The Libor Effect in U.S.

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Libor Effect

Source: Getty Images. Carl Court, AFP

By now, we’ve all heard of the Barclays interest rate fixing scandal. So far, it’s cost the banking conglomerate more than $450 million and analysts in both the U.S. and the UK say it’s just the beginning. But how will affect American markets?

Libor is the London Interbank Offered Rate and is the most important benchmark associated with interest rates on a global level. There is at least $10 trillion in various loans, which include car loans, student loans, mortgages (especially adjustable rates) and credit cards – along with $350 trillion in derivatives that are directly tied to Libor.

The rates are determined every business day in London and includes a series of bigger banks. These banks set the pace to some degree on the day’s interest rates. Specifically, the bankers provide an interest rate they would have to pay in order to borrow money for specific periods of time. From there, the responses are combined by Thomson Reuters. A bit of editing and before long, the Libor quotes are ready for release. Now, though, there lawsuits popping up everywhere and include allegations that the banks made artificially low Libor submissions, particularly during the financial crisis.

In the U.S. alone, there are currently more than two dozen lawsuits filed in New York – though they’re likely being consolidated into one suit. Banks are being accused of knowingly manipulating various rates unfairly, which then resulted in massive losses.

The dust has not yet settled, but already, settlements are being reached in the UK and here in the U.S. These civil suits address various regulators; however, Barclays did admit to knowing its traders had requested some colleagues who were in charge of Libor to tailor submissions with the goal of strengthening their trading positions. Worse, its believed it’s been going on since at least 2005.

As is the case with most scandals, there’s a mushroom effect. There are now several more firms, along with Barclays, that might have been involved. A few of those include JPMorgan Chase, Deutsche Bank, Royal Bank of Scotland, Citigroup, UBS and Credit Suisse. All are being accused of keeping rates “artificially low”. It could be there are other firms and banks involved; however, none have been identified as of yet.

A lawyer who represents the city of Baltimore said in an interview,

They were setting the rates for Libor at the same time that they were in the market transacting with people in instruments that were keyed to Libor,

said Arun Subramanian.

To me, this doesn’t seem like anything different than a normal, anti-trust conspiracy.

According to Lloyd’s Banking Group, all parties involved are cooperating with various regulators in continuing investigations. None of the other banks offered any type of comments to media. Instead, many filed countless motions in court to have the lawsuits dismissed. They say the cases are based on reports that are not based in fact and that the lack of evidence should serve as proof. According to the papers, the allegations are “too indirect and speculative”.

Lawyers are hoping to gain information from Barclays that would allow them to better support their claims in the lawsuits. It could take years for it to be sorted out, but the lawyers filing the lawsuits insist there’s much more to the story. The global impact could be devastating.

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About Author

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving.


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