No doubt by now someone in the media has tried to explain what the Libor scandal is and the significance of it. I will do so as well. Libor is essentially a self-reported interest rate major banks share with an organization in London. That organization throws out some of the high and low reports, and averages the rest. The interest rate is basically the rate at which banks charge each other to lend money. It is, above all things, the foundation by which 1st world banking is built on. You can see the Libor rates daily at sites like this.
Many loans and other financial instruments mention Libor to some degree, and by some measures hundreds of trillions, yes trillions, of dollars in contracts are tied to it. And now we learn bankers were messing with it for their own gain.
Oh, what a shocker! After everything we’ve seen since 2007 is anyone surprised by this at all? The interest rate is reported by the same companies that can profit from manipulating it. And while such groups within banks are supposed to be siloed, there’s nothing to stop it from happening other than the threat of losing one’s job and going to jail. As we’ve learned, that’s not an effective deterrent. The same goes for competing banks colluding. All these people know each other. By throwing out some of the high and low rates the Libor folks hope to remove any chance of a bank screwing with the rate. But screw they have.
Pundits are right, this is a huge scandal. But what few have acknowledged is that unlike the financial meltdown, no one really knows who exactly got screwed and how. And it’s going to be nearly impossible to prove how any individual was affected adversely, despite the lawsuits. The Libor scandal really shouldn’t matter to most people in their day to day lives. While it might have reduced the rate you get on your deposits, it also reduced the rate you pay on your loans. Likewise, it’s difficult for banks to make more than a set spread of interest on their loans, no matter what the underlying rates are.
In fact, this scandal may have helped prevent the meltdown from getting worse a few years ago. The rate manipulation in some cases made banks look stronger than they actually were. Does that make it a good thing? Of course not. Yes, individuals likely made some extra bucks by day to day manipulations. And they should be sued and prosecuted out of existence. But on the whole, despite the media attention so far, this scandal is much more boring than the likes of sketchy subprime lending and ponzi schemes.
Keep your eyes on further banking reforms as a result of this scandal. The banking system keeps taking blow after blow, but such immoral and illegal activity takes place all around us. Regulation is and always will be one step behind.
Image: markhillary
 By The Weakonomist |
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