It may go down as the biggest banking scandal in history, and yet many Americans have not even heard about it.
The LIBOR (London Interbank Offered Rate) scandal is a big deal, and so far no one knows just how deep the ruse ran. Put simply, the LIBOR rate is the rate at which banks get funds from other banks. The scandal: Barclays–and potentially other banks–allegedly tried to rig the rate. So far, Barclays has paid $455 million in fines to U.S. and U.K. regulators.
The LIBOR rate is a benchmark interest rate used to set an estimated $800 trillion in financial instruments. That’s not a typo–$800 trillion. As Christopher Barker of the Motley Fool financial blog explains:
The LIBOR benchmark rates that are tied to an estimated $800 trillion of securities, the offending banks essentially played with matches in the middle of the world’s largest house of leveraged cards. The combined gross domestic product of all the nations of the world is only about $70 trillion, so the towering mountain of LIBOR-connected securities out there climbs into the realm of leveraged derivatives like those that nearly brought the global financial system to its knees at the height of the 2008 credit crisis.
That, says The Economist , would make the LIBOR scandal the biggest in history:
If attempts to manipulate LIBOR were successful–and the regulators think that Barclays did manage it, on occasion–then this would be the biggest securities fraud in history, affecting investors and borrowers around the world. That opens the door to litigation not just by the direct customers of implicated banks, but by anyone with a financial interest in LIBOR.
As the AgainstCronyCapitalism.org blog points out, you know a banking scandal is bad when Bloomberg News calls for bankers to go to jail. Quoth the editors of Bloomberg News:
We don’t countenance bank bashing. Nor have we ever called on regulators to bust up big banks. But it’s difficult to defend an industry that defrauds the market with fake interest-rate figures, thereby stealing from other banks and customers.
Sadly, the Libor case reveals something rotten in today’s banking culture. We hope the investigations expose the bad actors, lead to jail terms for those who knowingly manipulated the market, and force out the senior managers and board directors who participated in, or overlooked, such conduct.
The worst part is that no one yet knows how deep the scandal ran, or how many bad actors may have been involved. But as the Motley Fool financial blog ominously observed today: “If a dozen or more banks can collectively manipulate something as central to the everyday functioning of our economic system as LIBOR, and in the process play games with an $800 trillion mountain of leveraged securities, is there any corner of our financial markets that can be deemed safe from such reckless and deceptive behavior?”
It’s a question investors may not know the answer to for some time.
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