I was present for many discussions about the LIBOR fixing
scandal towards the end of last year, but to be honest, much of the
conversation flew straight over my head. I've compiled an explanation of what Libor
is and what the scandal was about using information from all the sites I found
helpful.
What is LIBOR?
It’s “a benchmark rate that some of the world's leading
banks charge each other for short-term loans. It stands for Intercontinental
Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on
various loans throughout the world.” – Investopedia.
It sets a benchmark for rates of financial deals such as mortgages, loans and
inter-bank lending.
Why is it
important?
It is a measure of “trust in the financial system and the
faith banks have in each other's financial health.” - BBC
How is it set?
“Once a day, major London banks tell Thomson Reuters the
interest rate they would expect to pay on a loan from another bank. Thomson
Reuters drops those rates in the highest and lowest 25% and averages the 50% in
the middle.” – USA
Today
So what was all
the fuss about?
“Since the rates submitted are estimates not actual
transactions it's relatively easy to submit false figures. Traders at several
banks conspired to influence the Libor by getting colleagues to submit rates
that were either higher or lower than their actual estimate” - BBC
“If Libor was artificially high when you took out a loan,
then you paid more on the loan than you should have. Conversely, if Libor was
artificially low, you may have paid less than you should have.” – USA
Today. In other words, bans were artificially making loans and mortgages
more or less expensive, to make money for themselves.
“According to the Financial Services Authority, Barclays
derivatives traders routinely asked for submitters to help them profit from
their trades by sending in numbers that were either higher or lower than they
should have been. The regulator’s report says Barclays submitted inaccurate
rates “on numerous occasions” between January 2005 and July 2008 at the behest
of at least 14 Barclays derivatives traders. “Barclays could have benefitted
from this misconduct to the detriment of other market participants. Where
Barclays acted in concert with other banks, the risk of manipulation increased
materially,” according to the FSA. At times, the Barclays traders also tried to
influence the submissions of other banks, and passed along requests from their
counterparts to Barclays submitters. After a Barclays submission was lower, as
requested, one of those outside traders emailed their contact: “Dude. I owe you
big time! Come over one day after work and I’m opening a bottle of Bollinger.””
– The
Fiscal Times
Who else was
involved?
“Some of the banks whose names have come up in connection
to the investigation include Bank of America, Citigroup, HSBC, the Royal Bank
of Scotland and UBS. “There appear to be mountains of evidence that the conduct
in question was intentional and widespread, both within and among major banking
institutions in the UK and likely the U.S.,” Cumberland Advisors’ Lewitt wrote.”
– The
Fiscal Times
Consequences
“The Libor scandal has further undermined trust in banks.
The deputy governor of the Bank of England called the Libor market a
"cesspit". While those paying interest on loans would have benefited
from lower Libor rates, savers and investors would have lost out.” - BBC
Law suits were brought by people who felt they had been
ripped off. Many law firms were involved in bringing action on behalf of
institutions and businesses that had bought financial instruments, such as
interest rate swaps, from banks.
In settling the charges against Barclays, the U.K.’s
Financial Services Authority (FSA) imposed a penalty of £59.5 million (about
$92 million). The U.S. Commodities Futures Trading Commission ordered Barclays
to pay a $200 million penalty, and the Justice Department imposed a $160
million penalty. In all, Barclays agreed to pay more than $450 million. – The
Fiscal Times
Read More:
Lexis Nexis – A
Closer Look at the Libor Scandal
The Economist - The Rotten Heart of Finance
Commercially Aware - UPDATE: The Libor-Fixing scandal (07/10/2014)
Commercially Aware - UPDATE: The Libor-Fixing scandal (07/10/2014)
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