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What is Libor? Why should I care that Barclays and possibly other banks have been caught manipulating it?

The London Interbank Offered Rate (LIBOR) is the benchmark for interest rates around the world. Benchmark as in many banks set their interest rates in accordance with or relative to Libor. Given this fact Libor is also a major indicator for the health of global financial markets.

So what happened?

The British Bankers Association (BBA) uses reports submitted by banks to calculate the Libor rate, Barclays and other banks submitted false reports and therefore manipulated the rate to mask poor health and gain profits for their trading positions.

From the United States Commodity Futures Trading Commission (CFTC):

The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against Barclays PLC, Barclays Bank PLC (Barclays Bank) and Barclays Capital Inc. (Barclays Capital) (collectively Barclays or the Bank). The Order finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005.

According to the Order, Barclays, through its traders and employees responsible for determining the Bank’s LIBOR and Euribor submissions (submitters), attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the Bank’s derivatives trading positions by either increasing its profits or minimizing its losses. This conduct occurred regularly and was pervasive. In addition, the attempts to manipulate included Barclays’ traders asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate U.S. Dollar LIBOR and Euribor.

The Order also finds that throughout the global financial crisis in late August 2007 through early 2009, as a result of instructions from Barclays’ senior management, the Bank routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.

CFTC fined Barclays $200 million and asked for better internal controls.

From the United States Department of Justice:

Barclays Bank PLC, a financial institution headquartered in London, has entered into an agreement with the Department of Justice to pay a $160 million penalty to resolve violations arising from Barclays’s submissions for the London InterBank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR), which are benchmark interest rates used in financial markets around the world...

“Barclays Bank’s illegal activity involved manipulating its submissions for benchmark interest rates in order to benefit its trading positions and the media’s perception of the bank’s financial health,” said Assistant Director in Charge McJunkin.

Barclays was also fined by British Financial Services Authority. Prominent Barclays executives have resigned including the CEO Bob Diamond. Apparently British Banksters at least have to resign when their companies get caught breaking the law - not so in America.

The Libor probe has also expanded and now other banks are under investigation for similar illegality.

OK, Why Should I Care?

The fraud perpetrated by Barclays and perhaps others has two negative effects on the world, highlighted well by Jonathan Weil of Bloomberg:

If Barclays Plc (BARC) would lie about its borrowing costs, what else would it lie about?

That question gets to the heart of the damage Barclays did to itself by submitting false numbers for years to the British Bankers’ Association as part of the surveys used to set the London interbank offered rate, the benchmark for $360 trillion of financial instruments globally. The most important asset any bank has is trust -- especially when it comes to the figures on its own financial statements.  

So an attack on trust and the genuine effect the manipulations had on borrowing costs around the world.

Surprisingly, one of the harshest critiques on Barclay's attack on trust came from the Neoliberal Financial Times in an editorial that not only slammed Barclay's in particular but critiqued the financial system as whole, Shaming The Banks Into Better Ways:

The Barclays affair may lack the spice of some recent banking scandals, involving as it does the rather dry “crime” of misreporting interest rates. But few have shone such an unsparing light on the rotten heart of the financial system.
Well now. But it is not such a surprise when you factor in that what the Banksters are doing is attacking capitalism itself. Nothing destroys markets, let alone financial markets, like fraud. Capitalism requires valid information to be exchanged in order for its transactional culture to perpetuate. Without the expectation of valid information or trust in the market, capitalism fails. So if you want markets to work you can not have the culture of fraud the Financial Times details.

The Libor rate manipulation also effects you in more direct but equally sinister ways. From the BBC:

A key point here is that the attempts of Barclays' staff to rig Libor were not always upwards.

At times individual traders wanted Libor to be pushed lower, to suit their own deals. Mr Diamond said this might not have benefited Barclays as a whole.

At the height of the financial crisis a few years ago, senior staff at Barclays wanted to see Libor pushed lower too, to disguise the evidence that the bank was having a difficult time borrowing money from other banks.

So who would have been the losers?

They might be investors who lent money to the bank by buying its short-term bonds, with a Libor-linked interest rate.

In this case they might have been paid less interest than they should have been.

According to the Association of Corporate Treasurers, the vast majority of interest rate derivatives involve financial companies, such as banks, investment firms, insurers and hedge funds.

Neil MacKinnon, a City economist at VTB Capital, said: "Libor itself has already lost credibility as a benchmark - the banks do not lend to each other at all at the moment."

"But the banks may be open to litigation if they are sued by their customers for being ripped off."

Ah, ripping off customers again. Good thing pension funds don't invest  in - woops.

But what about borrowers? From NPR Planet Money:

Most Americans probably never heard of LIBOR. When I first moved to New York, I hadn't. Back then, I could barely afford my apartment and got an adjustable rate mortgage. And so I wondered: When my rate adjusts, how will I know how much I'll be paying?

I searched through all the documents and it was right there — LIBOR. I would be paying a few percentage points above whatever LIBOR was.

LIBOR, as it turns out, is the rate at which banks lend to each other. And more importantly, it has become the global benchmark for lending.

Banks look at it every day to figure out what they should charge you for not just home loans, but car loans, commercial loans, credit cards. LIBOR ends up almost everywhere...

This scandal is still unfolding. No one is sure how much money was made or lost on this scam yet. But think of it, with trillions of dollars in investments based on a number that now seems dodgy, if you lost money on a deal, you'd be calling your lawyers right now.

The city of Baltimore and a pension fund in Connecticut are the first to sue, claiming the LIBOR manipulation cost them millions. More lawsuits are on the way.

Cities, pensions, and other customers ripped off while your rates for your home, car loans, and credit cards are manipulated for their gain. And though the lawsuits will fly nothing will change because this is about saving a corrupt system not reforming it.

Wake up and Occupy Wall Street before it occupies you.
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