05 0.

01 4/17/08 0.00 0.00 4/ 2/ 20 07 5/ 2/ 20 07 6/ 2/ 20 07 7/ 2/ 20 07 8/ 2/ 20 07 9/ 2/ 20 07 10 /2 /2 00 7 11 /2 /2 00 7 12 /2 /2 00 7 1/ 2/ 20 08 2/ 2/ 20 08 3/ 2/ 20 08 1/ 2/ 20 07 2/ 2/ 20 07 3/ 2/ 20 07 4/ 2/ 20 08 5/ 2/ 20 08 All 16 Banks Deciding Group 30 .00 0.FIGURE 7.01 0.01 0.C Libor 1m: Cross-Sectional Coefficient of Variation for Banks Quotes 0.01 0.01 8/9/07 0.

FIGURE 8. 2008 8/9/07 4/17/08 300 250 CDS Spreads 200 150 100 50 0 1/2/2007 2/2/2007 3/2/2007 4/2/2007 5/2/2007 6/2/2007 7/2/2007 8/2/2007 9/2/2007 10/2/2007 11/2/2007 12/2/2007 1/2/2008 2/2/2008 3/2/2008 4/2/2008 JPM Chase HBOS BTMU Citigroup HSBC UBS AG Bank of America CSFB Lloyds West LB Barclays Deutschbank Rabobank Royal Bank of Scotland 31 5/2/2008 . 2007 .A CDS Spreads.May 30. Senior 5 years January 2.

2007 8/9/07 70 60 CDS Spreads 50 40 30 20 10 0 1/ 2/ 20 07 1/ 16 /2 00 7 1/ 30 /2 00 7 2/ 13 /2 00 7 2/ 27 /2 00 7 3/ 13 /2 00 7 3/ 27 /2 00 7 4/ 10 /2 00 7 4/ 24 /2 00 7 5/ 8/ 20 07 5/ 22 /2 00 7 6/ 5/ 20 07 6/ 19 /2 00 7 7/ 3/ 20 07 7/ 17 /2 00 7 7/ 31 /2 00 7 8/ 14 /2 00 7 Citigroup Citibank HSBC UBS AG Bank of America CSFB Lloyds West LB Barclays Deutschbank Rabobank JPM Chase HBOS Royal Bank of Scotland 32 .August 20. 2007 . Senior 5 years January 2.FIGURE 8.B CDS Spreads.

00 40.00 70.00 30.00 60.A Cross-Sectional Mean for Banks CDS Spreads 13 Banks 33 1/2/2008 2/2/2008 3/2/2008 4/2/2008 5/2/2008 4/17/08 .00 0.00 1/2/2007 2/2/2007 3/2/2007 4/2/2007 5/2/2007 6/2/2007 7/2/2007 8/9/07 8/2/2007 9/2/2007 10/2/2007 11/2/2007 12/2/2007 FIGURE 8.00 80.00 20.10.00 50.

0.50 2.00 1/2/2007 2/2/2007 3/2/2007 4/2/2007 5/2/2007 6/2/2007 7/2/2007 8/9/07 8/2/2007 9/2/2007 10/2/2007 0.00 2.00 1.50 1.00 4.B Cross-Sectional Standard Deviation for Banks CDS Spreads 13 Banks 34 11/2/2007 12/2/2007 1/2/2008 2/2/2008 3/2/2008 4/2/2008 5/2/2008 4/17/08 .00 3.50 3.50 5.50 4.00 FIGURE 8.

2007 .April 16. 2007 . 2008 April 17.August 8. 2008 .May 30. 2008 35 .TABLE 1 Time Periods Period 1 Period 2 Period 3 January 2. 2007 August 9.

