The Big LIBOR Lie

Jul 9, 2012 by

Barclays Bank building

The Mighty Fall Further

You’ve likely read about Barclay’s Bank and a scandal involving something called LIBOR. This story is going to become huge, I predict, and you may soon discover, if you follow developments, that you have personally been ripped off by Barclays and probably many other Big Banks yet to be named, even if you’ve never done business directly with any of them.

What is LIBOR?

Banks routinely borrow from each other to manage their cash flow and reserves. LIBOR—short for London Interbank Offered Rate—allegedly is the average interest rate banks pay to borrow short-term from other banks. Thomson Reuters—a provider of business information and tools—compiles data for calculating LIBOR by surveying a sampling of banks and asking:

“At what rate could you borrow funds, were you to do so, by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11am?”

Thomson Reuters tosses out answers at both ends of the bell curve of replies, then averages the rest and reports the result as the day’s LIBOR rate.

How Does LIBOR Affect Little Ol’ Me?

If you have an adjustable-rate mortgage, a private student loan, or some other floating rate loan, search through your dusty files for the paperwork, get out your fine-print magnifying glass, and there’s an excellent chance you’ll discover that your rate is tied to LIBOR. Feeling an uptick in your blood pressure now? You may have good reason.

LIBOR is used around the world—including especially in Canada and the U.S.—as a benchmark for setting rates for lending and borrowing. Any variable rates on loans you have are probably equal to LIBOR + X%, where X reflects the lender’s assessment of the loan’s riskiness.

Loan Rates Reset Based on LIBOR

If you have an ARM (adjustable-rate mortgage) or private student loan with a rate that can change periodically, and if the rate is tied to LIBOR (which is very likely), then when LIBOR falls, your monthly payment will fall. And if LIBOR rises, your monthly payment would rise at the next adjustment milestone, according to the formula in your loan documents.

How Has Barclays Been Cheating?

Barclays representatives and agents lied or induced others to lie when answering the Thomson Reuters inter-bank lending rate survey question. In short, Barclays sought to rig LIBOR to its own advantage. The Bank has been fined US$450 million as a result. (No, you—the little guy—won’t see a nickel of this money.) Moreover, seventeen other banks—including Bank of America, Citigroup, Royal Bank of Scotland, and UBS—are under investigation for similar antics. One of Barclays’ chief defenses so far had been to argue it’s been unfairly singled out. I tried that feeble line as a 5-year old when my older brother had misbehaved too; my Mom didn’t buy it either.

The Impact of the LIBOR Scandal

At this point, as best I can determine, it’s unclear whether the Big Banks’ LIBOR-rigging has helped or hurt mortgagors and other borrowers, collectively. Whether you personally have been hurt is a separate question with an answer depending on the details and timing of variable rate loans you’ve taken out over the past decade.

No doubt legions of attorneys are working around the clock now to make the case for collective hurt, their efforts likely climaxing soon with The Mother of All Class Action Lawsuits. And Thomson Reuters is working to eliminate from its LIBOR calculations a dependence on truthfulness by banks. I’m intrigued that Thomson Reuters relied on an “honor system” in the first place, knowing full well that there’s little of what you and I would call honor in the money management business.

Are You Following the Scandal?

Have you been following the Barclays-LIBOR story? How big do you think the scandal will grow? If variable-rate loan holders have been negatively affected, should they be compensated somehow? What if they’ve been positively affected?

Digiprove sealCopyright secured by Digiprove © 2012 Kurt Fischer
All original content on these pages is fingerprinted and certified by Digiprove