Late last month, Barclay's Bank, a multinational bank and financial institution based in the United Kingdom, admitted to regulators that it tried to manipulate something called "Libor" before and during the financial crisis in 2008. "Libor" is an acronym for London Interbank Offered Rate. It is a rate used as a benchmark for the cost of lending throughout the financial system, and it is also used as a reference rate for a wide range of financial products like car loans, adjustable-rate mortgages, student loans and credit cards.
The Libor is not based on an objective measure of the interest for bank-to-bank loans. It is the average of a daily poll of the Association's member banks, who give an estimate of the interest rate they think they would pay if they sought to borrow from another bank.
It is supposed to be the way the financial system assesses the overall health of the financial system, because if the banks being polled feel confident about the state of things, they report a low number, because they assume that if they had to borrow from another bank, their cost of borrowing would be low. If member banks feel a low degree of confidence in the financial system, they report a higher interest rate. And from that the Libor is calculated, affecting the interest rate on financial products around the globe.
What has emerged from the Barclay's Bank inquiry is evidence that banks may have, in fact, been deliberately manipulating Libor rates for years. The evidence so far is that one arm of a bank responding to the Libor poll would change their number based on what another arm of the same bank wanted -- and that other arm could consist of the bank's traders who make their money on whether the rate goes up or down. This means that millions of consumers, investors and businesses have been paying the wrong interest rate. Or rather, they haven't been paying an interest rate that is set according to some legitimate benchmark. Instead they are paying a rate based on a gentlemen's agreement at financial institutions, a method that practically incentivizes those banks to game the system to maximize their profits.
And remember, the British Bankers Association, the group that is responsible for setting the rate, is not a government agency. It is just a trade group of big banks -- Bank of America, JPMorgan Chase and Deutsche Bank and others -- whose decisions on such a crucial number are not based on honest accounting or rules or regulatory oversight, but on a gentlemen's agreement of honesty.
We don't know just how deep this scandal goes. But the fact is that if a fundamental component of our financial system has been or is being manipulated, we have the right to know about it. Banks are not above the law and they should not be allowed to operate in secrecy, especially when they have a history of taxpayer bailout and when we are forced to rely on them to provide capital for economic growth.
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Mark Gongloff: JPMorgan Chase Manipulation Scandal Raises Specter Of Enron
The Libor Scandal Should Destroy the Credibility of - Slate Magazine
The $800 Trillion Scandal: How Banks' LIBOR Lies Affected You ...
Libor Scandal: Manipulation Spanned Decades, According To Reports
Libor Scandal Intensifies Spotlight on Bank Regulators - NYTimes.com
http://www.dailyfinance.com/2012/07/11/the-libor-scandal-explained-in-one-simple-infographic/
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The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money."
http://www.americablog.com/2012/07/libor-for-laymenwhat-is-it-and-why.html
Continue reading our take on this issue over at The Corporate Observer (http://www.thecorporateobserver.com/2012/07/12/libor-rate-manipulation-scandal-why-american-cities-are-the-real-victims/)
What component isn’t being manipulated? Inflation rates, unemployment rates, currency exchange rates, job creation rates are all constantly being manipulated by the Government and the Fed as a matter of policy. The Consumer Price Index (CPI) formula that the Government uses for indexing several transfers and taxes including social security has been “adjusted” numerous times. If there was any confidence inspiring government generated “legitimate benchmark” providing an “objective measure of the interest for bank-to-bank loans”; then no one would be using “a rate based on a gentlemen's agreement at financial institutions”.
Unfortunately, no laws were broken in whatever deception was committed here. What we need is a better system for setting interest rates - basically, it should be a function of the free market.
It's easy to avoid lawbreaking once you invite yourself to participate in the process of writing regulation and law.
People do want to excoriate the evil bankers. Has to do with the evil.
I do know that LIBOR, if set low by collusion, will make a great many pension funds and investors receive less than they would have in returns were they set to reflect the true cost of borrowing. Millions of folks get a little less.
Perhaps that will prove to be a criminal matter--- as it's fraud.
I would argue that the market is not free if only the insiders know what the rules are. I think the "evil bankers" use complexity to obfuscate what they are doing.
Getting the news out like this on this scandal is making the market that much more free as we all learn abut how LIBOR is set by a group of folks on on their "estimation of their cost of borrowing" and not on actual borrowing costs.
Also if traders are emailing the rate setter and say "Hey we need this at x value for 3 more days.. " and its not a crime, it should be.
"DEC. 14, 2006
“For Monday we are very long 3m cash here in NY and would like the setting to be set as low as possible ... thanks”
— Trader in New York to submitter (From NYT)
This tell me that is just not plain evil banking....
Yup,,,,that about sums it up in a nutshell
"...evidence that banks may have, in fact, been deliberately manipulating Libor rates for years."
There is no "trying"...they in fact DID manipulate the rate.
There is no "may have been". They were deliberately manipulating.
These are proven facts by emails and other communications. So quit soft-peddling the issue.
Regulation is necessary at all times in order to have a healthy economy, like the first 200 years of U.S. history prove, except for the 1900 - 1930s, a period of time very similar to what we are living today. Ignoring history only makes you repeat it, we need to stop the causes from the root, which is the nature of many humans, greed. The financial markets have been allowed to gamble with our economy for too long, it is time to stop them!
How many economic disasters caused by corrupt bankers do we need to have until we put an end to this?
I suspect almost everyone would like to see the big banks broken up, the corrupt bankers thrown in jail, new banking regulations put in place, and an end to political bribery. Why do we stand for this?
The last vestiges of those regulations were repealed in 1999, it took the bankers and other "Masters of the Universe" less than ten years to crash it all again, as they had always done if given the opportunity.
will you work with me to do that?