If you have not heard about the LIBOR scandal, you are probably not alone. The mainstream media has been relatively quiet about this story. However there is plenty of information available on the internet if you look for it.
So what is LIBOR?
LIBOR is an acronym that stands for the London Inter-Bank Offer Rate. This is the rate at which banks are able to borrow money (like an interest rate). This is important because banks are consistently borrowing and lending money, so this gives people outside the banking industry an idea of what banks' "bills" will look like.
In order for a bank to be able to pay its "bills," it has to make income, and one source of income for banks is the interest it charges for loans. This means that the LIBOR rate has a direct effect on the interest rates that borrowers pay to banks.
Based on how much it costs for a bank to borrow money and how much income the bank is generating, it is fairly straightforward to tell how stable a bank is -- if it is making enough money to pay all of its bills, it's stable.
That's easy enough... The problem is that banks are pretty much on the honor system, and we (non-bankers) just take their word for it that their reports are honest. Anyone who has been paying attention to politics and the economy since about 2008 can see that banking culture considers honesty to be optional, especially when there is an opportunity to make a quick profit.
Luckily for the average person, the Commodity Futures Trading Commission (CFTC), which is part of the U.S. Department of Justice, has been paying enough attention to notice that there may be a problem with the honor system and opened an investigation.
Last month the CFTC released a legal document that exposed one bank in particular, Barclays, for having manipulated and falsified reports regarding their cost to borrow money.
The following is from the CFTC's summary of the document:
Over a period of several years, commencing in at least 2005, Barclays PLC, Barclays Banle and Barclays Capital... repeatedly attempted to manipulate and made false, misleading or knowingly inaccurate submissions concerning two global benchmark interest rates... [London Interbank Offered Rate ("LIB OR") Euro Interbank Offered Rate ("Euribor")].
The CFTC then elaborated on what these rates are and why they are important:
LIBOR and Euribor are leading short-term interest rate benchmarks intended to reflect the costs of borrowing unsecured funds in certain interbank markets. LIBOR and Euribor are critical to financial markets worldwide. They are used to price a variety of global financial products, including U.S.-based swaps transactions and futures contracts, as well as home mortgages and commercial and personal consumer loans...
The summary then explained how Barclays was able to manipulate these rates and that it was more than a few individuals:
Barclays Bank was, and is, a member of the panel of banks that submits rates for the daily calculation and global publication of various currencies of LIB OR and Euribor...
Barclays' violative conduct involved multiple desks, traders, offices and currencies, including United States Dollar ("U.S. Dollar"), Sterling, Euro and Yen. The wrongful conduct spanned from at least 2005 through at least 2009, and at times occurred on an almost daily basis.
You can read the entire document from the CFTC's website here.
Barclays was quick to settle with the CFTC. They reached a settlement with authorities on that same day, June 27th, for $450 million, admitting that its executives and traders did try to manipulate the LIBOR rates.
Considering that the LIBOR rate is involved in the manipulation of more than $560 trillion in loans, one might say that Barclays got off relatively easy. However as the scandal unfolds it may be that Barclays got off easy simply because it was the first bank to face legal action. Barclays is only one of sixteen banks that are involved in the LIBOR rate, so other banks may be involved in the case.
Visit ABC news and see their original article from June 27th here.
According to BBC news, as of July 2, the authorities are already gearing up to investigate the financial practices of other banks. Prime Minister David Cameron called for a full parliamentary inquiry into the scandal and advised that "bankers who have acted improperly should be punished."
Royal Bank of Scotland is also being investigated for its role in the LIBOR scandal, and a whistleblower has indicated that e-mails from the Bank of England led traders and management at Barclays to believe that the manipulation of LIBOR was encouraged by the Bank of England.
See this article published by BBC news on July 2nd.
The evidence supports the idea that this scandal is much larger than one bank or even a few banks. How far does the rabbit hole go? A contributing editor at Rolling Stone, Matt Taibbi, and the president/CEO of Better Markets, Inc., Dennis Kelleher, do a great job of explaining exactly why this is a problem with the banking system itself, not just a case of a few bad apples.
Here is the clip from Viewpoint with Elliot Spitzer:
In the next post, I will provide information related to the absence of news about this story in the mainstream media.
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