LIBOR – The Banking Scandal That Could Cause A Riot


This is the biggest banking scandal in years – and that’s saying something.

Some of the biggest names in banking are being torn down, and heads are rolling.

The latest scalp is the Chairman of the world’s 4th biggest bank – Barclays Plc.

Barclays faces an industry record fine to boot: $451 million. That’s close to half a billion dollars.

It won’t stop with Barclays.

Many of the other global banking monoliths are heading for the gallows. The world’s 3rd biggest bank, HSBC, and the world’s 11th biggest, Lloyds, are being investigated.

Royal Bank of Scotland (RBS), the 5th biggest bank, is also under the microscope.

This is where things could get really sticky, as RBS is 82% publicly owned. So any fine will be mostly paid by the favourite cannon-fodder of the banking system – the taxpayer.

You’d think that this would be just too bitter a pill for the UK taxpayer to swallow. This is riots-in-the-streets material.

Will your editor’s fellow poms go and sharpen their pitchforks, or have another good old grumble over a cup of tea instead? With the 2012 Olympics around the corner, the last thing the government needs is a mass protest.

But what has amazed me is how little bile the public has expressed over this whole mess. Make no mistake – this is an atomic bomb going off in the banking sector – and yet there is hardly any talk about it at all.

The LIBOR Scandal

I’m talking about the London Interbank Offered Rate (LIBOR) scandal.

This banking scandal makes Bernie Madoff’s antics look like a mild case of teenage shoplifting.

Perhaps the reason no one seems to give a damn is that the term LIBOR means nothing to them. I suspect the less-than-catchy name makes it easier to stop anger from crossing over into mainstream awareness.

Yet LIBOR is the most traded interest market in the world. It is the reference point for $360 trillion in contracts worldwide.

It underpins everything in the global markets from, bond markets, to mortgage rates, and even right down to loans for small-cap mining stocks. For example, the latest Diggers and Drillers stock tip plans to raise its debt financing at a rate dependent on LIBOR.

The idea is that the banks set the rate between them each day according to how much spare cash they have, or how big a gap there is in their balance sheet. In essence it is supposed to use market forces to determine the cost of borrowing any spare cash.

But traders at these biggest banks have been using their firepower to manipulate LIBOR rates in their favour. Traders were tweaking it so they could trade profitably against it.

Some of the banter between these traders beggars belief. Anyone who has the concept that the bond market is full of humourless Swiss banker types may need to reconsider. Take a look at some of these quotes released through the investigation:

‘Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.’

‘[…]if you know how to keep a secret I’ll bring you in on it […]
we’re going to push the cash downwards on the imm day […]
if you breathe a word of this I’m not telling you anything else […]
I know my treasury’s firepower…which will push the cash downwards […]
please keep it to yourself otherwise it won’t work.’

‘This is the way you pull off deals like this chicken, don’t talk about it too much, 2 months of preparation […] the trick is you must not do this alone […] this is between you and me but really don’t tell ANYBODY.’

‘Duuuude… whats up with ur guys 34.5 3m fix…tell him to get it up!!’

Well it’s great to know the core of the financial system is being run by such smart and honest folk.

This outrageous scandal is simply another nail in the coffin for the credibility of the banking system. It sets a new low.

The truth may only be coming out now, but all this went down about 5 years ago, just as the credit bubble was starting to pop. Back in that credit-fuelled euphoria, banks’ trading desks were full of invincible 20-year olds wearing ten-thousand-dollar watches.

The Governor of the Bank of England, Mervyn King, is not having a good week. He just told reporters that thanks to Europe he reckons we are not even halfway through the financial crisis. Now he has the LIBOR scandal on his plate. Over the weekend he said:

‘Everyone now understands that something went very wrong with the UK banking industry, from excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, we can see that we need a real change in the culture of the industry.’

A real change in the ‘culture’ of the industry? That’s like saying a convicted murderer needs a haircut, a new wardrobe and some elocution lessons.

The Libor Scandal is Just Beginning

What the banks responsible for this need is far more drastic. A few prison sentences for the traders manipulating the biggest interest rate market in the world would be a good start.

One thing is for sure is that this is just the start of the LIBOR scandal. It will drag on for years as more comes out of the woodwork. The only winners will be the lawyers, as always.

But somehow I have a horrible feeling that the jaded public will soon lose interest in ‘this LIBOR business’, and the whole thing will end up as just be another chapter in the ever bigger book of banking crimes. I dearly hope not.

But if so, the banking sector will have got away with it yet again.

White collar criminal: 1, Johnny taxpayer: 0.

Dr. Alex Cowie
Editor, Diggers & Drillers

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LIBOR – The Banking Scandal That Could Cause A Riot