The Biggest Financial Scam In World History


Why Is the Libor Scandal So Important to You?

There have been numerous big banking scandals recently. But the Libor scandal is the biggest financial scam in world history.  See this and this

Libor scandal: How I manipulated the bank borrowing rate

An anonymous insider from one of Britain’s biggest lenders – aside from Barclays – explains how he and his colleagues helped manipulate the UK’s bank borrowing rate. Neither the insider nor the bank can be identified for legal reasons.

The former CEO of Barclays said today that banks across the world were fixing interest rates in the run-up to the financial crisis. Professor of economics and law Bill Black notes:

It is the largest rigging of prices in the history of the world by many orders of magnitude.

Indeed, the scandal effects an $800 trillion dollar market – 10 times the size of the real world economy.

Matt Taibbi explains that this is the “mega scandal of all mega scandals”, because Libor is the “sun at the center of the financial universe”, and manipulating Libor means that “the whole Earth is built on quicksand.”

Local governmentscredit card holders, studentssmall businessessmall investorshomeowners and virtually everyone else in the entire world has been impacted by the manipulation.

Credit card debt – almost a trillion dollar market – is pegged to LiborSo are student loans – a trillion dollar market.

Mortgages are a bigger market: around $10 trillion dollars in the U.S.  The Washington Post notes today:

60 percent of prime adjustable rate mortgages, and nearly 100 percent of subprime ones, were indexed to LIBOR.

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That means that when LIBOR rises, so do the prices ordinary consumers pay to, say, get a mortgage.

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So how did the manipulations by Barclay’s affect this rate? First, from 2005 and 2007, the bank allegedly varied the rates it reported to the BBA and Thomson Reuters so as to improve its margins on internal trades. For example, it could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This … bumped up mortgage rates  however infinitesimally  for consumers even when the risk of the loans hadn’t changed at all.

Other loans – like small business loans – are usually based on Libor as well.

But that is all small potatoes compared to the $350 trillion in swaps tied to Libor.  Virtually every single local government in the United States has been scalped by Libor manipulation.

The Financial Times started reporting on the manipulation in 2007, and the Wall Street Journal in 2008 (see thisthisthisthis and this). But as the Economist reports today, the manipulation probably goes back a lot further:

The FSA has identified price-rigging dating back to 2005, yet some current and former traders say that problems go back much further than that. “Fifteen years ago the word was that LIBOR was being rigged,” says one industry veteran closely involved in the LIBOR process. “It was one of those well kept secrets, but the regulator was asleep, the Bank of England didn’t care and…[the banks participating were] happy with the reference prices.” Says another: “Going back to the late 1980s, when I was a trader, you saw some pretty odd fixings…With traders, if you don’t actually nail it down, they’ll steal it.”

Given that homeowners, students, credit card holders, and other borrowers pay more when rates are higher, the banks appear to have fleeced consumers for 10 years during the entire bull run leading up to the financial crisis.

The big banks have robbed the whole world.

Indeed, the scandal is so big that it will further destroy trust in our financial system and drive many people from investing in the capital markets altogether

A day of reckoning may finally be coming.

….banks will be sued only by those who have lost, and will be unable to claim back the unjust gains made by some of their other customers. Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.

I expect the firms involved to face a locust swarm of litigation. Lawyers may accomplish what regulators and politicians refused to do: strip the banks of ill gotten gains and bring their preening CEOs and “producers” down a few notches.

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