The LIBOR manipulation story has exploded into a major scandal overseas. The CEO of Barclays, Bob Diamond, has resigned in disgrace; his was the first of what will undoubtedly be many major banks to walk the regulatory plank for fixing the interbank exchange rate. The Labor party is demanding a sweeping criminal investigation. Mervyn King, Governor of the Bank of England, responded the way a real public official should (i.e. not like Ben Bernanke), blasting the banks:
It is time to do something about the banking system…Many people in the banking industry are hardworking and feel badly let down by some of their colleagues and leaders. It goes to the culture and the structure of banks: the excessive compensation, the shoddy treatment of customers, the deceitful manipulation of a key interest rate, and today, news of yet another mis-selling scandal.
The furor is over revelations that Barclays, the Royal Bank of Scotland, and other banks were monkeying with at least $10 trillion in loans (The Wall Street Journal is calculating that that LIBOR affects $800 trillion worth of contracts).
The banks gamed LIBOR for two semi-overlapping reasons. As noted here last week, there were instances of Barclays traders badgering the LIBOR submitters to "push down" rates in order to fatten their immediate bottom lines, depending on what they were trading or holding that day. They also apparently rigged LIBOR downward in order to produce a general appearance of better health, essentially tweaking their credit scores a few ticks upward.Read more: http://www.rollingstone.com/politics/blogs/taibblog/why-is-nobody-freaking-out-about-the-libor-banking-scandal-20120703#ixzz1zgV7yVgb
Again: Libor, the London Interbank Exchange Rate, is the rate at which banks borrow from each other. A huge percentage of the world’s variable-rate investments are pegged to Libor. When Libor rates are high, it suggests that the banks’ confidence in each other is low, and high Libor rates are generally an indicator of shaky financial health among the banks. If the banks manipulated Libor, they did it to make themselves look healthier, but this had the consequence of affecting hundreds of trillions of dollars’ worth of financial products worldwide.
During the crash of 2008, governments understandably would have been concerned about high Libor rates – high rates and a lack of confidence in banks threatened economic stability – but the notion that governments would have encouraged banks to fake those rates would have been beyond unthinkable even a decade ago.Read more: http://www.rollingstone.com/politics/blogs/taibblog/libor-banking-scandal-deepens-barclays-releases-damning-email-implicates-british-government-20120704#ixzz1zgVs4hxy