09/26/2012 12:27 pm ET Updated Sep 26, 2012

Traders Find Libor Manipulation Hilarious, Instant Messages Show

Libor is a joke.

Don't get me wrong, the London Interbank Offered Rate, or Libor, is deadly serious business, affecting $350 trillion in derivatives contracts and all sorts of borrowing costs around the world. Your adjustable-rate mortgage or corporate loan is probably based on Libor. A big deal, then.

But it has long been a hilarious joke to traders, as some new instant message transcripts dug up by Bloomberg show. The transcripts, which are evidence in a wrongful-termination suit by a former Royal Bank of Scotland trader, show RBS traders breezily chatting back and forth about how much fun they're having jerking around this important interest rate.

The rate is set every day by 16 banks that self-report their borrowing costs to a central authority, the British Bankers Association. The giant conflict of interest in this process is that these same banks also have derivatives desks that can profit if Libor is moved by just a few tenths of a percentage point higher or lower. The banks long ago discovered that they could manipulate Libor without much trouble, and it's looking more and more like they did so at every opportunity.

“Nice Libor,” former RBS trader Tan Chi Min, told his fellow traders in an April 2008 IM, Bloomberg reports. “Our six-month fixing moved the entire fixing, hahahah.”

On another occasion, in August 2007, Tan requested that another trader, Neil Danziger, move Libor higher, and the global head of RBS treasury markets in London, Scott Nygaard, responded, "Go Neil. Hahahaha."

Yes, hahahaha! The great thing about Libor manipulation is that it is easy, profitable and hilarious.

Only it's slightly less hilarious now. Tan, Danziger and other traders got fired last year for Libor manipulation. Sixteen banks in the U.S., U.K. and Europe are under investigation, and damages in the case could run into the tens of billions of dollars. Barclays Capital has already paid about $450 million in fines. Regulators are talking about dropping Libor as a benchmark interest rate.

Tan is suing RBS, saying his bosses knew full well that Libor was just a trader's plaything, and he's dragging out all of this IM traffic to prove it. The bank, which is mostly owned by the British government, says it is cooperating with regulatory investigations into its Libor practices.

This isn't the first time we've heard about traders yukking it up over Libor manipulation. Back in July, a former Morgan Stanley trader said he was laughed off the trading floor when he expressed shock about Libor manipulation back in 1996:

I talked with some of my more experienced colleagues about this. They told me banks misreported the Libor rates in a way that would generally bring them profits. I had been unaware of that, as I was relatively new to financial trading. My naivety seemed to be humorous to my colleagues.

Libor fraud: Making traders laugh since the Clinton administration.

It took regulators decades to finally get around to doing something about Libor, a process that began in earnest last year. Totally coincidentally, that is when Tan and other traders seemed to stop and wonder if there was anything wrong with what was going on:

“Question is what is illegal?" Tan said in one exchange in May 2011. "If making money if bank fix it to suits its own books are illegal... then no point fixing it right? Cuz there will be days when we will def make money fixing it.”

Tan was fired not long after.



Libor Scandal Timeline