303 Fed Funds Effective Rate Spread Mean Stand Deviation Coeff Variation 0.064 0.616 0.178 Libor 1-Month Mean Period 1 Period 2 Period 3 0.312 0.469 0.TABLE 2 Libor 3-Months Mean Period 1 Period 2 Period 3 0.6 Fed Funds Effective Rate Spread Mean Stand Deviation Coeff Variation 0.373 0.372 1.532 0.096 Treasury-Bill Spread Stand Deviation Coeff Variation 0.03 0.03 0.819 0.382 1.38 0.302 0.243 0.332 0.306 0.642 0.31 36 .1 0.165 0.069 Treasury-Bill Spread Stand Deviation Coeff Variation 0.404 1.352 0.395 1.495 0.675 0.342 0.912 0.141 0.12 0.371 0.269 0.

429 4/17/08-5/30/08 Li bor1m over FF-Eff Coeff T-Stat T-(robust) 0.297 -4.395 11.624 Li bor 3m over FF-Eff Coeff T-Stat T-(robust) 0.560 4.372 16.100 5.302 7.724 Intercept 0.026 33.734 33.203 8/9/07-4/16/08 0.286 -5.189 4.259 -1.225 1.297 0.TABLE 3 Statistical Tests on Changes in Spreads Means Intercept 8/9/07-4/16/08 4/17/08-5/30/08 Libor 1m over Tbill 1m Coeff T-Stat T-(robust) 0.648 5.273 11.064 3.279 11.009 21.675 0.699 4/17/08-5/30/08 Libor 3m over Tbill 3m Coeff T-Stat T-(robust) 0.577 2.921 -0.010 31.573 24.822 37.460 Intercept 8/9/07-4/16/08 4/17/08-5/30/08 37 .545 4.335 -4.738 12.414 Intercept 1.433 5.157 8/9/07-4/16/08 -0.

5% 0.6% 44.0% 76.7% 100.3% 97.3% 17.6% Period 3 0.1% 85.0% 76.8% 98.9% 15.7% 98.6% 80.0% 3.9% 3.3% 56.0% 43.0% 60.TABLE 4 Percent in Deciding Group BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Scotland UBS AG West LB Period 1 99.2% 93.3% 92.2% 98.9% 0.8% 92.0% 100.7% 86.0% 70.3% 26.7% 0.2% 1.7% 6.3% 6.4% 2.3% 13.0% 53.3% 99.2% 0.7% 0.7% 93.3% 93.7% 40.6% 98.2% 66.7% 33.0% 0.7% Period 2 0.5% 93.2% 37.1% 85.2% 4.0% 0.0% 46.0% 80.6% 2.3% 87.7% 1.3% 90.3% 13.6% 21.7% 53.7% 0.2% 13.9% 38.0% 24.7% 50.3% 53.0% 4.7% 6.3% 10.0% 0.7% 0.0% 10.0% 9.1% 45.3% 98.3% 0.0% 3.0% Percent Below Period 1 0.3% 6.7% 70.6% 0.0% Period 2 24.4% 66.3% Period 3 86.6% 96.8% 55.3% 0.9% 2.0% 0.5% 4.3% 70.7% 56.3% 3.3% 30.7% 0.0% 46.3% 0.0% 1.1% 61.3% 1.7% 17.7% 0.7% 30.0% 0.0% 86.3% 86.5% 33.5% 77.3% 76.7% 1.4% 89.0% 50.0% 0.0% 0.8% 80.4% 61.3% 6.0% 75.0% 0.0% 100.7% 19.0% 1.3% 3.1% 14.0% 66.7% 99.5% 67.0% Percent in Low Half Period 1 99.7% 93.6% 98.3% 94.4% 55.7% 100.0% 99.0% 13.7% 100.1% 58.7% 80.5% 55.3% 95.0% 7.4% 7.8% 96.3% 0.7% 3.7% 23.7% 0.0% Period 2 31.0% 99.0% 86.6% 1.7% 2.8% 78.0% Percent Above Period 1 0.7% 5.0% 99.4% 2.7% 100.5% 59.0% 6.0% 0.1% 1.7% 96.6% 55.9% 2.8% 91.3% 48.7% 0.3% Period 2 75.0% 4.1% Period 3 13.1% 86.0% 90.0% 0.0% 3.3% 96.3% 23.0% 75.7% 76.0% 96.0% 88.0% 54.3% 10.0% 0.0% 98.7% 20.5% 75.3% 13.0% 38 .0% 46.0% 96.6% 50.9% Period 3 3.

