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    Q: Why and How Was Libor Manipulated?: FDRM Assignment

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    rai19
    Major international banks manipulated the Libor interest rate benchmark between 2005-2008 by falsely reporting their borrowing costs in order to profit from derivatives contracts. This scandal involved over a dozen global banks and cost tens of billions. An even larger, ongoing scandal is that Libor has remained artificially low for half a decade, fueling an economic bubble that threatens another global financial crisis worse than 2008. While some individuals have faced charges, prosecuting individuals has not fully restored trust in the banking system as reforms are still needed to address flaws that allowed the manipulation.

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    Q: Why and How Was Libor Manipulated?: FDRM Assignment

    Uploaded by

    rai19
    163 views5 pages
    Major international banks manipulated the Libor interest rate benchmark between 2005-2008 by falsely reporting their borrowing costs in order to profit from derivatives contracts. This scandal involved over a dozen global banks and cost tens of billions. An even larger, ongoing scandal is that Libor has remained artificially low for half a decade, fueling an economic bubble that threatens another global financial crisis worse than 2008. While some individuals have faced charges, prosecuting individuals has not fully restored trust in the banking system as reforms are still needed to address flaws that allowed the manipulation.

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    Libor

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    Major international banks manipulated the Libor interest rate benchmark between 2005-2008 by falsely reporting their borrowing costs in order to profit from derivatives contracts. This scandal involved over a dozen global banks and cost tens of billions. An even larger, ongoing scandal is that Libor has remained artificially low for half a decade, fueling an economic bubble that threatens another global financial crisis worse than 2008. While some individuals have faced charges, prosecuting individuals has not fully restored trust in the banking system as reforms are still needed to address flaws that allowed the manipulation.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    163 views5 pages

    Q: Why and How Was Libor Manipulated?: FDRM Assignment

    Uploaded by

    rai19
    Major international banks manipulated the Libor interest rate benchmark between 2005-2008 by falsely reporting their borrowing costs in order to profit from derivatives contracts. This scandal involved over a dozen global banks and cost tens of billions. An even larger, ongoing scandal is that Libor has remained artificially low for half a decade, fueling an economic bubble that threatens another global financial crisis worse than 2008. While some individuals have faced charges, prosecuting individuals has not fully restored trust in the banking system as reforms are still needed to address flaws that allowed the manipulation.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 5

    FDRM Assignment

    Submitted by :
    Raina Guha

    36B

    Rohit Roy

    40B

    Sonali Porwal 50B

    Q: Why and how was Libor


    manipulated?
    Introduction
    Two years ago, a major scandal rocked the world after it was revealed that big
    international banks had long been manipulating the Libor interest rates to
    fraudulently boost their profits. As outrageous as the Libor rate-fixing scandal was,
    it pales in comparison to another Libor scandal that is occurring at this very
    moment, but has received virtually none of the attention that it rightfully deserves.
    The ultimate fallout of this much larger, little-known Libor scandal will be nothing
    less than an international financial crisis.

    Definition
    Libor is an acronym that stands for London Interbank Offered Rate, which is a
    benchmark interest rate that is derived from the rates that major banks charge each
    other for loans in the London interbank market. It is a benchmark interest rate
    based on the rates at which banks lend unsecured funds to each other on the
    London interbank market. Published daily, the rate was previously administered by
    the British Bankers' Association (BBA). But in the aftermath of the scandal, Britains
    primary financial regulator, the Financial Conduct Authority (FCA), shifted
    supervision of Libor to a new entity, the ICE Benchmark Administration (IBA), an
    independent subsidiary of the private exchange operator Intercontinental Exchange,
    or ICE.
    In order to calculate the Libor rate, a representative panel of global banks submit an
    estimate of their borrowing costs to the Thomson Reuters data collection service
    each morning at 11:00 a.m. The calculation agent throws out the highest and lowest
    25 percent of submissions and then averages the remaining rates to determine
    Libor. Calculated for five different currencies-the U.S. dollar, the euro, the British

    pound sterling, the Japanese yen, and the Swiss franc-at seven different maturity
    lengths from overnight to one year, Libor is the most relied upon global benchmark
    for short-term interest rates. The rate for each currency is set by panels of between
    eleven and eighteen banks.

    Libor Scandal and its impact


    Many banks worldwide use Libor as a base rate for setting interest rates on
    consumer and corporate loans. Indeed, hundreds of trillions of dollars in securities
    and loans are linked to Libor-government and corporate debt, as well as auto,
    student, and home loans, including over half of America's flexible-rate mortgages.
    When Libor rises, rates and payments on loans often increase; likewise, they fall
    when Libor goes down. Libor is also used to provide private-sector economists and
    central bankers with insights into market expectations of economic performance
    and interest rate developments.

    Why and how has been Libor manipulated?


