One of the few issues which both the political left and the right agree upon is rooting out financial corruption by the banking industry. The latest banking scandal involves big banks submitting falsified data in order to keep their borrowing rates low. As many as 16 banks worldwide have been submitting false information to LIBOR, the London interbank offer rate. LIBOR is considered one of the most crucial interest rates in finance. It is the average interest rate the world's largest banks pay when they borrow money from each other, and affects the rate of interest borrowers pay on everything from student loans to credit cards to corporate debt. It is the benchmark for three-quarters of a quadrillion dollars in financial dealings.
16 banks contribute daily estimates to LIBOR of what interest rate they would have to pay if they borrowed money. Banks borrow from each other on occasion when they find that more withdrawals have been made in a day than deposits by customers. By submitting artificially low interest rates, the banks were able to disguise their financial troubles. This heavily contributed to the subprime mortgage meltdown. Subprime mortgage lenders preferred using the LIBOR index to tie adjustable rate mortgages to due to their overly rosy picture.
The New York Fed, which was headed by TARP bailout architect and now Secretary of the Treasury Timothy Geithner, knew in 2007 that banks were rate rigging. Although Geithner offered suggestions to increase transparency, nothing was done and the rate rigging continued. Evidence of the rate rigging goes back to 2005.
The brazenness with which Barclay traders would commit these crimes is astounding. Matt Levine at Dealbreaker has reprinted some of the conversations between LIBOR and Barclays traders joking about submitting falsified numbers. One Barclay trader wrote in an email to a submitter: “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] LIBORS as high as possible.”
Eventually Barclay employees started complaining. A Barclays employee told a representative from the Federal Reserve Bank of New York in April 2008 that Barclays was reporting falsified rates to LIBOR. In October of last year, another Barclays employee told the bank that the LIBOR rate is “absolute rubbish.” In December, a Barclays employee complained to the U.S. Commodities Future Trading Commission that Barclays was underrerporting its rate to LIBOR.
After subpoenaing emails, Barclays admitted it submitted false documents, and was fined $453 million by British and American regulators. Three of its top executives resigned, including CEO Bob Diamond on July 3. Deutsche Bank is already cooperating with regulators. Barclays' outgoing chairman Marcus Agius hinted that other banks may be implicated more than Barclays. Barclays' defense was that it was forced to underreport its own borrowing cost because other banks were. This means Barclays is just the tip of the iceberg, other banks could be in even bigger trouble; a full-fledged global banking scandal. The UK's Serious Fraud Office has launched a criminal investigation. US investigators are preparing lawsuits against the banks and several class actions have already been filed by investors.
15 other banks that submit interest rates to LIBOR, including Citigroup, are also under investigation. Other U.S. banks that participate in LIBOR include Bank of America, JP Morgan Chase, and HSBC.
Barclays received $8.5 billion in bailouts from the U.S. bailout of AIG. Meanwhile, it continued giving generous bonuses to executives. Citigroup received a $45 billion TARP bailout and gave its executives generous bonuses in 2010 despite huge losses.
This latest scandal is more proof that the big banks are greedy and ruthless and will break the law in order to make a profit and huge bonuses. Falsifying their interest rates has affected millions of people around the world, including struggling homeowners whose mortgages rates stayed artificially high due to the manipulation.
It is extraordinarily unfair that dishonest, lying banks received bailouts with taxpayers' money. They should have been forced to go under like many homeowners have through no fault of their own, who simply fell on hard times due to losing a job or becoming sick. These same banks refuse to give many homeowners a break on their interest rates; meanwhile they lie about their interest rates. The penalty assessed against Barclays is just a slap on the wrist, because the bank made that money up on profits from manipulating interest rates. Whereas to a struggling homeowner, not being able to adjust the interest rate on their mortgage could mean losing their house.
On June 29, Bank of England governor Sir Mervyn King said there needs to be a "cultural change", adding: "The idea that one can base the future calculation of LIBOR on the idea that 'my word is my LIBOR' is now dead.” Perhaps that line should be revised to “My lie is my LIBOR.”