Did you hear the one about the group of bankers that manipulated the bank interest rates in order to make millions? No? No, not Lehman Brothers. They failed because of a lack of regulation and over extending themselves in a subprime bubble. Nooo, not Bear Stearns. They failed because they failed to keep enough capital to back up their investments. Nor, any number of other banks that most of us have heard of. Sadly, it’s not a joke, and it is being almost completely ignored in the main stream media.
In fact, other than a passing reference in most places, it really isn’t getting much coverage anywhere outside of dedicated financial news, and yet, this is one that is hugely important.
So, what the heck is it? The London Interbank Offered Rate (LIBOR) and its manipulation by Barclays Bank staff. Oh? You haven’t heard about it? That wouldn’t surprise me. And, yet, it has the possibility to impact as much as $800 trillion in various financial products! Granted, that’s the extreme end, and it is likely only $3 trillion. Did you read that correctly? $3 trillion. With a T. Three times the annual US budget deficit for each of the last three years that the American politicians and media make such a brouhaha about, and yet, there is almost no coverage of it.
How can this rate be so important? Because more than half of every contract, loan, credit card, and mortgage rate is tied to the LIBOR. It is specified in the contract. So, when a small handful of people are sending e-mails back and forth with one literally asking the other to either raise or lower this rate so that they can make a few million dollars, this is a big problem for the rest of us. It affects the interest rates that we are being charged for the instruments that are attached to it.
The worst part is that this is not new. The Wall Street Journal first released a study revealing this might be possible in 2008. The New York Federal Reserve released documents in 2012 showing that they have known banks were falsely setting the LIBOR as far back as 2007, and yet, chose to do nothing about this.
So, what is the real impact here? Well, the lawsuits have already started. In fact, Barclays paid a $450 million fine to settle charges that they lied about their rate. But, that’s just the beginning.
Who has a claim? “Anyone with a floating rate. The suits are building with some class actions forming already,” says bank analyst Glenn Schorr of Nomura. Earlier this year three plaintiff groups including Charles Schwab and the City of Baltimore filed suits against the 16 banks that submit Libor rates accusing them of collusion, or price fixing, under the Sherman Antitrust Act.
Think about that. Anyone with a floating rate. Any of the ARM mortgages. Any credit cards. etc.
So, how long will it be before this is the new line of defense against foreclosure? Where are the smart lawyers to use it in Bankruptcy proceedings? They’re coming. And, they will have a strong case. Barclays was smart. They plead out. It will give them some legal standing and leniency when the time comes. The rest will have fought it, and will therefore face a harder road when they’re caught out.
This is just the tip of the iceberg. What you haven’t heard is going to be huge. What should really scare you is why they’re keeping this so under wraps. If it is only being peripherally covered, then you know that you need to know!!
Today’s column is a lot lighter on detail than many that I present. I am aware. The problem is that no one really knows the depths of the problem that we face. Or, rather, the people who do know, are not talking. We know that Barclays has admitted their part. It is likely that most, if not all, of the other 17 banks involved in calculating the LIBOR are also guilty of the same type of fixing. In fact, it is most likely that these banks were coordinating together. That is, admittedly, speculation. It is, however, speculation based on well founded suspicion and it is shared by those who are actually investigating this, as you will have seen if you followed the links above.
So, then, for a column that tries very hard to focus on known facts to have veered into this grey area, as a reader, you would have every reason to ask, “Why?”. The answer is two fold. One, because even though we do not have the facts yet, this is important and has the potential to have massive waves when it does hit. Two, because we need to be seeking out the information on this. We need to be making noise and asking questions. We need to be talking amongst ourselves, calling our representatives, senators, etc and demanding of them that they are looking into it. It needs to be a proactive concern. That, is why.