    Barclays and fifteen other global financial institutions came under investigation by a
    handful of regulatory authoritiesincluding those of the United States, Canada,
    Japan, Switzerland, and the UKfor colluding to manipulate the Libor rate beginning
    in 2003. Barclays reportedly first manipulated Libor during the global economic
    upswing of 20052007 so that its traders could make profits on derivatives pegged
    to the base rate.
    During that period, "swaps traders often asked the Barclays employees who
    submitted the rates to provide figures that would benefit the traders, instead of
    submitting the rates the bank would actually pay to borrow money," the New York
    Times reported. Moreover, "certain traders at Barclays coordinated with other banks

    to alter their rates as well." During this period, Libor was maneuvered both upward
    and downward based "entirely on a trader's position," explains the London School of
    Economics' Ronald Anderson.
    Hundreds of trillions of dollars in securities and loans are linked to Libor
    government and corporate debt, as well as auto, student, and home loans, including
    over half of Americas flexible-rate mortgages.
    Following the onset of the global financial crisis of 20072008,
    Barclays
    manipulated Libor downward by telling Libor calculators that it could borrow money
    at relatively inexpensive rates to make the bank appear less risky and insulate
    itself. The investigation into UBS focused on trader Thomas Hayes, whose alleged
    rigging led him to post profits in the hundreds of millions for the bank over his
    three-year stint. After Hayes was arrested in December 2012, UBS executives took
    the blame for creating a system in which traders were rewarded with large bonuses
    if they agreed to take part in the scheme. At the same time, collusion allegedly
    occurred between Hayes and traders at RBS, which is majority owned by British
    taxpayers, in order to affect submissions across multiple institutions.

    What really went behind it?


    Amid all of the attention that the Libor rate-fixing scandal has received, the world is
    completely overlooking a far worse Libor scandal that has been occurring right

    under our noses this entire time. Though the Libor rate-fixing scandal is certainly no
    trivial matter, the losses caused by it amount to a few tens of billions of dollars,
    which is ultimately a drop in the bucket compared to the size of the global economy
    and financial system. In addition, as dramatic as the term rate-fixing sounds, the
    Libor manipulations only moved the Libor rate by a few basis points (basis points
    are .01 percentage points) for just a few brief moments at a time. The Libor
    manipulations did not move the rate by significant magnitudes such as from 5
    percent to 2 percent, for example.
    The vastly worse Libor scandal that I am referring to is the fact that the Libor has
    stayed at record low levels for the past half-decade, which is helping to fuel a
    massive economic bubble around the entire world that will end in a devastating
    financial crisis that will be even worse than the Global Financial Crisis. Instead of
    causing a few tens of billions of dollars worth of losses like the Libor rate-fixing
    scandal, the Libor Bubble will gut the global economy by trillions of dollars.
    The chart below shows the U.S. dollar Libor rates for four common maturities:

    Significance of the Libor Scandal


    Many experts say that the Libor scandal has eroded public trust in the marketplace.
    As the Wall Street, Libor manipulation meant "trillions of dollars of financial
    instruments were priced at the wrong ratea fact that could do wonders for
    plaintiffs' lawyers while undermining investors' confidence in financial markets."
    Indeed, securities broker and investment bank Keefe, Bruyette & Woods estimated
    that the banks being investigated for Libor manipulation could end up paying $35
    billion in private legal settlementsseparate from any fines to regulators.
    These sums could pose new challenges for financial institutions that are increasingly
    required to maintain higher reserves to guard against another systemic crisis.
    "Relative to the size of the sixteen banks at risk of lawsuits in the Libor scandal, $35
    billion is chump change.

    Charges and Penalties


    A wave of Libor-related prosecutions, led by a range of U.S. and European regulatory
    bodies, has led to several major settlements. All told, global banks have paid over
    $9 billion in fines, as of May 2015. More than one hundred traders or brokers have
    been fired or suspended, twenty-one have been charged, and several executives,
    including former Barclays CEO Bob Diamond and Rabobank CEO Piet Moerland,
    have been forced out.
    The UKs Barclays settled its case with authorities for $435 million in July 2012. In
    December 2012, Swiss banking giant UBS was slapped with the biggest Liborrelated fine up to that point, paying global regulators a combined $1.5 billion in
    penalties. The complaint, led by the U.S. Commodity Futures Trading Commission
    (CFTC), cited over 2,000 instances of wrongdoing committed by dozens of UBS
    employees. Later in 2013, Dutch Rabobank settled charges against it for over $1
    billion.
    In December 2013, EU regulatory authorities settled their investigation into
    Barclays, Deutsche Bank, RBS, and Socit Gnrale, fining the latter three banks a
    combined total of 1.7 billion euros, or over $2 billion. They were all found guilty of
    colluding to manipulate market rates between 2005 and 2008. In exchange for
    revealing the cartel to regulators, Barclays was not fined. U.S.-based JP Morgan
    Chase and Citigroup also became the first American institutions fined, with
    much smaller penalties.
    In April 2015, Germanys Deutsche Bank agreed to the largest single settlement in
    the Libor saga, paying $2.5 billion to U.S. and European regulators and entering a
    guilty plea for its London-based branch. In addition, the bank was obligated to fire
    seven employees. It brings the total amount of fines paid by Deutsche Bank to $3.5
    billion, more than twice that of any other institution.

    So should we trust the banks now?


    By prosecuting Tom Hayes, the person who was seen to be the ringleader of the
    crime has been convicted. But have we regained trust in the banking system as a
    whole? I put forward the case that we havent and that it will take a lot more than
    just prosecuting individuals for the general public to regain their trust in the system
    as a whole.
    When it comes to trust there are at least two levels to take into account. We might
    have things fixed at the individual level by removing wrongdoers from the system
    and setting up criminal sanctions to do so. But the system as a whole and its
    reputation still need repairing.

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