Cups and Balls: LIBOR


(photo and joke credit John Gapper)

I suspect there are a lot of other people like me who aren’t keyed into banking scandals. 2008 left us shaking our heads and shrugging our shoulders like babushkas in Stalin’s Russia.  Corruption! What can you do?  The economic sector blew up.  People are out of work, can’t pay their mortgages, pension funds are imploding.  We scrabble through.  Ho hum.  Life goes on.

But oh no.  Life keeps nudging.  We aren’t in Stalin’s Russia.  We are in the democratic west, and we must fight corruption.  But it’s too hard to understand!  Are you reading what I’m reading about Barclays bank and the LIBOR scandal?  Not Barclays! Not the heroic bank that bought Lehman Brothers in 2008 and saved the world from being sucked into a black hole?

LIBOR?  What’s LIBOR???

London Interbank Offered Rate.  It’s what 18 big banks charge each other to make loans to each other.  Very official.  Closely governed.  It’s the incantation uttered every day to stir markets gone stale.  It’s the twitching hand on Mammon’s robe: the fabric swirls and shivers right down to us. Right.  Holy stuff.

What has LIBOR to do with us?  Companies everywhere use LIBOR to help price returns to investors.  Banks use LIBOR to set interest rates on adjustable mortgages, student loans, car loans.  Still too abstract?  How about this?  In the State of Ohio, 60% of the prime adjustable rate mortgages and 100% of the subprime mortgage rates are tied to LIBOR.  About $10,000,000,000,000 (ten trillion if you’re not into counting zeroes) in loans are based on LIBOR. It underpins the world economy.

So we hope and trust that the LIBOR rates are tied to real money, real value, real markets, but dang it!  The top three bankers at Barclay’s just resigned in disgrace because apparently LIBOR was manipulated.  How could this happen?  On paper it sounds like a good, corruption-proof system.  Here’s how it works:

Every morning the bankers report what they are paying in interest to the British Bankers Association.   To weed out cheaters, I mean anomalies, the rates at the highest and lowest end are tossed out.  A number somewhere in the middle is determined as the day’s rate, and every day at 11:00 a.m., it is announced to the world. Ta Da.  Trillions of dollars in loans are adjusted accordingly.  The rate moves frequently, up a little, down a little.  Very market-like.  Self-correcting and all that.

Ooops.  Turns out, back in mid to late 2000′s, it wasn’t always the market that was tweaking interest rates.  It was sometimes also bank traders, who were trying to look a little better than they actually were. They also scratched each others’ backs, within banks and between banks to help keep LIBOR rates friendly to themselves.  They called and emailed each other, saying things like, hey dude, if the rate is just a hinchy bit lower tomorrow, my boss will be really happy, and I might just get that $2 million holiday bonus. Think I’m pulling your leg?  Here are some e-mail transcripts:

“Done .. for you big boy.”  “Dude I owe you big time.  Come over one day after work and I’m opening a bottle of Bollinger.” 

Thank you

Yep. The interest rate that is central to everyday functioning of the economy was rigged.

Where were the regulators!?!

They were on the case.  It’s taken this long to line things up.  You don’t just go out on  rumors and accuse the most powerful and richest people in the world of fraud.  Now the case is finally laid however, and heads are rolling. Rumored to be next in the firing line:  Royal Bank of Scotland, Citigroup, HSBC, JP Morgan Chase, Lloyds, Bank of Tokyo.

Think it won’t make any difference to ordinary people?  Maybe not.  Things are pretty bad already.  But consider this.  If banks aren’t functioning properly, not lending, not borrowing, not juicing up the economy, or if investors aren’t investing because they don’t trust the banks, things will slow down even more.  That could be bad news for Obama, who many on the R side of the fence already blame for the slowdown.  Think Romney’s immune?  One of his biggest fundraisers, known in the business as a “bundler”, is Bob Diamond (not Jamie Dimon, the recently disgraced head of JP Morgan Chase), the just-resigned CEO of Barclay’s Bank.  Mr. Diamond has considerately resigned from Romney’s campaign.

Defenders of the bankers are already saying, hey interest rates go down a little, they go up a little, over time it evens out.  You can’t prove that anyone was hurt.  For instance, Barclay’s is accused of pressuring the banks to lower LIBOR, so that it looked like Barclay’s was healthy, able to borrow cheaply, not desperate for cash.  This meant that interest rates everywhere dropped, so mortgages and student loans and all the rest were lower.  Good, right?

No.  Barclay’s wasn’t healthy and shouldn’t have been pretending it was.  That’s how investors get burned.  Plus, LIBOR rates were still much higher at the time than what Barclay’s and the other big banks were paying to the U.S. Treasury for loans from US.  Got that?  Translation: We loaned them U.S. money at 1%, so that they could loan us money for houses and cars at 16%.  Do I have that straight?  Actually, I’m not sure.  It took the US Justice Department, the CFTC and FSA five years to unravel it.  For me, it’s a little like trying to keep my eye on the pebble under the cup.

Cups and Balls

The irony, however, is not hard to get.  Barclay’s Bank monkeyed with LIBOR to make itself look trustworthy.  Feeling trusting yet?  Hang on.  We might be in for another wild ride.


  • For most of us, banking involves making meager deposits, paying a few bills, and grumbling about the fraction of a percent we’re earning in interest on our savings. Trying to comprehend the behind-the-scenes activity of huge financial institutions is difficult — the numbers are outside our familiar routine, similar to the way we can’t fathom the size of the universe because we’re so used to measuring distances in miles or kilometers. Still, while I may not fully understand the infractions, I’m continually surprised by how frequently they occur. Thank you for explaining it so well, Julia.


  • Isn’t that the truth? By the time we putzes counting our .025% interest get a whiff of trouble, 5 years have gone by, the paltry fines have been levied and paid, the CEO resigned and the golden parachute is safely tucked away in an account in the Cayman Islands. Pretty slick.


  • Oh come on! What’s wrong with a few friends helping each other out by reducing a few percetanges here and there? Baker’s do so much for the economy, can’t we overlook a few small things?

    And you are wrong to say the government did nothing. In the UK, Barclays were sent a strongly worded letter, saying, ‘old chap, you can’t do this.” 🙂


  • I heard a hilarious recap of this on NPR with two commentators actually reading out some of those incriminating emails, complete with British accents (they mention Bollinger champagne at one point). When you hear it that baldly, it sounds so sleezy. Thanks for the excellent summary, Julia!


    • It’s pretty funny, unless you take this kind of thing seriously, which I guess we should. Stinkers. Thanks for the visit.


  • Good job with this complicated issue, Julia. I just saw a piece on the news MSNBC. It is like insurance — so boring that nobody really pays attention and we all suffer as a result of letting folks get away with murder and theft.


  • It’s a slog to trying to get a handle on corruption, especially when there is so much more interesting stuff out there., and it takes four or five years to get to the bottom of it. Oh man, another banking scandal?!? Do I have to? Well, yeah, I guess we do. Thanks for the visit.


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