Bringing Up the Rear: The LIBOR Scandal

by 13 Aug 2012

Okay, so now we all know what LIBOR stands for, right?  It stands for “Lying in Between Other Reporting.”  But that’s not even what I found to be the amazing part of this latest in a long line of banking scandals.    


That Barclay’s Bank was lying about something… well, that aspect hardly even raised an eyebrow in this country.  It was like, “Big bank caught lying about interest rates,” and most everyone in the U.S. barely paused to yawn.  That, I thought, was nothing short of hysterical.  We’ve reached a point in this country where we don’t expect bankers to be doing anything less than whatever they can get away with in order to come out on top.


It was like the story could have been mentioned at the very end of the nightly news.  “Oh, and one more thing… Lindsay Lohan was arrested for drunk driving again, and yet another big bank was caught lying about something.  And that’s the news, we hope you’ll have a pleasant tomorrow.”  Roll credits.


LIBOR, the London Interbank Offered Rate, is considered to be an extremely important benchmark interest rate used in the financial markets.  LIBOR is used to calculate payments on literally hundreds of trillions of pounds/dollars worth of financial contracts all over the planet.  It’s so important that the methodology for calculating LIBOR is highly scientific… banks self-report their number… in other words, they use the honor system, if you will. 


Here’s how it works.  Every day someone at the British Bankers' Association (“BBA”) picks up his or her phone, calls 16 banks and asks each one how much they are paying to borrow money.  Each banker contacted provides a number. They then throw out the bottom four and the top four and take an average of the numbers that remain.  So, LIBOR is supposed to be the average interest rate at which 16 giant financial institutions based in London can borrow from each other.


It should be easy to see that no one polled in this situation would ever provide a higher number than absolutely necessary, as that would signal that their institution isn’t considered to be on solid ground.  So, that reporting bias has always been built in to the published rate.


What should also be more than obvious is that this scandal cannot be borne at Barclay’s alone because if that were the case, it wouldn’t accomplish anything.  One bank misreporting its borrowing rate wouldn’t make any difference, right?  They throw out the top and bottom four, remember?  So, why would you bother lying if your buddies at the other 15 banks weren’t going to do the same?  Answer: You wouldn’t. 


But, somehow… we’re not sure yet whether others are involved.  And that’s because – well, because we’re dumber than a box of rocks, that’s why.  Or, at least that’s the only reason of which I can conceive.  Nothing else makes any sense.


Barclay’s traders have apparently been fudging their LIBOR reporting since 2005 in order to up their profits, and hence their bonuses, and that’s the next “you’ve got to be kidding me” moment in this scandal.  Who designed this system of asking traders to self-report a number that affected their bonuses?  Was it a small child?  And why would it only have started in 2005? 


Do you see what I mean?  This isn’t just a scandal… it’s an exposé into absolute stupidity.  Who thought this system would work?  Everyone on that list needs to be hospitalized, because they could hurt themselves crossing the street or tying their shoes.


And yet, the BBC reported: “… the rigging of LIBOR may have pushed attitudes at the highest levels to the point of disgust.”  Seriously?  They knew how this whole reporting system was set up and what it affected, and yet they figured everything would work out just fine?  What could possibly go wrong?  And these are the masters of global high finance… the smartest guys in the room, as it were?


Now it’s come out that both US and UK regulators, the Federal Reserve and the Bank of England, have been aware since May 2008 that all the banks, not just Barclays, may have been under-reporting their borrowing costs to the BBA's LIBOR committee.


All the banks “MAY” have been underreporting their borrowing costs?  Maybe?  It MIGHT have happened?  They’re not sure?


I don’t know about you, but I can handle finding out that global banking is a cartel.  I can handle finding out that the whole world is basing its most important numbers on what some trader in London says on the phone every morning.  But, I hate it when people treat me like I’m four years old.


When I heard that JPMorgan lost two billion unexpectedly I thought… wow, someone should invent a product that protects against things like that happening.  Maybe like an alarm clock sort of thing… the alarm goes off after you’ve lost one billion.


And finding out that Bernie Madoff stole $60 billion showed me that we don’t actually have regulators.  Because if we had regulators, he would have been caught after stealing, I don’t know… say $30 billion?


And, first Wells Fargo’s and now HSBC’s money laundering antics made me realize that we’re talking tip of the iceberg once again.  The Senate's Permanent Subcommittee on Investigations’ report that accused the British bank of having a "pervasively polluted" culture pretty much said it all.  So, finding out that said money-laundering problems were flagged by regulators for nearly a decade barely made me sick.


But, let’s stop kidding ourselves, shall we?  I mean, some people are saying that the banks have learned to operate like organized crime. I think that’s giving organized crime way too much credit, because it’s become abundantly clear that if anything, organized crime learned to operate the way they do… from the banks.


How much longer until we all wake up to the fact that we’ve got a problem here?  I think the ugly truth is… we won’t, because we’re fundamentally okay with all of it.  We just want a piece of the pie… our own kickback.  Because our bankers aren’t from another planet, they are a reflection of us… what we’ve become. 


We used to wage war on poverty; now we attack poor people.  We used to care about our country; now we only care about ourselves. 


We’ve lost eight million homes to foreclosure in this country, and about as many jobs, but we’ve lost a lot more than that.  In truth, we’ve lost our humanity… our empathy… our dedication to our common good… in our children’s future.  The homes we’ve lost are just pocket change.



[caption id="attachment_6320" align="alignleft" width="100"]Martin Andelman Martin Andelman[/caption]

Martin Andelman is a staff writer for The Niche Report. He also writes an almost daily column on ML-Implode called Mandelman Matters, and publishes a Monthly Museletter.  You can follow “Mandelman” on Twitter. Send your responses to


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