Libor Scandal May Spread to the US Next
Libor is the world’s most important benchmark interest rate, directly affecting nearly $360 trillion worth of global financial securities. If you have a car loan, mortgage, credit card, or student loan, Libor affects you. Strangely enough, Libor is unknown to most Americans. For a comprehensive explanation of Libor, check out Jeanne’s article explaining why Libor is such a BFD.
Given the tremendous importance of Libor to the loans directly affecting millions of ordinary people from all around the world, many were outraged upon learning that several banking institutions were low-balling the rates they reported for Libor averaging in an attempt to appear more stable and credit-worthy.
Directly at the center of the Liborgate scandal stands Barclays, a U.K.-based multinational banking company that emerged from the financial meltdown of 2008-2009 as a global powerhouse. Back in 2007, the high Libor submissions reported by Barclays had many lenders questioning whether the bank was having liquidity problems. Wanting to appear more stable, the bank deliberately understated the rates they reported to the BBA (British Bankers Association) and Thomas Reuters for Libor averaging.
Many would argue that Barclays was on the very bottom of the list of banks needing government intervention. Like it’s angelic counterpart JP Morgan, Barclays was considered among the few competent banking institutions in the wake of the 2008-2009 financial crisis. Unlike the public reaction towardto JP Morgan’s trading debacle back in May, Liborgate is unlikely to blow over anytime soon. If anything, Wednesday’s hearing before a British parliamentary committee has opened a can of worms that will lead to many more investigations. The hearing came only one day after CEO Bob Diamond resigned due to “external pressure.” COO Jerry del Missier resigned soon after. During the hearing, Diamond made it very clear that it wasn’t just Barclays. The “it wasn’t just Barclays” defense was disheartening not because it was true-- and there were many more who participated in Libor manipulation-- but because Diamond clearly did not feel accountable for the shady practices going on under his leadership. He referred to Liborgate as “an unfortunate series of events,” continuing to explain that a few bad apples caused the scandal. Most notable of the comments during the grilling session was when an enraged John Mann said to Diamond, “Either you were complicit in what was going on, or you were grossly negligent, or you were incompetent.” Given the information thus far, one would find it hard to believe that Diamond was unaware of the varying incorrect rates reported to the BBA and Thomas Reuters from 2005 to 2009.
As the scandal unfolds, it’s becoming clear that Liborgate is bigger than Barclays. Bank of America, Citi, and JP Morgan are also under investigation. The independence and integrity of the Central Bank was also called into question after Barclays released a memo of a 2008 phone call Diamond had with Bank of England Deputy Governor Paul Tucker. During the conversation, it appeared that Tucker hinted Barclays should lower its rates. Tucker is scheduled to appear before Parliament on Monday.