QUICK FACTS: LIBOR BANKING SCANDAL
We don’t like banks. I know that’s a big statement. But I’m fairly sure it is true of most of us.
We know they do what’s best for their shareholders, of whom we may of course number ourselves, given our superannuation funds include banks in their portfolios.
But making a marginal profit from our shareholding when the markets are good doesn’t seem to negate the bad taste left when bank scandals are exposed.
And there have been quite a few! Amongst them – Barings, Lehman Brothers, Salomon Brothers not to mention the financial scandals like Bernie Madoff’s ponzi rip off, which involved JP Morgan Chase and HSBC amongst other investment banks.
The latest – by which I mean last week – is that the HSBC bank has been accused of putting its commercial interests ahead of US and international money-laundering laws by allowing highly suspect clients (Mexican drug cartels, al-Qa’ida, Iran and North Korea) to move vast sums of money around the world with little or no apparent scrutiny by the bank’s compliance division.
This one looks like it could end up embroiling Britain’s Trade Minister who was Chief Executive of HSBC between 2003 and 2006 and its chairman until 2010 – the period that the US Senate says the bank had a “pervasively polluted” culture which allowed the dirty money to swill around.
The amount of money moved around is staggering – it’s in the billions. But so too the penalty HSBC looks likely to incur – more than a $1 billion in fines, which will hurt it and no doubt HSBC shareholders.
But at the end of the day, HSBC’s indiscretions probably won’t greatly impact your hip pocket.
Not like the Libor scandal. Barclays Bank has been in the dock on this one, the epicentre of which is the cost of money!
And it’s big.
As Warren Buffett said: “You get Libor, and you’re talking about the whole world”.
So what is Libor? What was the scandal? And why aren’t we deeply concerned?
1. Libor is an acronym for the London interbank offered rate and it’s the average interest rate for loans between banks. Major banks around the world use it to set the rate for their financial products – credit cards, mortgage rates and student loans to name but a few. Many of the variable rate investment products around the world are based on Libor as well as US$350 trillion in derivatives, securities, and debt pricing.
2. Because it’s a benchmark for interest rates, if it’s manipulated, it strikes at the very heart of the financial system. Libor is, as The New York Times puts it, one of the “most important numbers in the financial world”.
3. How is it set? The banks calculate each morning how much money they need to borrow from each other to make sure their balance sheets, well, balance.
4. Of course, sometimes a bank has more cash than it needs. It is then in a position to lend to other banks. And if it does find itself in this lucky position, it calculates how much it can lend and at what rate.
5. Libor measures how much this inter-bank lending actually costs by calculating the average rate banks pay when they borrow from each other.
6. 150 different Libor rates are calculated everyday for 15 borrowing periods across 10 different currencies.
7. The rates are based on calculations determined from data, which is submitted by panels of major banks.
8. The British Bankers’ Association and the European Banking Association oversees the calculations in which the highest and lowest rates at which the banks borrow from and lend to each other are tossed out, and the remaining rates are averaged.
9. It turns out banks aren’t that different to you and me. When a bank is charged a high interest rate by another bank, that’s because the lending bank doesn’t have a lot of confidence in the borrowing bank.
10. So the Libor reflects the overall health of the banking system which means that during tough times – like the global financial crisis when there was little confidence in the banking sector – the Libor is high.
11. But banks don’t like low confidence. And regulators don’t much like a high Libor.
12. Between 2005 and 2009, Barclays Bank was found by US and UK regulators to have submitted false reports on borrowing rates. It admitted to submitting rates that were artificially low to deflect suspicion it was under financial stress and having to borrow at higher rates than its competitors. During the GFC it made Barclays look less risky.
13. The bank also admitted that some of its traders had influenced the bank’s submissions on rates so their desk profits would look better.
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9 Responses to this article
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SandsOfTime July 23, 2012
Monica thanks for the article. There is an important point to make though – you make a logical leap from banks, and Barclays in particular, artificially manipulating the rate lower, to the impact on mortgages and credit card rates. If the rate was manipulated lower (as was, apparently, the case in 2008 although there were instances of the rate being manipulated higher to benefit traders) then ‘Joe Public’ could in fact have benefited.
LIBOR is set by submissions from 16 banks of which the four highest and four lowest are excluded and the rest averaged. As we now know, this is not a perfect system, but it does mean that one bank wil have little influence over the overall rate. Bear in mind that Barclays is the first of many banks to have been investigated – we still await the results of the rest, some of whome are understood to be far less co-operative than Barclays. If and when it is shown that banks were colluding, then the rate could well have been meaningfully manipulated, and there’s your story. That is not to say that a bank acting alone to give a false impression of the rate at which it coudl borrow was wrong – it is absolutely wrong – but the impact on the consumer was most unlikely to have been significant.
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Hugh Robertson July 23, 2012
Sands of Time, you should have a look through the emails. The complex regulatory framework describe ld by Monica seems often to have manipulated by informal discussion between te banks prior to the lodging of documents. Emails reveal instances of bankers thanking colleagues for doing them a favour by manipulating rates, and in one case inviting someone to dinner and a bottle of Bollinger!
And while you are (half) correct that artificially lowered interest rates help punters, it only does so if a loan is involved. But lower returns on savings and investments accounts and superannuation certainly doesn’t help the average person.
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Rhoda July 23, 2012
Yes it concerns me. The financial sector has a lot to answer for. And next time I hear someone talk about pensioners wasting their pension on the pokies I’ll be reminding them there are bigger fish to fry.
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Tess July 23, 2012
And these are only the things that have been uncovered…sigh…it seems there is no integrity left in big business anymore…
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Monica July 24, 2012
Sands of Time – it was the manipulation higher that skewed the mortgage rates and as Hugh points out artificially lowering rates had a significant impact on savings and investments. In both cases, the dishonesty, breach of public trust and impact on “balance sheets” across a wide range of industry and investment vehicles which subsequently effected people holding jobs was truly awful.
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liza July 24, 2012
And what’s more most people are watching reality T.V. when they could be following this much more exciting story of Money,Greed, lies.Unbelievable ?
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SandsOfTime July 24, 2012
Monica (and Hugh) I don’t disagree – I was just pointing out a logical inconsistency in your article which lnked lower rates with losses by borrowers – as you rightly point out in your comment, that was not necessarily the case. There may have been winners and losers in the general public although as I noted for that to occur there would need to be collusion between a number of banks – although I would not be ata ll surprised if it is soon revealed that this has happened. Whether people and businsses won or lost as a result of higher or lower rates is relevant, but even without that the behaviour of those involved in LIBOR rigging was reprehensible.
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Monica July 24, 2012
Sands of Time — and yes, it seems other banks are now being investigated. So watch this space!
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Monica July 24, 2012
An interesting rebuttal of the claim that no-one was hurt in the libor scandal:
http://www.slate.com/blogs/spitzer/2012/07/23/larry_kudlow_says_the_libor_conspiracy_has_no_victims_that_s_grotesquely_wrong_.html
