This video can be viewed at the below link.[1]

What is the London Interbank Offered Rate, or LIBOR, and why is its passing away is actually a good thing for your house or car shopping?

LIBOR was an innovation of the 1970s to facilitate businesses borrowing from banks at a rate that adjusted based upon market interest rates. You might know it as a variable rate loan.

By the 1980s, to determine LIBOR, banks were using the rate at which banks were lending to each other without taking collateral—what’s known as unsecured loans.

It became so popular that it was embedded in hundreds of trillions of dollars of financial contracts around the world—well beyond those business and bank loans—even to your mortgages and car loans. So it’s really important LIBOR be based on something honest and reliable.

Yet, you see, there was a problem. There were so few actual transactions underpinning LIBOR that, as Hans Christian Andersen wrote in his famous folktale “The Emperor’s New Clothes,” this emperor—LIBOR—had no clothes.

In 2008, the Governor of the Bank of England, Mervyn King, said of LIBOR: “It is, in many ways, the rate at which banks do not lend to each other.”

It was that same year that the staff at the Commodity Futures Trading Commission began looking into this. I was honored to Chair that agency starting a year later, and working with law enforcement partners, we found multiple cases of banks manipulating LIBOR for their own profit and defrauding the public.

Policymakers around the globe—from central banks, like the Federal Reserve, to the Financial Stability Board, market regulators like the SEC itself and the CFTC, to Congress—all came together to end LIBOR. In essence, we all knew we needed an emperor who was properly clothed.

It took a lot of work, but 15 years later, it’s finally being replaced. But we can’t stop here.

In the United States, the main replacement for LIBOR is something called the Secured Overnight Financing Rate. But, there’s going to be some pretenders and contenders for the throne, just as history tells us there often are when an emperor is replaced.

We need to be sure the replacements have integrity and are properly clothed.

This is also a cautionary tale not to just trust something because it’s popular or ubiquitous.

RIP LIBOR, the emperor with no clothes.