Libor Bank Scandal May Be The First Financial Scam That Helped Consumers

Unless I am missing something, it seems pretty clear that the manipulator of Libor – is the measurement used to set hundreds of trillions of dollars in mortgages and other loans – actually helped homeowners and credit card holders.

How is that possible, you may ask?

Well it turns out that in what may be the biggest scam every pulled, the banks were only hurting investors and each other.

Here is the way it works. Virtually every variable consumer interest and mortgage rate and student loan is set Libor, which is arrived at by a dozen major banks around the world telling international regulators how much each has to pay other banks for borrowing money.

The problem is that the banks are not required to provide actual figures. It seems that is too hard. So every day the 12 to 15 banks tell regulators what THEY THINK they are paying.

Since the financial crisis started in 2007, banks have been low-balling the figure so that regulators and others were think they were in such great shape that other banks were eager to loan them money cheaply.

Follow me so far? Good. Now for the fun part.

Not only did the banks fudge the numbers, they also told the investor side of the banks what the fudged numbers were so they would have an advantage trading billions and trillions of dollars in financial instruments.

So what happened was that we got a break in our interest rates, since they would have been higher if the banks had reported more realistic figures. But investors and speculators and smaller banks got burnt because they were late getting information and were betting blindly.

So as my more boss once told me, the evil eat their own.

Unfortunately taxpayers got burned because the rate set on municipal and state bonds are also impacted by the Libor benchmark.

Cities, states and municipal agencies also are examining whether they suffered losses from the rate manipulation, and some have filed suits.

Barclays, the British bank, had already agreed to pay $450 million in fines to the U.S. and to the Brits. Three top executives were forced to quit and criminal charges are expected.

And several of the other huge banks involved in this game are also under civil and criminal investigations in London and in Washington. And of course class action lawyers are lining up to file their lawsuits.

“The multiyear investigation has ensnared more than 10 big banks in the United States and abroad,” said the New York Times. “With the prospects of criminal action, several firms, including at least two European institutions, are scrambling to arrange deals, according to lawyers close to the case.”

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1 Comment on "Libor Bank Scandal May Be The First Financial Scam That Helped Consumers"

  1. Your analysis is correct.

    Simple if you paid interest you were ahead of the curve, and if you earned interest you were behind the curve.

    So on Municipal fund balances (short term cash held) the interest earned was less than arguably could have been earned. In most cases the amount is not meaningful.

    However on municipal debt sold where interest is paid, the amount would have been arguably less. The reality is that most communities were much better off with lower long term financing costs, then with the very small ‘loss’ of potential interest earned.

    In the end the lawyers will be the richer and everyone else will be the poorer.

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