Is it just me, or do we indeed discover each week how a major financial institution has played “fast and loose” with banking rules, federal regulations, and/or business ethics? In June, huge international finance powerhouse, Barclays, paid a $450 million fine for a scheme that lasted at least four years (between 2005 and 2009), involving the manipulation of the single most important international benchmark for interest rates – the London Interbank Offered Rate (LIBOR). Since then, there have been periodic follow-up stories about this serial fraud. Now, within the past two weeks, the issue has brought back into the forefront. Bloomberg and the Wall Street Journal have reported that subpoenas related to the LIBOR scandal have been issued to a number of banks, including: J.P. Morgan Chase, Bank of America, UBS AG, Bank of Tokyo Mitsubishi UFJ, Credit Suisse AG, Lloyds Banking Group PLC, Royal Bank of Canada, Societe Generale SA, and several less well known banks. That brings the total number of banks under suspicion to sixteen.
For all of those who are unfamiliar with “LIBOR”, the next question might be: “So what?” The economic reality is that virtually everyone who has borrowed money is impacted, to one degree or another, by LIBOR rate setting. The interest rate on trillions of dollars of financial instruments have been (and are) tied to the LIBOR rate – including mortgage loans, credit cards, and small business loans.
Experts differ on a precise quantification of the aggregate “damages” incurred among all borrowers because of LIBOR rate fixing. But they all agree that this is, effectively, a matter of massive fraud.
According to New York Times market journalist, Gretchen Morgenson: “Manipulating the LIBOR is a big deal because it affects the cost of money for almost everyone.” More graphically, Washington Post reporter, Dylan Matthews, offers this observation: “A bank that mucks with the LIBOR rate isn’t just playing around with esoteric derivatives that will only affect other traders: They’re playing with the real economy that most of us participate in every day.”
To give you just a hint of the economic scale of this massive and systemic fraud, experts have (thus far) estimated the total financial impact at somewhere between $360 trillion and $800 trillion! When one compares that figure with the current U.S. Federal Debt of over $16 trillion, the almost unimaginable magnitude of this scandal becomes much clearer! Countrywide Financial and Bank of America thought they had an incredible scheme in “The Hustle”. (see http://quadrust.com/article/a-dark-twist-on-the-hustle) Since “LIBORgate” totally dwarfs that scheme, and was an international effort, perhaps we should call LIBORgate the “Super Duper Enorme Uber Hustle”! http://articles.chicagotribune.com/2012-07-25/news/sns-201207251830–tms–ahuffcoltq–m-a20120725-20120725_1_barclays-bank-libor-interest-rate-benchmark