The $800 Trillion Scandal: How Banks' LIBOR Lies Affected You

Barclays BankBanking scandals have grown so common that perhaps folks have simply run out of outrage. Or maybe the numbers are just too huge to wrap our mortal heads around.

Whatever it is that's behind the relatively light news coverage and lack of public debate on this incredible LIBOR rate-rigging scandal thus far, the story is not going away. In fact, it's bound to grow substantially in scope, as many of the world's largest banks have already been implicated in manipulating interest rates that are tied to some $800 trillion in loans and securities.

LIBOR -- the London Interbank Offered Rate -- is supposed to reflect the average interest rate at which banks are willing to loan funds to each other. Banks submit their daily estimates of borrowing costs for various loan durations in 10 different currencies, and after tossing out the top 25% and bottom 25% of those estimates, the LIBOR rates are calculated as an average of the remaining 50% of submissions. A separate benchmark called EURIBOR tracks borrowing costs among eurozone banks.

As revelations of widespread misconduct by multiple rate-reporting banks begin to emerge, worldwide confidence in these self-reported rates has been seriously eroded, and the banking establishment as a whole has taken another major leap downward into an abyss of well-deserved public distrust.

Barclays is Just the Tip of the Iceberg

The U.S. Department of Justice slapped U.K. banking giant Barclays (BCS) with a $160 million penalty last week, declaring that "Barclays Bank's illegal activity involved manipulating its submissions for benchmark interest rates in order to benefit its trading positions and the media's perception of the bank's financial health."

Combining the penalties assessed by a trio of U.S. and British regulators, and the roughly $155 million that Barclays spent during the multiyear investigation, this one bank alone has incurred more than $600 million in charges. The bank's CEO, Bob Diamond, has resigned in disgrace, and the familiar Barclays name has been significantly tarnished.

Royal Bank of Scotland (RBS) -- the propped-up bank in which, in a royally cruel twist of fate, British taxpayers hold an 82% stake -- will reportedly be next on the hook with penalties of $233 million for its role in the rate-setting scandal. Swiss bank UBS (UBS) received "conditional immunity" from prosecution last year in return for its cooperation with the Justice Department's ongoing investigation. Meanwhile, authorities on both sides of the Atlantic are reportedly looking into potential misconduct by, among others: Citigroup (C), HSBC (HBC), Deutsche Bank (DB), JPMorgan Chase (JPM), Lloyds, and Bank of Tokyo Mitsubishi. Now that we know who some of the players are, let's examine the stakes of their dangerous game.

Why LIBOR Matters to You

By messing with 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. First by building that leveraged house of cards in the first place on a completely obscene scale, and then by shaking its very foundation by manipulating the interest rates on which all that paper is based, the rate-rigging banks took unthinkable risks with the fate of the entire global financial system.

Moreover, the manipulation could have affected you personally in any number of ways. If you have an adjustable-rate mortgage or an auto loan that's tied to LIBOR, the interest charged to you could have been tweaked upward or downward depending upon the direction of a particular manipulative impact.

If you own stock, the companies in your portfolio may have been cheated out of revenue from interest rate hedges. Interest on corporate debt is often tied to LIBOR as well. As Motley Fool analyst Matt Koppenheffer pointed out, Coca-Cola Enterprises (CCE) alone carries some $1 billion in debt that's tied to the LIBOR.

Pension funds, furthermore, routinely hold income-generating securities in which payments are based upon LIBOR. Municipalities likewise hedge interest rate exposures through derivatives, so your local town may have also paid the price for this horrendous behavior by the too-big-to-fail banks.

What Else Is Rigged?

A fascinating question comes to my mind as I consider the implications of LIBOR-gate: 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? A number of astonishing scandals over recent years have shattered the industry's image, and collectively they portray a culture of corruption that is disturbingly pervasive.

