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February 2013
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Everything you've ever wanted to know about LIE-BOR

LIBOWe all now know that bankers have manipulated LIBOR and been caught doing it.  But why does it matter and why would the United States be worried about LIBOR? It's London Interbank Offer Rate after all?

Its because LIBOR influences a wide range of products across 10 global currencies. It sets the basic interest rate for products in the United Kingdom, Europe, much of Asia and to some extent in the
US.   So we’re lucky to have branded it "London", because there is a separate daily "LIBOR" rate,
for each currency involved.

Private banks (like Barclays, RBS and others) report the rates at which they believe they could get borrowing from other banks. The estimates are collated and published each day, setting the basic
interest rate from which all others are calculated. 

Falsely reporting LIBOR is the equivalent of a consultant heart surgeon lying about a patient’s blood pressure to make the results of his treatment look impressive.

So how does it work? How are Libor Rates Calculated?  The British Bankers' Association selects "panel banks" which are asked how much interest they think they would be charged by other banks if they were to borrow money in certain currencies and over certain periods of time. These panel, or "contributor banks", submit their perceived borrowing rates daily. Reuters collects the rate information from all contributor banks and produces an adjusted average.  Depending on the currency involved with the rate, there are 7 to 18 contributor banks.

The current 18 panel banks for the US Dollar include US, Canadian, German, Japanese, Swiss and amongst others, Barclays, HSBC, Lloyds and RBS. This is why the US regulator was sufficiently cheesed off to fine in the States, at the same time as the UK FSA fined banks at home.

Neither Barclays nor RBS could have influenced LIBOR on their own - that required collusion between banks. This collusion moved rates up or down over a period of years and helped enhance individuals bonuses and bank profits/reputation. Later, during the financial crisis, banks wanted to appear healthy, so they submitted lower borrowing rates than they could actually achieve which showed their reputation / credit in the market in a better light than they merited.

With acknowledgements to David Corneilus of Bishop Fleming (a fellow Kreston member firm to PEM) upon whose excellent and more detailed post this is based. 


Company valuation is an art?

We think its more of an art than a science.    And this is borne out by legal precedent:

"in the field of valuation the experience of the valuer and his ability to form a sound commercial judgement is of overiding importance. The process of valuation cannot be reduced to the application of a set of abstract formulae..."

Justice Vinelott - High Court Case Re Cumana (1986)

I lead our business valuations activity, and as such I often get to see earlier attempts at valuing the company, or sometimes in a dispute the valuation prepared for the other side.  I'm always astonished at home little knowledge is shown of the business being valued.    Its like a surveyor valuing a house simply by driving past it at speed.   And companies are more complex to value.   I've also seen valuations where earnings multiples are simply plucked from the air, or derived from quite ludicrous comparatives.   And probably the worse offenders are the valuations that clearly suffer from "death by spreadsheet".  In other words lots of complicated, but meaningless, analysis.

We believe strongly that valuation reports should be useful, and if possible interesting to the company that commissions them.

If you're interested in learning a little about the factors that will influence the value of your business, why not come to one of our seminars where we cover the topic.  We're runing one in Norwich this week 14 March at Dunston Hall Hotel.   We're running them again in Cambridge at the Trinity Centre on 13 June, and in Borehamwood at the Holiday Inn on 20 June.  If you'd like to find out more about the program or to book visit our events page