Right, so here's my Z$2c...
Firstly, it's important to note that everyone in the mkt has always known about LIBOR being manipulated. Periodically, various people (including yours truly) have undertaken efforts to discuss the various glaringly obvious flaws of the fixing process with the BBA (the agency that is responsible for defining and publishing the rates). I personally had a discussion with the gentleman in charge of LIBOR at the BBA in late 2007. The BBA's response had always been "it's not our business to interfere in the market-driven process that determines LIBOR". Needless to say, that's idiotic (which I pointed out to them back then) and it's now come back to haunt them. To summarize, the main issues with LIBOR are twofold: a) it's a rate that is structurally easier to manipulate than other mkt rates; b) it's the most commonly used reference rate in the world of interest rate derivatives. Needless to say, a) and b) together create an explosive combination.
Now on the subject of actual manipulation. It's generally important to distinguish between the two very distinct types of "manipulation" that the Barclays settlement has brought to light.
The first type, while being the more headline-worthy one, is actually materially not very significant. I am referring to the whole "Big boy, I set LIBOR 1 basis point lower for you for a bottle of Bollinger" borrox that has gone on during the pre-2008 crisis period. Yes, it has always gone on; yes, it's bad, as it's not only market manipulation, but also is a symptom of collusion among the banking cartel. However, on the flip side, a) this is truly a zero-sum game, as it's just Bank A competing to take a basis point from Bank B; b) a basis point on a fixing is really irrelevant in a grand scheme of things, even for the derivatives mkt that is measured in trillions of gross notional. Regardless of material impact, I imagine this is the sort of thing where the FSA (and others) can actually bring criminal charges against specific traders.
The other type of manipulation that Barclays have effectively admitted to is the "head above the parapet" type of lowballing of LIBOR that occurred systemically during the crisis, i.e. late 2007, 2008 etc. Now, ironically, Barclays in this case actually tried to do the right thing, i.e. their LIBOR submissions were right and they made numerous attempts to notify both the FSA and the BBA that the other banks were lowballing. However, that proved to be a threat to their survival and the authorities started to get involved (whether Diamond actually got the nod from Tucker or not remains to be seen), which forced Barclays to re-join the pack. The process of parceling out blame is starting now, with all the hearings, investigations and the like. I don't know how it all actually ends, but it's likely to be very messy and going to tarnish a lot of names. One thing for sure, the actual impact of the banks collectively lowballing LIBOR is very significant. My estimate is that we're talking about tens of billions of dollars and the lawsuits are already making their ways through the courts (including the large class action suit in NY).
So that's about it. There's a lot of sturm und drang and, if I had to guess, this is only the beginning.
