[ by Howard Haykin ] And It's Not Just An "English Thing." Gary Gensler, whose CFTC successfully settled the Barclays Libor Rate Manipulation case for $252 million, could theoretically sit back and revel in his Agency's new-found popularity.  Rather than take another victory lap, Mr. Gensler placed a well-timed Op-Ed piece in the NYTimes, to dispel several misnomers in America about the Libor benchmark rate. Because Libor is not commonly mentioned here, it's understandable that many Americans - and probably quite a few Wall Streeters, see this manipulation matter as an "English matter." But as Mr. Gensler points out, Libor is an important benchmark that has impacts American business every day.  Did you know that ...

• Libor is the reference rate for nearly half of adjustable-rate mortgages (ARMs) in the United States;
• Libor is used for about 70% of the American futures market; and,
• Libor is used for a majority of the American swaps market, where businesses hedge risks from changes in interest rates.

Those statistics don't begin to reflect the global importance of the London interbank offered rate, or Libor. It is one of the benchmark rates used to determine the cost of borrowing around the world, and "what goes around comes around," meaning it factors into the cost of exports and imports. Concern for All Key Interest Rates. The Barclays case, as well as those cases involving other banks aren’t just about misconduct by large financial institutions.  They also raise questions about the reliability and accuracy of each of the key interest rates, which are largely determined by the private sector, without significant government oversight. What Libor Is and What It's Supposed to Be. Libor is supposed to be the average rate at which the largest banks honestly believe they can borrow from one another unsecured (that is, without posting collateral). Libor was set up in the 1980s when banks regularly made loans to other banks on that basis.  Yet, that loan market is essentially, a "shadow of its former self."  That's because:

• fewer banks are willing to lend to one another on such terms because of economic turmoil - including the 2008 global financial crisis, the European debt crisis that began in 2010, and the 2012 downgrading of large banks’ credit ratings.
• banks rely more heavily on secured borrowing; and,
• on occasion, the banks depend if not rely on borrowing from central banks like the Federal Reserve and the European Central Bank.  As Mervyn King, the governor of the Bank of England, said of Libor in 2008:  "It is, in many ways, the rate at which banks do not lend to each other."

Dissimilarity of Libor to Other Benchmarks. Furthermore, Libor has produced rates that are quite dissimilar to other benchmark interest rates - like Euribor.   While Libor is presumably based on what rate a bank thinks it can borrow unsecured funds, Euribor, or euro interbank offered rate, is based on what rate a bank thinks other banks are able to borrow.  The two should not differ markedly because banks are asked roughly the same question - but they are.  The Euribor for dollar borrowings is about twice as high as the comparable Libor. This, in turn, prompts Mr. Gensler to ask why Libor and other benchmark rates have not typically been aligned, especially since 2008.  A long-established financial theory known as interest rate parity says that the difference in interest rates between 2 countries should be roughly in line with the expected change in exchange rates between the countries’ currencies.  (If it isn’t, that opens an opportunity for arbitrage, the practice of taking advantage of price differences.) Conclusion. For Mr. Gensler, it all comes down to honesty and transparency - it's time for a new or revised benchmark to become an "emperor clothed in actual, observable market transactions."  Only then can the confidence of American (though the issue should be applied to investors world-wide) be restored. For further details, go to:  [NYTimes, 8/6/12].