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Aug 08, 2012, 03.37 PM IST
Minos Zombanakis, born 86 years ago on a Greek island, remembers the birth of the interest rate benchmark now at the heart of a global rigging scandal well.
"I was, more or less, if you excuse the lack of modesty, the one who started the whole thing," he laughs, speaking by telephone from his village among citrus orchards in Crete.
Zombanakis was running the newly-opened London branch of Manufacturer's Hanover, now part of JPMorgan, when the bank organised one of the first syndicated loans pegged to what he dubbed a London interbank offered rate (Libor) in 1969.
The USD 80 million loan, for the Shah of Iran, embodied the way cross-border financial markets that had been effectively closed since 1929 were being prised open - sowing the seeds for London to flourish as a global financial centre.
The ambitious bankers of that era had little idea that the rate they were using to price these loans would become a central cog in the global financial system and a benchmark for USD 550 trillion in contracts ranging from interest rate derivatives to home loans and credit cards.
Four decades on, that rate has been discredited by the brazen attempts of traders to game it, by the banks that have lied about their true costs of borrowing and by the regulators accused of either condoning or failing to stop manipulation.
Libor, designed to reflect a bank's borrowing costs accurately, burst into the headlines in June when Barclays
Even regulators admit privately they were taken aback by the public and political backlash, which forced out four top Barclays directors, sparked a fraud squad probe and a string of reviews into what has been dubbed "the crime of the century".
Bankers working in London in the decades before the credit crisis, when interbank funding dried up and speculation grew that banks were being dishonest about their borrowing costs, insist there was no hint of rigging in the early days.
Stanislas Yassukovich, a veteran banker who arrived in London in the early 1960s with New York bank White, Weld & Co, blames the modern bonus culture and emergence of "all singing, all dancing" mega banks for destroying corporate loyalty.
Libor evolved to meet rising demand around the 1960s for "Euro" currencies - offshore, stateless and often in dollars - that swept London and allowed companies and countries to borrow, deposit and repay while dodging domestic regulation and taxes.
The wave of oversees dollars was triggered in part by the costs of the Vietnam War and US trade deficit and fears the Berlin blockade would prompt the United States to freeze Soviet deposits on American soil. Those factors compounded longer term concerns over the weight of US regulation.
"Geopolitical forces, especially the Vietnam war, coincided with the emergence of global trade imbalances and restrictive legislation in the US and resulted in the unexpected and sudden creation of the Eurodollar market in London in the 1960s," says David Clark, another banking veteran and current Chairman of the Wholesale Markets Brokers Association.
"It was from this start that syndicated lending and capital markets recycled offshore dollars using floating interest rates based on Libor."
Other countries played their part in creating Euro currencies. But London, where many overseas banks had branches, became the home of the loosely regulated Eurodollar.
Bankers such as Zombanakis, George Bolton, the chairman of the Bank of London & South America (BOLSA), Bankers Trust International chairman Evan Galbraith, who later became US ambassador to France, and Walter Shipley of Chemical Bank, were among those who spotted the market's potential.
Former World Bank president James Wolfensohn has paid tribute to the role played by the likes of Zombanakis, who jostled with rivals to organise banks into consortia, sharing the risks for massive syndicated loans funded through a series of short-term deposits based on floating interest rates.
Loan requests poured in and financial markets took off.
"In the early days it was very much like a club," said Yassukovich, a former chairman of the UK Securities Association, a forerunner of Britain's Financial Services Authority regulator, speaking from his retirement home in France.
Often the only force keeping eager bankers in check was when the Governor of the Bank of England expressed his displeasure by "raising an eyebrow": summoning a bank's manager if he saw anything inappropriate.
Tags: Minos Zombanakis, Greek, Libor, interest rate, London interbank offered rate, credit crunch, Bank of England
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