The LIBOR (London Interbank Offered Rate) scandal is the biggest banking scandal in the history of the financial sector and yet has been one of the most underreported stories over the last few years. The LIBOR scandal has potentially siphoned off billions from consumers in the form of artificially high interest rates that were the result of collusion and corruption by traders at some of the world’s biggest banks.
The LIBOR is the interest rate that banks charge each other to make commercial loans to each other. The rate is set by 18 of the world’s largest banks which includes JP Morgan, UBS, Barclays and Bank of America to name a few. The rates are published by Thomson Reuters, a multinational media and financial-data firm, at 11:30 a.m. every day by averaging the middle 10 banks in terms of interest rates offered, while the top four and lowest four rates are discarded.
The problems that arose with that method of calculating LIBOR is that the rates are self-reported and are not averaged based on actual loans made. This led to the manipulation of the LIBOR rate as bankers from most of the major banks colluded to artificially raise the rate over the past few years by reporting inaccurate rates to Thomson Reuters. So why is it a big deal that a few bankers artificially manipulated interest rates?
These manipulations are a huge deal because the LIBOR rate is used to calculate the interest rate for the $350 trillion derivatives market (yes, trillion with a “T”) and just about every consumer financial product on the market. When I say everything, I mean everything from student loans to credit cards, car loans and even home mortgages and equity lines of credit. The manipulations in these rates meant consumers potentially paid billions in artificially higher interest rates due to the greed of a few bankers. There are likely quite a few students and faculty reading this that are paying hundreds if not thousands more in interest for student loans, home loans or car loans due to this scandal.
As I described before, the method for calculating the rate throws out the top and bottom four rates offered by banks. So how can anyone manipulate the rate? One trader or even an entire bank wouldn’t be sufficient to manipulate the LIBOR rate; it took collaboration between multiple banks and traders in order to manipulate it. This is where some of the most brazen and disgusting examples of corruption come to light.
Emails between bankers and traders, revealed in a report by British Financial Services Authority, show exactly how these manipulations came about. One trader was very explicit about how he wanted to manipulate the rate by stating in an email, “If you keep 6s [ie, the six-month Japanese yen Libor rate] unchanged today … I will f*****g do one humongous deal with you … Like a 50,000 buck deal, whatever … I need you to keep it as low as possible … if you do that …. I’ll pay you, you know, 50,000 dollars, 100,000 dollars… whatever you want … I’m a man of my word.”
It wasn’t just lowly traders involved either, this collusion ran up the chain to managers as well. The British Financial Services Authority or FSA issued a scathing 40 page report that included damning indictments of UBS’s actions. “At least two further managers and five senior managers were also aware of the practice of the manipulation of submissions to benefit trading positions.” Because of this, UBS was forced to pay a $1.5 billion fine to the British government, but this is a drop in the bucket compared to the ramifications of how the manipulations affected consumers.
Only a few low level traders have been charged, but the brazen corruption and collusion between traders and managers of the world’s largest banks has finally stirred financial regulators into action. There needs to be serious actions taken against these bankers to show that they are not above the law and an example needs to be set so anyone contemplating such actions in the future will think twice about doing so.
Despite the large implications of the manipulation of the LIBOR, few people are even aware of what has been happening. Perhaps many think making this a huge story will undermine the financial sector. However, the irony is that unlike the financial meltdown of 2008, this is a very clear example of bankers colluding to defraud consumers of billions and yet no one is out in the streets protesting or calling for action. Maybe the financial regulators asleep at the wheel on a dose of laissez-faire will finally wake up to the fumes of corruption.
Alex Caraballo can be reached at alex.caraballo@spartans.ut.edu