There has been a lot of news coverage recently regarding the “LIBOR scandal.” LIBOR stands for London Interbank Offered Rate. In fact, the U.S. Department of Justice (DOJ) just announced a deferred prosecution agreement (DPA) with Lloyds Banking Group that requires the bank to admit to participation in the scheme and pay an $86 million penalty. Combined with penalties the bank is paying to several other agencies, Lloyds has racked up a total of almost $370 million in penalties and fines for the scheme. In the financial sector, the scandal was big news, but the manipulation of the LIBOR rates has much further reaching effects than most people realize. The term alone, LIBOR, sounds like an abstract, obscure financial term – and it is – but it can affect individuals much more directly than one might realize.
First, it needs to be said that LIBOR is a self-calculated, self-reported, semi-subjective standard in the banking industry. Currently there are 11 to 18 contributor banks for 10 currencies, including the five major currencies U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF), and involving 15 different maturities ranging from overnight to one year. Every day, a group of analysts calls up those banks (the same banks every day) and asks them how much interest they would pay to borrow money from another bank. The LIBOR for a given currency at a specific maturity was the result of a calculation based upon submissions from a panel of banks for that currency (the Contributor Panel) selected by the British Bankers’ Association (BBA), a trade association based in London and the former publisher of LIBOR. LIBOR is calculated each day for all reported rates. Essentially, the contributor banks set the LIBOR at their whim. Looking back, the potential for manipulation is obvious, but at the time, nobody suspected the banks would lie. At the same time, however, there was no system to verify accurately reported rates and nobody ever checked to see if the banks were telling the truth. It turns out they were not.
LIBOR’s primary function is to serve as the benchmark reference rate for debt instruments, including government and corporate bonds, mortgages, student loans, credit cards, derivatives such as currency and interest swaps, and many other financial products. LIBOR still sounds like an abstract concept, right? Consider this: most adjustable rate loans, including adjustable-rate mortgage (ARM), are some percentage point above LIBOR. If the LIBOR falls, your ARM rate would also go down. Conversely, if LIBOR rises, so does your ARM.
Thus, the manipulation of LIBOR to a rate that favored banks and their friends trickles down to affect those with ARMs, and that’s just one example. Any and every loan and credit with an interest rate based on LIBOR was affected by this scandal – fixed-rates included, but more so if the interest rate is adjustable. The Bank of International Settlements estimated that as of the second half of 2009, outstanding interest rate contracts were valued at approximately $450 trillion. Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division said in a recent press release:
Because investors and consumers rely on LIBOR’s integrity, rate-rigging fundamentally undermines confidence in financial markets.
Lloyds is not the only bank to pay large settlements: Royal Bank of Scotland agreed to pay $612 million to U.S. and British authorities; UBS agreed to pay $1.5 billion; and Barclays agreed to pay $453 million. The investigations are ongoing and, thankfully, so is a class action in the Southern District of New York. Schemes like this – the result of back-room, clandestine agreements and conversations – damage not only consumer confidence in the financial markets, but also consumer bank accounts. If you need more information, contact Rebecca Gilliland, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com.
Sources: Reuters; Marketplace.org, Justice.org and The Corporate Crime Reporter
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