Posted: November 8th, 2013 | By: Andrew Verstein
Last week, a fifth financial institution acceded to allegations of rigging the Libor rate, reminding us that major financial scandals ain’t over till they’re over. Rabobank’s $1.1 billion dollar settlement can serve as an opportunity to take stock again of what the Libor manipulation represents and where it stands.
What is Libor?
Libor, the London Interbank Offered Rate, is a financial index or benchmark. For many years, it has been synonymous with “the cost of money.” Although its name refers to London, Libor is terrifically important at all levels of the U.S. financial system. Consumers will find it written into credit card agreements, student loan contracts, and adjustable rate mortgages, particularly at the sub-prime grade. At the higher levels of the financial system, corporations and municipalities use Libor-linked financial derivatives to protect themselves against volatile interest rates. If Libor goes up, borrowers of all stripes pay more.Libor is calculated by polling representatives at some of the world’s largest banks, such as the Dutch lender Rabobank, about how much they would have to pay to raise money today. For a variety of reasons, this polling process was conducted on the honor system rather than with quality checks and oversight. Four banks and one intermediary have now admitted that their employees were sometimes untruthful in ways that were supposed to help them or their employers.
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