The Libor scandal - London Interbank Offered Rate

the Libor Scamdal (London Interbank Offered Rate)

The Libor is supposed to be an overall assessment of the health of the financial system because if the banks being polled feel confident about the state of things, they report a low number and if the member banks feel a low degree of confidence in the financial system, they report a higher interest rate number.

Libor underpins approximately $350 trillion in derivatives. It is controlled by the British Bankers' Association (BBA)

Libor is set every day by a group of banks, including Barclays, JPMorgan Chase and Citigroup. It is based on the interest these banks say they have to pay to borrow money for short periods of time. Regulators are investigating charges that several banks, in addition to Barclays, misreported their borrowing costs to manipulate Libor higher or lower, depending on their needs, possibly affecting the borrowing costs for millions of individuals and businesses. During the crisis, the banks might have reported lower borrowing costs in order to avoid the appearance that they were suffering financial hardship.

The banks are supposed to submit the actual interest rates they are paying, or would expect to pay, for borrowing from other banks. 

On 29 May 2008, The Wall Street Journal (WSJ) released a controversial study suggesting that some banks might have understated borrowing costs they reported for Libor during the 2008 credit crunch that may have misled others about the financial position of these banks.

On its timeline, Barclays lists a total of 12 meetings with Federal Reserve officials from August 2007 to October 2008.

The degree to which federal regulators had advance warning about issues with Libor is a question that U.S. lawmakers are starting to ask, as well. On Tuesday, the Senate Banking Committee announced it will call Geithner and Federal Reserve Chairman Ben Bernanke to testify about the Libor scandal.

That announcement followed a letter sent Monday by Republican Rep. Randy Neugebauer of Texas, chair of the House Financial Services Committee's oversight and investigations panel, to New York Fed chair William Dudley, requesting transcripts of all communications between Barclays and the Fed concerning Libor from August 2007 to November 2009. “Some news reports indicate that although Barclays raised concerns multiple times with American and British authorities about discrepancies over how Libor was set, the bank was not told to stop the practice” of manipulating the rate, the letter said.

In November 2008, the Governor of the Bank of England, Mervin King, described Libor to the UK Parliament saying "It is in many ways the rate at which banks do not lend to each other, ... it is not a rate at which anyone is actually borrowing."

Barclays has been fined $452 million (360 million euros) by British and US regulators for attempted manipulation of the markets for Libor and Eurobor benchmark interest rates between 2005 and 2009.

Three top Barclays executives have resigned and on Friday Britain's Serious Fraud Office said it would formally investigate the case, which has dented London's reputation as a top financial center.

But speculation runs to other banks because the Libor rate is set based on information from 16 international banks, and many think that manipulating it would take more than one bank.

On 28 February 2012, it was revealed that the U.S. Department of Justice is conducting a criminal investigation into Libor abuse

In a statement dated Tuesday on its website, the New York Federal Reserve said, "In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and emails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor. In the spring of 2008, following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted. We subsequently shared our analysis and suggestions for reform of Libor with the relevant authorities in the UK."

Over the past week damning evidence has emerged, in documents detailing a settlement between Barclays and regulators in America and Britain, that employees at the bank and at several other unnamed banks tried to rig the number time and again over a period of at least five years. And worse is likely to emerge. Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. “This is the banking industry’s tobacco moment,” says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America’s tobacco industry more than $200 billion in 1998. “It’s that big,” he says.

As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged. The scandal also corrodes further what little remains of public trust in banks and those who run them.

Sources:
huffingtonpost
newsyahoo!
en.wikipedia
The Economist
DailyFinance
Business Insider
NYTimes