Interest in Interest

Ever hear of LIBOR?  I hadn’t until I started working in the financial industry years ago.  It’s the interest rate that you’re likely to never have heard of before but one that still determines what you may end up paying on credit cards, mortgages, and pretty much any other form of commonly held debt.  It stands for the London Interbank Offered Rate, and it’s a composite of rates that banks would charge one another for borrowing money.  It’s a benchmark rate in global finance, and, despite its relative obscurity to the general public, one that is very, very important.

What’s interesting about LIBOR is that it’s not calculated by a single bank, but rather, by many.  The British Bankers Association asks about thirty or so global banking outfits in London what they think the rate should be, eliminate the top and bottom rates, and then publish the averaged results every day in Thomson Reuters.  It’s basically a financial straw poll.

So here’s where it gets tawdry (and therefore interesting): it’s becoming increasingly clear that a few of the banks involved in the setting of the rate have been manipulating it.  The scope of the problem isn’t clear, but the more that regulators on both sides of the pond look, the more questions, rather than less, they have.  The problem was confined to a number of British banks thus far, but investigators are widening their investigation to cover the following: Citigroup, JPMorgan Chase, UBS and Deutsche Bank.  This is in addition to the scrutiny that HSBC, Barclays and the Royal Bank of Scotland are under.

Investigators are increasingly getting the feeling that the banks either lowballed or highballed the straw poll in order to serve their own narrow financial interest, and it’s becoming increasingly likely that the banks didn’t act alone, but rather in concert, which would amount to collusion.  So, when you have a reputable organization, such as Reuters, publishing a global benchmark interest rate, and people assume it to be accurate when it’s not, what’s the effect?  People paying tens of billions of dollars a day more than they otherwise would have.  Or, in some cases, people not paying tens of billions of dollars a day that they probably should have.  The entire effect is to cast yet more doubt onto an already shaky global financial system.

This news, all in all, isn’t that surprising.  With report after report of global banking outfits operating with a nearly sociopathic disregard for the public interest, this is just one more exhibit, were regulators to grow a pair and decide to smack the banks into line, with which they could probably send some bankers to jail, and with that, send a clear message to the financial community: you play by the rules, otherwise, you go to jail, no matter how much money you spent buying off your home governments.

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