LIBOR SCANDAL

Came Wall

to light in late June 2012

Street Scandal of scandals heart of finance

Rotten

Mother

of all scandals (which can finally lead to criminal charges & insolvency of major banks)

LIBOR

LIBOR (London Inter Bank Offered Rate) the interest rate at which top-tier banks in London offer to lend to each other on an unsecured basis loans are usually short term, typically a day, a week, or several months extremely low risk one of the lowest interest rates available in the market became the base rate to calculate a vast number of other products and transactions.

Fixing the Libor

LIBOR is set by a committee of banks (British Bankers Association) send their estimates of the rate at which they could borrow The banks on the committee are among the largest in the world including J.P. Morgan, Citibank, Bank of America The committee would discard the highest & lowest rates and average the rest to arrive at the official LIBOR

Scandal

Barclays & various other banks, who were part of LIBOR, collaborated to manipulate the LIBOR rate (& Euribor), defrauding its customers in the process (If bank representatives could nudge an interest rate up or down a few points they could bring in nice profits)

The scandal arose when it was discovered that banks were falsely inflating/deflating their rates so as to profit from trades, or to give the

Some of the banks on the committee lied about the rates(2005-2010)

The lies had two purposes: to make money for the bank by lowering what it had to pay on LIBOR-based contracts. This is a kind of direct theft from customers to hide the fact that some banks were being asked to pay high rates during the Panic of 2008. This is considered a sign of distress. By lowering the reported rate, the banks were made to appear healthier than they were and committed a fraud on the market as a whole.

Regulators acted as aiders of the fraud by ignoring clear signs, including admissions by the banks themselves, that the rates were rigged Regulators passed vague proposals back and forth about the need to improve practices instead of calling law enforcement agencies to investigate and prosecute the crimes.

Role of Barclays

The 1st Barclays scheme (2005-2007, again from 2009- till recent) involved Barclays traders trying to manipulate Libor and Euribor rates to enhance their trading profits. The 2nd scheme (2007-2009, Lehman Bros fall period) Senior Barclays managers instructed traders to submit falsely low rates to counter the perception that other banks were charging high rates to lend to Barclays, a sign of financial weakness.

Scandalous Result

Even if the banks lied by as little as one-tenth of 1 percent, that percentage applied to $500 trillion multiplied by the six years of the fraud comes to $3 trillion stolen from customers Cutting that amount in half to allow for the fact that some customers benefited from the fraud while others lost still gives implied damages of $1.5 trillion These damages are enough to render a large segment of the global banking system insolvent

Present condition

Barclays was fined $450 million (278.4 million pounds) by U.S. and UK regulators and is the only bank to have settled After the Barclays settlement, the banks chief executive, Robert Diamond Jr. and the banks chairman, Marcus Agius resigned, along with one of Mr. Diamonds top deputies, Jerry del Missier. RBS is yet to settle the claims, mostly by the year end

HOW DOES IT AFFECT THE COMMON PEOPLE?

Also influences savings rates. If banks can borrow more cheaply from each other then they don't need to offer such good returns to savers.