8% 94.3% 55.6% 100.7% 96.2% 72.0% 97.6% 98.3% 100.5% 93.4% 100.3% 99.0% 39 .8% 96.0% 99.A Banks Pairwise Participation Rates.7% 56.5% 84.7% 98.7% 71.5% 95.3% 98.0% 99.3% 100.7% 73.0% 99.6% 98.0% Lloyds 96.0% 75.3% 99.7% 94. 2/1/07 .9% 85.0% 95.7% 95.0% 98.6% 93.8% JPM Chase 98.0% 100.3% 100.1% Norinch 84.4% West LB 99.0% 98.1% 98.9% 75.3% 85.3% 99.0% 99.8% 92.0% 98.3% 3.7% 97.3% Deutschb 94.7% 100.5% 47.8% 99.6% 96.3% 99.0% 99.7% 98.2% 2.4% 98.3% 100.1% 97.7% 99.3% 2.0% 98.3% 99.4% 75.0% 98.9% 98.0% 98.6% 4.3% 93.1% 95.7% 97.1% 90.1% 98.9% Citi 99.0% 98.4% 100.7% 100.7% 56.3% 97.4% 100.0% 98.6% 96.3% 96.3% 99.2% 77.3% 99.0% 98.7% 57.6% 97.3% 96.3% 99.0% 100.0% 87.4% 4.3% 55.1% 3.4% 96.0% 98.0% 76.7% 98.0% 99.0% 96.0% 98.6% 97.7% 64.2% 93.7% 5.9% 54.9% 93.3% 99.7% 93.0% 99.3% 97.7% 71.6% 100.0% 95.6% 4.0% 100.3% 99.3% 97.0% 100.6% 97.3% 100.0% 98.7% Royal Bank of Stotland 4.4% 76.3% 57.3% 76.0% 98.1% 84.3% CSFB 99.2% 99.3% 97.3% 99.9% 97.3% 85.9% Rabob 75.7% 4.3% 55.0% 100.3% 99.2% 76.3% 100.0% 56.3% 100.6% 95.7% 97.3% 100.0% 98.0% 100.1% 55.8% 98.8% 4.4% 4.3% 94.0% 99.6% 56.4% 3.4% 100.7% 97.7% 28.0% 99.0% 100.3% 98.3% 85.6% 95.3% 52.6% 100.7% 97.9% BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Stotland UBS AG West LB BTMU 100.2% 92.0% 97.3% 99.3% 99.4% HSBC 98.3% 99.3% 99.5% 85.1% 99.6% 98.2% 99.0% 99.4% HBOS 96.6% 96.3% 76.9% 85.9% 88.3% 100.0% 99.0% 85.1% 84.0% 98.0% 88.4% 98.7% 96.3% 100.3% 99.7% UBS AG 96.0% 3.8% 100.7% 100.0% 98.7% 97.2% 100.0% 85.1% 97.2% 97.0% 97.0% 100.1% 92.3% 95.6% 2.3% 100.0% 99.3% Barcl 55.7% 97.1% 96.9% 95.3% 75.4% 96.5% 99.8/8/07 Bank Amer 93.7% 84.0% 98.3% 92.7% 100.1% 100.4% 98.TABLE 5.6% 98.2% 97.7% 94.7% 97.0% 55.8% 93.3% 99.0% 71.0% 98.7% 76.3% 93.3% 98.8% 100.1% 96.8% 100.3% 99.3% 97.3% 96.3% 99.3% 100.0% Royal Bank of Canada 98.7% 96.1% 85.8% 84.3% 99.0% 71.3% 99.