I am utterly convinced, for example, that gold and silver prices have been routinely manipulated by certain banks to deflect attention from the weak condition of the major paper currencies. We know that a subsidiary of JPMorgan Chase is under investigation for alleged energy-market manipulation. And a slew of banks have been implicated in a municipal bond-rigging scandal that, in the words of Rolling Stone reporter Matt Taibbi, reveals "the astonishing inner workings of the reigning American crime syndicate."

I'm quite certain that plenty of good, honest people working in the banking industry are just as outraged as we are by these sorts of revelations. But unfortunately there is but one inescapable conclusion to draw from LIBOR-gate and the vast array of 21st-century banking scandals: Where opportunity and motive coincide for banks to pursue their own agenda through secretive and unsavory means, it seems far safer to presume that they will rather than to trust that they will not.

Motley Fool contributor Christopher Barker can be found on Twitter here. He owns no shares in the companies mentioned. The Motley Fool owns shares of JPMorgan Chase and Citigroup.

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A reverse mortgage is a loan for senior homeowners that use a portion of the home's equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance.

June 23 2013 at 8:58 AM Report abuse rate up rate down Reply

The reason banks cheat customers indirectly through the culture (and probably less likely directly by fraud) is because their customers simply dont matter much when they are so highly leveraged. Banks by in large get large sums of printed money from the government at extremely low interest or no interest and then lend this out to lucrative credit card companies who charge 25% interest. It is no wonder small business cannot get a loan and the economy properly stimulated. The problem will only get worse in the information age due to collusion and the profit motive, and regulation is sorely needed. A simple solution is to break up big banks, de-leverage them, so they once again have to care and compete for customers deposits. Its very simple and capitalism at work. Right now the banks are basically socialist welfare institutions and taking us all for a ride. The government should also sincerely consider making a truly competitive partner by directly lending to people in effect making its own bank to compete with the corrupt ones, since many banks are just harmful and useless middlemen. Finally, since banks already get free printed money to make money upon, it is unreasable for them to seek huge yields from money they did in no ways earn. If they want to continue their welfare model, there should be a relative % linking savings and investment rates. That way if banks want to make lucrative profits on credit cards, so be it, but they need to include their saving customers in on this. Win win..

November 05 2012 at 4:24 PM Report abuse rate up rate down Reply

This is quite interesting, and while hard to attempt to fully comprehend, and the fact of the matter is we do have a exponentially growing population; here is a relative article to this current trend- So while we continue a exponential trend of energy consuption all due to a surpluss of energy in the form of fossil fuels, namely hydrocarbons, in conjuction with compatible technologies that allow us to harvest and use this energy at a faster rate than any point in history, and use it in wastefull manners from an effeciency standpoint, (i.e. 10 calories used for every calorie of food transported, in many common cases) it stands to reason that we will in effect be victims of our own cruel device, lack of virtue, complacency, vanity, greed, hunger, travel lust, ect. if somebody or bodies do not tighten the reigns, through what seems to be greed, and may in fact be. What seems to be the bottom line, and I ask not to be quoted on this (I am no expert), is that we need to slow the f down and start learning to conserve what we still have left of any sustainable equity rather than asset concern. And if this means people generally on a median scale get less money while more money which exist metaphysically is racked and stacked up by central powers it is a subsiquent effect caused by a growth of poulation and need for more financial foundation. But as availabilty to these large sums grow due to a trend of massive accelerated growth availability for larger greed also becomes available, and while many might consider this immoral, it may be intirely nessesary to have these pockets of greed more centralized and concentrated as not to spread the slue of immature energy usage and availabilty to these ecologically devastating practices as fast as we can by making it grow by growing in numbers ourselfs. At this point in history it is hard for me not to believe that the responsibility of stability is shifting pound for pound back onto our shoulders to become a more transparently communative communications society, which is already taking place as we can witness with the internet in conjunction with becoming a more sustainable, intellegient, responsible, integrated mature societies. This may include democracy on the next level, which would be public city to state grassroots based, state or small country funded economic web browsers, sorta like Craigslist for market trading on a more regional scale. Regions should ideally have a public secure government supported system of browsers tied in to a single central network so they can make desisions on trade with eachother separate to internationally based market system which continue to doop us and jip us of our currencies through inreliable trusts and accounting financial scam strategies. A.K.A. ponzi economy. While I may recieve, harsh, bold, brash, sharp, intellegient remarks for the statements, they are merely food for though

July 11 2012 at 11:06 PM Report abuse rate up rate down Reply
quill kay

Credit union, credit union, credit union.....shared and run by people you KNOW.

