Why Is the Libor Scandal So Important to You?
There have been numerous big banking scandals recently.
The former CEO of Barclays said today that banks across the world were fixing interest rates in the run-up to the financial crisis .
MIT finance professor Andrew Lo notes:
This dwarfs by orders of magnitude any financial scams in the history of markets.
Professor of economics and law Bill Black points out:
It is the largest rigging of prices in the history of the world by many orders of magnitude.
Indeed, the scandal effects an $800 trillion dollar market – 10 times the size of the real world economy.
Matt Taibbi explains that this is the “mega scandal of all mega scandals”, because Libor is the “sun at the center of the financial universe”, and manipulating Libor means that “the whole Earth is built on quicksand.”
60 percent of prime adjustable rate mortgages, and nearly 100 percent of subprime ones, were indexed to LIBOR.
That means that when LIBOR rises, so do the prices ordinary consumers pay to, say, get a mortgage.
So how did the manipulations by Barclay’s affect this rate? First, from 2005 and 2007, the bank allegedly varied the rates it reported to the BBA and Thomson Reuters so as to improve its margins on internal trades. For example, it could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This … bumped up mortgage rates – however infinitesimally – for consumers even when the risk of the loans hadn’t changed at all.
Other loans – like small business loans – are usually based on Libor as well.
The big banks have robbed the whole world.
Indeed, the scandal is so big that it will further destroy trust in our financial system and drive many people from investing in the capital markets altogether.
George Washington [our pen name here Washington’s Blog] is right when he calls the LIBOR scandal “The Biggest Financial Scam In World History” ….