How LIBOR works... (2)

Back in 2008, I posted up the following comment by Lola:

Boss of Bank A is looking at its balance sheet and saying: "Bloody Hell! If ours is that bad his (Bank B) must be even worse. So sod that for a game of soldiers, I am not lending to him at any price, well unless I can get a silly rate. Fred? Jack up the LIBOR rate by 500 bps."

Fred: "OK Boss."

Turns out we were wrong, the conversation actually goes something more like this:

Boss of Bank BARC.L is looking at its balance sheet and saying: "Bloody Hell! If ours is that bad his (Bank X) must be even worse. But we know that he knows that we know. If it gets out, we can sod this for a game of soldiers and nobody will lend to any of us at any price, well unless I can get a silly rate. Fred? Knock down the LIBOR rate by 500 bps. Right now, we don't care what it costs us."

Fred: "OK Boss."

Boss: "Oh, and find out if the fixed interest guys have offloaded some of the stuff they bought last month, there's got to be a few quid in it by now."

Fred: "They're already on it, Boss."