July 11 2012 at 10:17 PM Report abuse rate up rate down Reply

It didn't. I have no debt.

July 11 2012 at 6:41 AM Report abuse rate up rate down Reply

The LIBOR scandal just may be the mere beginning of the end in exposing the current manipulative culture embraced by the global powers that be (whether prominent politicos or well-connected financiers) who are making every effort possible to retain a monetary-fiscal system that has lost its way.

And, in due time, the unholy manipulation of gold and silver will also be exposed in order to be judiciously addressed . . . . A measure that will set into motion the abandonment of the failed monetary-fiscal policies of the past and allow for the renewal of a liberated free market system backed by a sound currency that will benefit every man . . . and not primarily the unscrupulous powers that be.

July 11 2012 at 2:54 AM Report abuse rate up rate down Reply
1 reply to Bob's comment

And what is Bernake and the Fed doing?

July 11 2012 at 6:42 AM Report abuse +1 rate up rate down Reply
dr scott kanner

Unfortunately our... or any legal system as is cannot deter this from occurring. At this stage of human evolution the only effective deterrant to wide scale fraud and theft is the death penalty. Remember the Michael Douglas film ...Star Chamber?

July 10 2012 at 4:25 PM Report abuse rate up rate down Reply
1 reply to dr scott kanner's comment

I stopped at Star, cause this reminds me of Kunstler. James Howard Kunstler write all kinds of insightful
articles about topic of the day. And he's really good at it. Anyway, Kunstler just jumps all over the LIBOR thing. And he's moving from coast to coast. This is where the Star thing comes to mind. He ends his article about LIBOR with this.

Over here, in this sorry-ass edition of America, the election will look more and more like a World Wrestling Federation staged dumb-show between two catamite hostages of a foul corporate oligarchy. Imagine that horse's ass Mitt Romney spending the next four months denouncing Obama-care, modeled on his own health care reform in Massachusetts, while Obama pretends he has a grip on an economy where the rule of law is absent due to Obama's own omissions and negligence.

And if you can't stand that spectacle, just look around at America itself: a wasteland of futile motoring and discount shopping populated by depressed, overfed clowns bedizened with sinister tattoos, pretending to be Star Warriors. No nation ever seen in human history ever laid such a disappointing egg. Only to have it fry on the sidewalk.____________________________________

Read more:

July 10 2012 at 4:39 PM Report abuse rate up rate down Reply
Mark Brander

Obama controls the Department of Justice, Rothschild controls Obama, Rothschild also controls the Banks that the Justice Department is fining... They are busy at every juncture destroying the the Global Banking system, which they have always controlled, in order to bring in a Global currency which we all know will be a computer chip called the 'mark of the beast'

Every time you read something in the media you are being lied to. That is the truth. Get the 'real scoop' about what is really going on,

July 10 2012 at 4:14 PM Report abuse rate up rate down Reply

Nothing to see here - just move along. And don't forget to vote for Romney this November, he will restore America to a world where corporate raiders will never again be forced to lower themselves to such screw-tiny
by friendly regulators.

July 10 2012 at 2:36 PM Report abuse rate up rate down Reply

The US needs to reinstate Glass Steagall and we need to have mandatory jail time for the math majors who dream up these schemes. Then let them do the math in a cell.

July 10 2012 at 2:20 PM Report abuse rate up rate down Reply