LIBOR is a daily rate supposed to measure the average cost of short-term loans between major banks. It used to be set in London by 16 giant banks including JP Morgan, Citigroup, Barclays, Deutsche Bank, and was run by the British Bankers' Association BBA until early 2014. According to recent reports, the interest rates for tens of trillions of dollars in home mortgages, student loans and credit cards are pegged to LIBOR, as are derivatives valued at $350 trillion and euro-dollar futures worth $564 trillion.
According to some unearthed plots, beginning around 2003 LIBOR rates kept being rigged by those persons/agencies who were entrusted by law to set perfectly competitive rate. The process continued up to the early years of the current decade. They had reportedly amassed hundreds of billions of ill gotten dollars. "In settlements with the Financial Services Authority (FSA) in Britain and America's Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions." (
www.economist.com/node/21558281)
The Economist has described the event as Rotten Heart of the global financial system. It has also been described as the worst financial crime in human history. Elsewhere, it has been described as "the largest organised theft ever committed in human history."
Given the circumstance - financial crimes, specially defrauding, proliferating at rates unprecedented in history while efforts meant for detection and punishment tend to be reluctant and scrawny-- economic humans must feel disoriented to think about, among others, the very prospect of the global financial sector. The cumulative effect of these scandals is that the public and the government no longer trust the industry to set its own standards for acceptable behaviour.
In another case, a New York federal judge ruled that a lawsuit against Citigroup Inc and dozens of other banks had failed for lack of personal jurisdiction and because " claims that LIBOR manipulation cost him $100 million were brought too late". The Judge said that his court lacked jurisdiction over the many foreign banks, accused of participating in a scheme that "tanked Solow and his company's $450 million portfolio of municipal securities."
According to one report, "the U.S. and U.K. regulatory bodies fined Barclays $ 451 million in June 2012 over alleged manipulation of LIBOR by its employees …. Since then, UBS and RBS have also settled with authorities for $1.5 billion and $ 621 million respectively". That is, lack of jurisdiction failed to stop the US regulator while it did punish the largest UK bank. As to the complaints against the U.S.-based banks like Citigroup, the Judge decided that the plaintiff's Racketeer Influenced and Corrupt Organizations Act allegations were time-barred because he "sued more than four years after a Wall Street Journal article in 2008 first brought the LIBOR-rigging scheme to light".
On April 16, 2008 the Wall Street Journal for the first time reported that some banks might have understated borrowing costs they reported for the LIBOR during the 2008 credit crunch. In response, the BBA, the self proclaimed LIBOR supervisor, claimed that the LIBOR continued to be reliable even in times of financial crisis. In March 2008, Bank for International Settlements announced that "available data do not support the hypothesis that contributor banks manipulated LIBOR."
Then in April 2010 the findings of a study by two economists, Snider and Youle, corroborated the results of the Wall Street Journal. It "was not that", the study argued, "the banks were trying to appear strong ... but rather that the banks sought to make substantial profits on their large LIBOR interest-linked portfolios." In February 2012, the US department of Justice was conducting a criminal investigation into LIBOR abuse. It sought to investigate the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an unprecedented amount of inside knowledge into global instruments.
The above narrative purports to argue that the established institutional setup first defended the practice that was going on as regards LIBOR pricing and then in the face of abundant evidence to the contrary reluctantly yielded to open the path for investigation. Barclays, the most notorious offender and the first bank to be fined for LIBOR rigging offence, had as its chairperson someone who concurrently also chaired the BBA, in turn the sole regulatory authority of LIBOR affairs. It was thus natural that as long as he would be in charge he would do everything in his capacity to suppress complaints about matters that challenged his authority. He resigned on July 02, 2012.
Right after his resignation scores of losers started to apply for justice. Number of redress seekers as well as the likely amount of losses may be imagined from the following quote. "… this scandal is global. Hedge funds trading in derivatives are going to line up to sue the big banks … LIBOR affects $550 trillion in derivative contracts … There is something for everyone … If the banks are responsible for just 1/10th of one percent of the $800 trillion in LIBOR transactions, it would represent $800 billion in liability to the banks. …"
While dismissing another suit in which the plaintiff complained that due to collusion between Citigroup and others his portfolio lost value, the Judge said that the plaintiff could not prove antitrust injury "because the process of determining LIBOR rates was inherently cooperative and not competitive". Unfortunately, according to how we are informed, the opposite is true. Just as a piece of proof we quote the following lines, " … the fact that there may now be price-fixing scandals involving both LIBOR and ISDA fix suggests a single, giant mushrooming conspiracy of collusion and price-fixing hovering under the ostensibly competitive veneer of Wall Street culture." (
www.rollingstone.com)
It should be noted that LIBOR debuted in 1986 following Margaret Thatcher's fascination about the Chicago School notion that markets normally self-regulate and are most efficient without government regulation. By markets, it certainly does not mean the ones other than the perfectly competitive markets.
On the whole, it should be too disconcerting to sensible people to see that the authority concerned first did everything to deny any wrong-doing about LIBOR pricing. When their long-drawn war of argumentation failed to stand, they began to look for ways to practically deny justice. In the meanwhile some too-late-too-little kind of changes have been introduced in the process of LIBOR determination and regulation.
According to reports, amendments were introduced into the UK Financial Services Act 2012 to specifically make LIBOR manipulation a criminal offence. The administration of LIBOR has become a regulated activity under the purview of the UK Financial Services and Markets Act 2000. BBA's role about LIBOR has been withdrawn. NYSE Euronext Rate Administration Limited is now the new LIBOR administrator.
What we worry most about is: will such changes alone ensure justice to the vast cross-section of population-consumer-loan holders, credit card debtors, businesses etc - that reportedly lost their lifetime's saving? Doesn't common rationale suggest that the proven swindlers should be made at least to surrender their ill-gotten money and the government assume responsibility to redistribute those among the proven losers?
We are afraid, if justice fails the vast cross-section of innocent commoners, whose only fault is they trusted the criminal gang of banks by wanting to do business, the very foundation of the economies concerned could face devastation. Diminished confidence in the financial industry by businesses and the public will retard economic growth.
The writer is professor, Dhaka School of Economics. ncnagcu@yahoo.com
