Outside a Barclays branch in London. (Olivia Harris / Courtesy Reuters)

Governments in Europe, Japan, and the United States are now investigating 16 major banks for manipulating interest rates. In the months leading up to the 2008 financial crisis, many of the world's most powerful financial institutions allegedly worked to keep down the London Interbank Offered Rate. Libor, as it is known, is supposed to be the average rate at which the largest and ostensibly safest banks in the world can borrow from one another. Manipulating Libor allowed traders to rig financial markets to their advantage; in the process, they distorted the actual value of key financial instruments such as credit default swaps, derivatives, and home mortgages. 

The scandal has sparked calls from politicians, including Mervyn King, the governor of the Bank of England, for stronger regulation of the world's most powerful banks. But such proposals miss a key point: Price fixing and

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  • JONATHAN MACEY is Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale Law School.
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