Perhaps you vaguely know that banks were tinkering with the rates for their own advantage.
Big deal, you say. So what?
So, basically investors, including your mutual fund, were hosed. So, the banks essentially stacked the deck so they would be guaranteed to win.
So, it was an organized effort that included more than a dozen participants. And who orchestrated it all? The cops who were supposed to regulate them.
You should care because of all the missteps of the financial crisis, this one can’t be explained away by Wall Street’s excuses:
“We were just stupid.” “It was the borrowers’ fault.” “We misjudged the risk.” “We didn’t see it coming.”
The scandal over Libor, the London interbank-offered rate, is hard to understand. It’s difficult to follow the money, ferret out the bad and good intentions. It’s not as easy of a Wall Street scandal to digest as, say, insider trading or front-running trades or Ponzi schemes.
But like all of those things, fixing interest rates is simply a fancy way of saying the banks stole money — the money we entrusted to them.
In an effort to boil interest-rate fixing down to its simplest terms, here’s what I came up with.
1. Regulators, worried that the financial crisis was seizing up the credit markets, asked the banks to make it look as if credit was more plentiful and cheaper than it really was (something the industry may have been doing on its own prior to the request).
2. Banks fudged Libor, one of the key corporate interest rates, making the rate look lower. In reality, the banks weren’t really offering those rates, or more likely, offering credit at all.
3. Because Libor was a benchmark, the banks that colluded on the rate now had inside information on which direction the rate could go. That means they could bet on a corporate-debt derivative knowing that the underlying rate would go higher, lower or stay flat.
The upshot of all this is that as early as 2005, Libor was being set at a level that suited the banks’ interests — not the free market’s. It initially hurt consumers because it hurt what they paid for credit. Later, lower rates hurt their investments.
That’s just one scenario. Depending on where the banks set the rate, the fallout was almost infinite. From corporate borrowers to small businesses. From big investors such as Warren Buffett, to a small investor and his or her 401(k).
There was a real economic loss here. And some pension funds, including the City of Baltimore, claim to have lost millions.
Unfortunately, a real dollar amount can’t be estimated without going back and looking at every manipulation and where the interest rate should have actually been and then forensically reconstructing every trade or decision made as a result.
By David Weidner
Should we be preparing for another October surprise?
Note...The statute of limitations runs out on any federal investigations or indictments after...you guessed it...FIVE YEARS.
The latest word from the regulatory "cops on the beat" is that they are planning to CUT A DEAL with the bankers amounting to possibly 460 million in fines...(A pittance compared to what could be billions in losses incurred by investors).
It looks like business as usual on Wall St. and in Washington, as the BIGGEST DONORS to all candidates get a free ride on your cash and a get out of jail free card from the SEC and Congress.
Now look out folks, because this rip off is not over yet, only the tip of the iceberg is visible now. This type of manipulation (partially defended by Ben Bernanke) has happened before...LIKE IN 2007!
WASHINGTON -- Federal Reserve Chairman Ben S. Bernanke defended the central bank's response to allegations that large banks manipulated a key international interest rate, but said the benchmark rate was "structurally flawed" and could not assure lawmakers that it was reliable.
Sen. David Vitter (R-La.) asked Bernanke if the Fed investigated to determine if U.S. banks involved in setting the LIBOR rate were also doing the same manipulation as Barclays (since fined 460 million dollars). Bernanke said the Fed referred the issue to other U.S. authorities, which are conducting investigations.
(LA Times) NEW YORK — Barclays' rate-fixing scandal claimed its biggest casualty so far: Chief Executive Robert E. Diamond Jr., who resigned on the eve of a new investigation into the bank's operations by a committee of the British Parliament.
After resisting pressure to leave, Diamond resigned Tuesday and left immediately, a week after the bank announced it would pay $453 million in fines to U.S. and British authorities for its attempts to manipulate key interest rates, including the London interbank offered rate, or LIBOR.
Listen to the story here on Jerry Doyle