January 9, 2013 12:36 pm

Backgrounder: The Libor scandal

A worldwide investigation stretching from New York to Switzerland to Tokyo has discovered widespread manipulation of benchmark interbank lending rates by traders and brokers.

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The London Interbank Offered Rate, or Libor, and its equivalents in other currencies are compiled from banks’ estimates of the rates at which they can borrow from one another each day.

Libor is the reference rate for about $350tn of financial products, ranging from interest rate swaps and corporate loans to credit cards, mortgages and savings accounts.

‘Epic’ manipulation

Barclays of the UK, the first bank to settle with regulators, incurred a $450m fine in June 2012 for its part in the scandal, which forced Bob Diamond to resign as chief executive.

In December 2012, Swiss investment bank UBS agreed to pay a record $1.5bn to US, UK and Swiss authorities to settle allegations of “pervasive” and “epic” efforts to manipulate Libor.

Traders, brokers and the bank officials who make Libor submissions have been caught engaging in two types of manipulation since 2005.

Before the financial crisis struck, some sought to alter rate submissions to secure profits on trading positions linked to Libor. When the collapse of Lehman Brothers spread panic through the financial sector and forced other banks to seek state rescues, Libor served as a critical measure of banks’ health or otherwise. Investigators found that some bankers “lowballed” their Libor submissions to avoid their banks being seen as vulnerable.

Nearly 20 banks, on three continents, have received subpoenas and information requests from regulators and at least a dozen banks and interdealer brokers have fired or suspended employees in connection with the probes.

In December the US brought the first criminal charges related to alleged fiddling of Libor.

‘For you, big boy’

Emails disclosed by investigators have shone a light onto the culture of investment banks as they face tighter regulation in the wake of the financial crisis.

Agreeing to a request from a trader to adjust rates, one Barclays submitter replied: “Done … for you big boy”.

At UBS, one trader told a broker that if he left a particular rate unchanged that day, “I will f***ing do one humongous deal with you …  I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want.”

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