2% 43.3% 73.3% Royal Bank of Canada 88.7% 34.9% 60.4% 35.0% 40 .8% 75.3% 91.3% Lloyds 81. 8/9/07 .2% 55.0% 65.5% 22.2% 62.6% 40.7% 77.7% 62.9% 50.9% 63.6% 33.6% 65.5% 63.7% 87.8% 100.5% 44.3% 26.7% 78.3% 61.2% 91.4% 65.9% 63.8% 58.4% 58.1% 54.6% 55.1% 100.3% 68.7% 75.TABLE 5.1% 69.0% 78.1% 59.7% 88.4% 88.6% 92.2% 56.0% 48.9% 78.5% 72.6% 80.9% 92.8% 58.6% 67.4% 76.4% 77.7% 90.1% 90.4% 32.3% 71.6% 34.7% 45.3% 89.0% 73.6% 86.3% 60.0% 67.8% 67.1% 94.3% 59.7% 57.0% 67.0% 52.9% 92.6% Norinch 35.9% 94.9% 83.8% 68.5% 91.5% 64.0% 59.9% 41.1% BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Stotland UBS AG West LB BTMU 100.3% 79.7% Rabob 45.5% Deutschb 22.1% 100.2% 78.0% 77.7% 78.8% 73.1% 84.4% 100.8% 78.8% 77.3% 82.6% 74.0% 84.6% 48.9% 100.1% 85.9% 63.6% 76.8% 71.0% JPM Chase 89.3% 63.7% 22.4% 24.2% 60.7% 69.8% 73.0% 100.0% 75.7% 59.0% 61.3% 66.3% 60.8% 100.0% 74.B Banks Pairwise Participation Rates.7% 86.2% 19.0% 56.0% 32.2% Citi 59.1% 92.3% 80.9% 56.2% HSBC 71.8% 47.3% 88.9% 81.1% 28.8% 45.8% 60.2% 100.4% 17.2% 81.1% 90.0% 23.0% 63.4% 94.7% 29.8% 78.8% 45.0% 87.9% 78.0% 48.6% 92.4% 31.8% 59.3% 80.7% 76.5% CSFB 77.4% 100.0% 83.9% 89.9% 77.2% 74.3% 88.1% 31.4% 62.6% 77.5% 72.7% 55.0% 58.2% 66.1% 20.5% 95.2% 49.6% 74.1% 41.7% 87.5% 100.3% 65.0% 60.2% 60.0% 22.8% 100.3% 44.9% 42.8% 71.0% 87.0% 47.1% 79.5% 86.0% 44.4% 56.1% 88.3% 75.3% 66.2% 81.0% 65.1% 72.0% 33.0% 81.8% 20.9% 86.5% UBS AG 56.2% 100.6% 16.9% 53.7% 41.1% 60.5% West LB 93.7% 77.3% 22.4/16/08 Bank Amer 71.0% 89.1% 50.8% 21.5% 65.5% 43.0% 84.2% 47.1% 49.3% 72.5% 48.3% Barcl 48.3% 36.4% 60.4% 83.5% 39.7% 92.6% 78.4% 94.2% 37.6% 73.6% 75.4% 91.0% 72.4% 86.6% 91.4% 100.1% 57.5% 16.1% 82.0% 76.6% 76.3% 34.9% 17.7% 50.7% 43.4% 73.9% 75.3% 100.5% 55.2% 89.8% 80.7% 94.8% 66.6% 78.1% 74.3% 86.3% 87.7% 79.2% 100.7% 69.3% Royal Bank of Stotland 60.2% HBOS 77.

