The full extent of the LIBOR benchmark rate’s manipulation is still unknown, even after the fine meted out to Barclays Bank, but it is most likely that the scandal involves more banks and most certain that it will undermine faith in the international finance system even further. The magnitude of the issue is inconceivable and its consequences unpredictable. LIBOR rates are the basis for loans estimated at 360 trillion dollars across the globe, from mortgages in the United States and derivatives to the credit cards in our pockets. This, as Bloomberg noted, means that a discrepancy of just 0.1 percent over a year adds up to 300 billion dollars.
It appears that Barclays? admission of manipulation and the 360-million-euro fine imposed on it were just the beginning. ?The alleged rate-rigging is a major competition concern,? the European commissioner for competition, Joaquin Almunia, said on Friday. ?This is why we started investigating a number of banks last year for their possible concerted manipulation of [interest rate] benchmarks such as LIBOR, EURIBOR and TIBOR, the Tokyo rate, for several currencies,? he added. The London Interbank Offered Rate (LIBOR) is determined daily in London from 18 major banks’ estimates of their own interbank rates and is a benchmark for what banks, businesses and individuals pay for loans. EURIBOR covers the eurozone and is calculated from the estimates of 43 international banks, while TIBOR is the Japanese equivalent. ?The investigations have top priority because this sort of collusion can seriously harm competition worldwide and on our continent in particular,? Almunia said.
Robert Shapiro, former US undersecretary for commerce and an adviser to the presidential campaigns of Bill Clinton, Al Gore and John Kerry, in an article on the Globalist (theglobalist.com), wrote that investigators are looking into reports of similar manipulation by other major banks such as Citigroup, Deutsche Bank and JPMorgan Chase. ?This could well turn into the largest consumer fraud ever seen,? Shapiro commented.
Last Thursday, the Washington Post reported that in May 2008, US Treasury Secretary Timothy Geithner, then head of the Federal Reserve Bank of New York, had expressed concern to the Bank of England and proposed measures for a more transparent LIBOR procedure. This was five months before October 2008, when Barclays lowered its estimated rate in an attempt to lower LIBOR and suggest that it did not face problems from the crisis that broke out after the collapse of Lehman Bros. Since then, it has been revealed that Barclays traders had been manipulating interest rates since 2005.
Shapiro noted that, ?for several years, academics and a number of market followers warned that something funny was going on with LIBOR. The evidence was not hard to find.? He described how the spread between US Treasury rates and LIBOR rates for loans of the same time frame began to widen: From 2000 to 2006, LIBOR rates averaged about 0.25 percent above US rates, with the two moving up and down together; in 2007, the spread more than doubled to about 0.6 percent; by 2008 the difference was ?averaging 1.3 percentage points, and the up-and-down movements of the two rates no longer tracked each other.?
It is not yet clear who won and who gained, but, according to Bloomberg’s editors, ?estimates of payments related to lawsuits are currently in the billions or tens of billions of dollars. The full scope of possible litigation, though, won?t be known until the details of civil and criminal investigations emerge.?
The banking sector will be rocked by investigations, fines and payments, and — most likely — by stricter regulations. Top executives will lose many of their benefits and some banks may be broken up to separate their banking from other services. The cost will probably roll on to the customers, as usual. The further loss of trust in banking will worsen the political discontent and the economic climate across Europe, making recovery even more difficult. As we have seen in Greece, loss of faith in an economy and in a political system sets off a vicious spiral of recession, rage and political nihilism. It is growing increasingly clear that national economic models must change, international economic relations must change, and the financial sector must undergo a thorough overhaul so that economies and their financial sectors can begin to work toward the prosperity of the people whom they should be serving.