Well... SilasX has at least half a point. If the Libor rate is being messed with (and if the messing nets to a Libor that is a consistent, say, 0.05% too low), people making contracts could adjust the offset up by 0.05%.

But I still think that SilasX's view isn't the right way to look at this. Why were people messing with Libor? It wasn't because they were going to make more money off of interbank loans. It's because they were going to make more money off of other things that were keyed to Libor. So, yes, they were using Libor to manipulate the price of things.

And if I understand correctly, it works like this: The contract says Libor + X%. The X is fixed at the time the contract is negotiated, not at the time it closes. Then, later, the contract closes, and uses the Libor at the date of closing. This means that the Libor-setters move last, after the offset is determined. This makes it impossible in practice to use the offset to fix the Libor machinations.

Agreed, in that every loan I ever saw had a fixed Libor offset. Disagree, in that Libor was fixed at closing, instead it was most often used as a floating rate. So, you had a floating Libor + a fixed offset. In regards to manipulating Libor to move downwards would have only hurt the bottom line of my firm.