0% 85.0% 14.3% 8.0% 87.7% 68.7% 16.2% 52.8% 52.9% Royal Bank of Canada 75.2% 65.3% 100.1% 100.3% 14.7% 7.5% 0.6% 75.8% 100.0% 45.8% 29.7% 20.8% 66.5% 88.6% 81.3% JPM Chase 75.0% 92.3% 46.3% 91.3% 100.2% 46.0% 84.4% 56.0% 85.3% 16.7% 84.1% Citi 75.6% 68.0% 85.7% 100.6% 84.3% 12.9% 23.5% 16.3% 100.2% 82.5% 41.0% 66.3% 53.7% 93.6% 87.0% 100.4% 68.0% 66.4% 9.5% 8.3% 84.7% 100.0% 100.1% 85.7% 15.0% 53.7% 11.7% West LB 50.8% 68.1% 7.4% UBS AG 100.5% 75.6% 85.3% 42.8% 52.7% 84.0% 85.4% 23.5% 94.8% 50.7% BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Stotland UBS AG West LB BTMU 100.0% 57.6% 66.3% 83.0% 68.7% 69.5% 0.0% 52.7% 85.9% 95.0% 84.0% 100.5% 100.3% 33.0% Lloyds 25.8% 66.2% 57.5% 82.0% 14.7% 84.9% 50.6% 81.0% 0.0% 50.4% Norinch 75.5% 82.7% 91.3% 84.0% 100.6% 10.6% 85.0% 0.8% 61.7% 7.4% 83.8% 95.8% 88.6% 84.4% Royal Bank of Stotland 50.7% 91.4% 65.5% 83.3% 76.4% 17.0% 14.3% 8.7% 92.8% 66.0% 84.0% 69.7% 11.7% 33.8% 7.3% 66.7% 100.3% 11.5% 56.5% 9.2% 43.9% 66.0% 28.2% 25.7% 78.0% 57.9% 75.5% 100.8% 66.8% 33.6% 83.1% 12.0% HBOS 50.1% 85.7% 91.9% 83.0% 29.C Banks Pairwise Participation Rates.8% 68.4% 42.0% 85.7% HSBC 100.8% 45.0% 45.0% Deutschb 25.6% 100.8% 41.3% 95.0% 84.3% 100.7% 87.6% 100.1% 76.0% 6.3% 83.2% 85.7% 87.8% 53.1% 57.1% 100.0% 50.3% 17.3% 29.0% 6.7% 71.7% 78.0% 85.0% 41 .7% 87.0% 25.0% 71.5% Rabob 50.0% 52.0% 81.1% 23.3% 88.5% 33.6% 83.6% 93.0% 14. 4/17/08-5/30/08 Bank Amer 0.0% 42.5% 54.9% 71.8% 94.2% 100.0% 85.1% 76.6% 61.5% Barcl 25.0% 15.1% 12.7% 78.8% 76.7% 50.3% 84.3% 84.9% 45.4% 21.6% 37.9% 14.3% 11.0% 85.2% 19.8% 92.7% 83.7% 84.9% 71.9% 57.4% 23.TABLE 5.7% 50.0% 100.5% 84.6% 80.2% 100.0% 26.0% 28.0% 53.0% 83.2% 46.1% 16.8% 53.4% 89.0% 57.8% 66.2% CSFB 75.7% 87.7% 100.7% 23.4% 6.3% 15.7% 53.7% 42.3% 18.6% 84.3% 96.3% 57.4% 66.6% 62.0% 0.6% 93.0% 62.8% 19.2% 92.6% 100.7% 46.

19 0.79 -0.39 0.TABLE 6 Correlation between Quotes and CDS Spreads BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Scotland UBS AG West LB Period 1 0.89 NaN -0.58 0.82 -0.58 0.52 0.82 -0.15 NaN NaN 0.76 -0.41 0.35 0.85 -0.85 Period 3 0.51 0.84 -0.88 NaN NaN -0.85 -0.58 0.00 0.57 0.40 0.24 NaN 0.85 -0.24 0.18 0.71 NaN 0.24 NaN NaN 0.84 -0.51 42 .53 0.86 -0.71 Period 2 -0.18 0.50 0.46 0.16 -0.44 -0.

