It is 2007/8. The world financial system is melting and about to collapse. Everyday headlines are about massive losses, banks' collapses, jobs losses, etc. Everyone is shiting their pants. Out of fear and survival instincts management at certain troubled institutions begin lowering their submissions to Libor in order to contain fear and contagion and keep afloat. Other banks, that have easily realised of the strategy, join the party and do the same as soon as their own hull begins cracking and water coming in. The first time you do it you hold your breath, the second and third are easier and so on. Subtle and indirect calls, meetings and emails between management of these institutions and global regulators touch the topic of the apparently lower submissions. However, their apparent indifference and even promotion of the Libor rate for their own purposes strengthen your believe that they don't care or even support your behaviour. And then is when the party really begins.
So far the submissions have been made in controlled manner and for a specific purpose of saving your own ass, however after a while it seems that the behaviour is perfectly legitimate. Naturally, traders seeing that their positions are collapsing call the Libor submitting employees and ask them for a small favour: a submission, let's say, 0.3 lower or higher. It is not that much really, both think, and anyway we have been doing this for a few months now, everyone else is doing it and we cannot get behind, moreover regulators are aware but not getting nosy about it, etc, etc, so why not? Shortly, the practice extends almost to everyone and staff from different institutions begin commenting on the fact that it seems free buffet when it comes to Libor. The look at the dark and gloomy economic horizon and think: "why not I scratch your back and you scratch mine". It may not be the right thing to do, but regulators and management are behind us, thousands of bankers are being fired here and there and my time might come soon so let's pack our pockets now. You can blame the traders for their horrible behaviour, and they are certainly guilty, but when the rout of hungry wolves kill the goat regulators must ask themselves what level of guilt they share for having turned a blind eye to the slaughter feast.
Of course this is just a imaginary scenario and we do not know yet all the details (we will never know, probably), but it is very easy for politicians and regulators to blame the banks and get away with it. Regulators and governments undoubtedly have some level of guilt in this affair however, so far, no one has raised their hands yet and say sorry. This fact shows what kind of integrity and honesty most regulators have: none. If they truly have some moral fibre they should apologise and be more carefully in the way they criticise banks.