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What is the Libor Scandal and Why Does it Still Matter?

Credit: CNN Money Buzz Blog

Last year, one of the biggest financial scandals ever erupted over how banks set the Libor. The reverberations continue today, with cities like Baltimore leading a class-action lawsuit over the manipulation, and accusations flying that billions — or even trillions — of dollars were involved.

But what is the Libor scandal? And does it really still matter?

Libor Scandal: An Overview

The London interbank offered rate (Libor) is a benchmark based on reports of various banks. Libor is supposed to be set based on a poll of banks, and the rates they are offering. However, in 2012, Barclays PLC, one of the most venerable banks in the world, admitted to manipulating the process. Barclays paid a fine, and indicated that other banks colluded to manipulate the Libor in ways that meant more profits for banks. Barclays insisted that this manipulation has been happening since before the financial crisis of 2008.

The scandal is huge because the Libor affects almost every rate in the world. Banks based mortgage rates off the Libor. Companies and cities borrow money, and offer bonds based on the Libor. From the interest rate paid student loans to the price paid for a pair of shoes, consumers have been impacted by the Libor.

On top of that, manipulation of the Libor might have been used during and immediately after the financial crisis to minimize bank liabilities, creating a false sense of health for certain financial institutions.

Right now, though, outrage over the Libor scandal is fading quite a bit, but the situation hasn’t be resolved. The U.S. government is trying to figure out how to punish institutions involved without causing more economic problems, and there is a class-action lawsuit in process, led by cities like Baltimore, which claim that they were out billions due to Libor manipulation. Essentially, the argument is that public money was funneled into private bank profits illegally through this collusion to manipulate the Libor.

Does It Still Matter To You?

What happens next could make a big difference. How the U.S. government decides to proceed could impact a financial system still considered by many to be in a delicate state. Punishing the big banks involved in Libor manipulation could mean setbacks for the system. At the same time, failure to deliver any punishment at all could lead to further manipulation as banks realize they can get away with this behavior.

And, of course, there are those that contend that Libor manipulation could still be going on. This means that you might be paying more to borrow. Additionally, losses to cities might mean that you see a reduction in services you are used to. Finally, companies that pay more in interest for loans to create products tend to pass the costs onto customers. Almost everyone is affected in some way by the Libor, and if the scandal is still ongoing, you might be surprised to find that it still matters very much.


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