08 -0.09 -0.11 NaN -0.03 -0.15 -0.23 NaN -0.00 -0.48 NaN NaN -0.20 -0.31 0.25 -0.TABLE 7 Correlation between changes in Quotes and changes in CDS Spreads BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Scotland UBS AG West LB Period 1 -0.26 -0.11 -0.13 0.00 -0.21 -0.06 -0.05 -0.28 0.07 -0.15 -0.02 Period 3 -0.18 -0.44 -0.19 0.29 43 .09 -0.13 0.01 NaN NaN -0.53 -0.01 Period 2 -0.25 -0.07 NaN NaN -0.03 -0.55 -0.02 -0.12 0.17 NaN -0.21 -0.

67 0.68 0.19 NaN Period 2 NaN 0.78 0.06 -0.91 0.14 -0.46 0.85 0.75 NaN 44 .21 0.88 NaN NaN -0.81 0.91 0.93 NaN Period 3 NaN 0.89 -0.03 0.12 -0.53 0.30 -0.77 -0.TABLE 8 Correlation between Quotes and Market CAP BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Scotland UBS AG West LB Period 1 NaN -0.05 -0.85 0.58 0.37 0.78 NaN NaN 0.00 NaN NaN 0.84 0.30 -0.22 0.36 0.85 0.00 -0.78 0.73 0.19 0.

0% 93.0% 98.3% 100.0% 99.4% 58.7% 0.6% 26.0% 96.7% 36.7% 99.TABLE 9 CDS spreads BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Scotland UBS AG West LB Percent in Low Half Period 1 Period 2 68.4% 94.7% 0.7% Period 3 100.0% Libor Quotes Percent in Low Half (*1) Period 1 Period 2 Period 3 96.0% 16.2% 91.0% 32.3% 98.7% 1.6% 41.3% 97.0% 70.7% 36.6% 93.4% NaN NaN 100.0% 100.3% 55.0% 85.0% NaN 100.9% 99.5% 0.3% 8.0% 98.1% 93.2% 100.7% 96.7% (*1) Computed only among the 13 banks for which we also have CDS spreads data 45 .5% 76.4% 23.5% 86.1% 59.0% 42.0% 75.8% 3.3% 90.1% 76.0% 100.3% 98.3% 54.3% 2.7% 36.1% 66.3% 8.0% 92.1% 45.4% 0.0% 64.0% NaN NaN NaN NaN 83.0% 0.3% 99.0% NaN NaN 46.7% 98.0% 100.8% 46.0% 0.3% 6.7% 63.0% 53.0% 100.7% 96.8% 0.9% 100.0% 84.4% 100.7% 99.7% 59.3% 61.2% 3.

4% 100.0% 100.0% 100.0% 87.8% NaN NaN Period 3 NaN 93.0% 0.0% 3.6% 19.7% 36.2% 99.2% 100.0% 0.0% 100.0% 0.0% 0.7% 66.0% 90.0% 98.1% 48.0% 71.0% 0.9% 55.0% 100.3% 90.7% 98.0% 100.7% 36.0% 63.3% 99.0% 0.0% 4.7% 76.0% 99.0% NaN NaN 53.0% NaN NaN NaN (*1) Computed only among the 12 banks for which we also have Market CAP data.0% 20.0% 93.9% 96. 46 .7% 93.9% NaN NaN NaN NaN 98.3% NaN Market CAP Percent in Low Half (*1) Period 1 Period 2 Period 3 NaN NaN NaN 0.3% 0.0% 40.0% 100.9% 100.0% 0.7% 59.3% 76.3% 60.0% 0.7% 96.0% 0.3% 87.TABLE 10 Libor Quotes BTMU Bank of America Barclays JPM Chase Citigroup CSFB Deutschbank HBOS HSBC Lloyds Norinchukin Rabobank Royal Bank of Canada Royal Bank of Scotland UBS AG West LB Percent in Low Half Period 1 Period 2 NaN NaN 96.7% 0.0% 97.9% 98.0% 100.3% 99.0% 98.2% 98.3% 20.0% 100.7% 100.0% 51.7% 48.0% 100.0% NaN NaN NaN NaN NaN NaN 100.0% 0.0% 0.0% 0.0% 100.7% 100.

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