What is Libor? Why should I care that Barclays and possibly other banks have been caught manipulating it?
The London Interbank Offered Rate (LIBOR) is the benchmark for interest rates around the world. Benchmark as in many banks set their interest rates in accordance with or relative to Libor. Given this fact Libor is also a major indicator for the health of global financial markets.
So what happened?
The British Bankers Association (BBA) uses reports submitted by banks to calculate the Libor rate, Barclays and other banks submitted false reports and therefore manipulated the rate to mask poor health and gain profits for their trading positions.
From the United States Commodity Futures Trading Commission (CFTC):
The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against Barclays PLC, Barclays Bank PLC (Barclays Bank) and Barclays Capital Inc. (Barclays Capital) (collectively Barclays or the Bank). The Order finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005.
According to the Order, Barclays, through its traders and employees responsible for determining the Bank’s LIBOR and Euribor submissions (submitters), attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the Bank’s derivatives trading positions by either increasing its profits or minimizing its losses. This conduct occurred regularly and was pervasive. In addition, the attempts to manipulate included Barclays’ traders asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate U.S. Dollar LIBOR and Euribor.
The Order also finds that throughout the global financial crisis in late August 2007 through early 2009, as a result of instructions from Barclays’ senior management, the Bank routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.
CFTC fined Barclays $200 million and asked for better internal controls.
From the United States Department of Justice:
Barclays Bank PLC, a financial institution headquartered in London, has entered into an agreement with the Department of Justice to pay a $160 million penalty to resolve violations arising from Barclays’s submissions for the London InterBank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR), which are benchmark interest rates used in financial markets around the world…
“Barclays Bank’s illegal activity involved manipulating its submissions for benchmark interest rates in order to benefit its trading positions and the media’s perception of the bank’s financial health,” said Assistant Director in Charge McJunkin.
Barclays was also fined by British Financial Services Authority. Prominent Barclays executives have resigned including the CEO Bob Diamond. Apparently British Banksters at least have to resign when their companies get caught breaking the law – not so in America.
The Libor probe has also expanded and now other banks are under investigation for similar illegality.
OK, Why Should I Care?
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