Bill Knight - August 23
9:54 am
Wed August 22, 2012

The Very Expensive LIBOR Scandal

All summer, the press has occasionally covered the “LIBOR Scandal,” but many stories have been a lot of “inside-baseball”-style financial confusion. Actually, the situation affects working people much more than has been noted.

Besides making a mockery of what the Right wing dubs a “free market,” LIBOR – specifically, manipulating LIBOR – costs us money in many ways. First, LIBOR stands for London Interbank Offered Rate, which is supposed to gauge the average interest rate banks charge when they lend to each other. Ideally a measure of banks' trust in their solvency, LIBOR is used as a foundation for other rates, like adjustable-rate mortgages, plus a reference point for complex financial derivatives. But: Big Banks don’t use data based on verifiable facts; there’s no check or balance.

So that ideal – the pretense – dissolved in June, when Britain's Barclays bank admitted that it had routinely and repeatedly understated the rate for years. They did so in two main ways. First, Big Banks conspired to move LIBOR levels (up or down) to benefit banks’ own investments, not customers. Next, during the 2008 financial crisis, Big Banks appear to have underreported LIBOR to seem financially stronger.

LIBOR affects regular people because it changes the cost of money for almost everybody, whether personal or commercial borrowing. It influences credit cards, student loans, mortgages and more. Interest rates banks charge on such loans are usually figured as LIBOR plus an additional amount set out in loan agreements.

When LIBOR rates are high, it suggests that the banks’ confidence in each other is low; high LIBOR rates generally reveal shaky financial health among the banks.

Barclays has become shaky; its CEO resigned, and it will pay $453 million in fines to settle charges of LIBOR manipulation as far back as 2005. More banks will probably be implicated. About 20 Big Banks contributed to LIBOR – including three giant U.S. outfits: Bank of America, Citigroup and JPMorgan Chase – at least sometimes involving themselves in the scheme, as well as possibly the Bank of England, the U.S. Federal Reserve, and the U.K. government, according to material Barclay’s disclosed to investigators.

The colossal fraud had Big Banks profiting at the expense of customers – and even the illusion of financial-market integrity.

Gary Gensler, chair of the U.S. Commodity Futures Trading Commission (CFTC), one of the regulators investigating the scandal, told Time magazine, “This is a very, very significant event. LIBOR is the mother of all financial indices, and it's at the heart of the consumer-lending markets. We all lose if the market isn't perceived to be honest."

However, the CFTC neither charged Barclays with a crime nor required restitution to victims. Still, Barclays' activities may be felonies under federal RICO statutes. The Racketeer Influenced and Corrupt Organizations Act authorizes victims to recover triple damages.

Another gigantic consequence of the LIBOR manipulation is that it hid 2008’s financial crisis for months. The scandal represents a financial system that remains secret and under-regulated – four years after the crisis began – further eroding people’s understandable distrust of Big Banks.

Economist, author and former Labor Secretary Robert Reich said, “Just when you thought Wall Street couldn't sink any lower – when its myriad abuses of public trust have already spread a miasma of cynicism over the entire economic system, giving birth to Tea Partiers and Occupiers and all manner of conspiracy theories; when its excesses have already wrought havoc with the lives of millions of Americans, causing taxpayers to shell out billions (of which only a portion has been repaid) even as its top executives are back to making more money than ever; when its vast political power (via campaign contributions) has already eviscerated much of the Dodd-Frank law that was supposed to rein it in, including the so-called ‘Volker’ Rule that was sold as a milder version of the old Glass-Steagall Act that used to separate investment from commercial banking – yes, just when you thought the Street had hit bottom, an even deeper level of public-be-damned greed and corruption is revealed.”

The extent of the fraud and its consequences is incredible.

Attorney Ellen Brown, chair of the Public Banking Institute and author of Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free, said, “The losers have been local governments, hospitals, universities, and other nonprofits. For more than a decade, banks and insurance companies convinced them that interest-rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools.”

Heather Slavkin writing for AFL-CIO Now said, “Around $10 trillion in loans is indexed to LIBOR [and] when you add in all types of financial products including complex instruments like derivatives, LIBOR is the index for around $800 trillion in financial instruments.”

That $800 trillion is 11 times the Gross Domestic Products of every nation on Earth, according to 2011 figures from the International Monetary Fund.

Again, Big Banks could face criminal prosecution, civil lawsuits and regulatory penalties, but how did it happen for so many years? Were regulators themselves – admittedly dealing with weaker laws than decades past – incompetent or corrupt? Further, will prosecutors do their job and go after such corporate illegality? After this international cartel?

Bill Knight is a freelance writer. The opinions expressed are not necessarily those of Western Illinois University or Tri States Public Radio.