In the past month, a finance scandal had been discovered which affects everyone who deals with money – basically, everyone in the world. This scandal, which was named after the rate which is at the heart of it, is called the LIBOR scandal.
What does LIBOR mean? LIBOR stands for the London Interbank Offered Rate, an influential rate set by a number of banks which has an effect on numerous interest rates around the world. The rate is set every day when representatives from each of the sixteen banks meet and tell Thomson Reuters the rate at which they can lend money on that day. Reuters averages out this rate, removing the two highest values and the two lowest values, and reports that value each day. This value has a direct impact on around $800 trillion, with corporations, stock markets and governments working by this value. If everyone involved was honest in these agreements, it wouldn’t have made the news, and most people would be able to go about their everyday lives. Unfortunately, some people didn’t respect these agreements.
If everything went correctly, the banks should have reported their interest rates to their representatives, who would then report them to Reuters. What actually happened was quite different. The member banks reported to each other their interest rates, and then discussed what would be most profitable for them in the long run – in this case, lowering rates. How did this benefit them? Ever since the recent market crash, many investors have lost confidence in the banks due to their amount of exposure to the toxic assets, and a high interest rate, a rate that would have been what the banks actually should have offered to Reuters, would be plausible if the banks didn’t have a lot of capital. The banks wanted to look like healthy companies, however, and offered Reuters low interest rates, which, while it did slightly lower their profits, ensured that investors believed that the banking industry was in much better shape than it actually is. Now, even though this may seem like a type of deception which only hurt the investors in the company, who else did it hurt?
As mentioned earlier, over $800 trillion is impacted by the LIBOR, with much of this money being in the form of investments that many people around the world own. As a result, when banks lowered the LIBOR, they also lowered profits that would be given out to consumers who owned these investments, with governments and corporations who owned or offered these investments also being affected. Governments who offered bonds which were set to be near the LIBOR suffered losses of profits without knowing, as bank’s lower rates were not representative of the market. Matt Taibbi of Rolling Stone magazine described the effects of the lowered rate on everyone by saying “This is the world’s biggest banks stealing money that would otherwise have gone toward textbooks and medicine and housing for ordinary … [citizens] … and turning the cash into sports cars and bonuses for the already rich.” With governments recently becoming aware of the situation, the best we can hope for today is that major punishments are instituted against these companies to ensure that a situation similar to this does not happen in the future.
