LIBOR: The Biggest Financial Crime in History
It's been five years since a few academics and journalists began to dig up evidence that something was wrong with the London Inter-Bank Offered Rate, or LIBOR. The data that curious researchers were compiling couldn't be explained using the prevailing definition of what LIBOR supposedly was: a trustworthy interest rate that accurately gauged the market price of borrowed US dollars held overseas by the world's biggest banks. Many began to realize that the data could easily be explained if the banks were rigging the LIBOR rate in their favor. Strange discrepancies in LIBOR's correlation to other rates showed something seriously amiss, but it made sense if the banks were cheating.
The motives of the banks have been clear from the beginning. A few banks that dominate the marketplace for derivatives stand to make billions if LIBOR moves in their favor on particular days when contractual payments between them and their customers come due. They therefore suppressed the rates in order to skim billions of dollars off derivatives and investments. Later these same banks suppressed LIBOR rates to create the illusion that their balance sheets were robust during the financial crisis. This also allowed them further rounds of money-siphoning from their unwitting derivatives customers.
Until recently LIBOR rates have been set by the British Bankers Association (BBA). The BBA is a private industry lobby group formed a 100 years ago in London. LIBOR was created to further integrate the giant global money market in US dollars held in overseas banks or holding companies, unregulated by the US Federal Reserve.
Everyone assumed that LIBOR was a market rate reflecting competition. Instead, LIBOR has probably all along been a fudged rate, determined less by vast market forces and invisible hands, and more by the vulgar self-interest and power of the elite banks that set LIBOR rates.
Last year government investigations into this globe-spanning crime led to multi-billion dollar fines against Barclays, the Royal Bank of Scotland, and UBS, the 7th, 8th, and 20th largest banks in the world. Criminal investigations spearheaded by US, UK, Japanese, Canadian, Swiss, and Singaporean authorities are ongoing and aimed at other banks such as Citigroup, JP Morgan, Bank of America, and other "too big to fail" institutions.
California is fast emerging as a center of investigation and litigation into the LIBOR-fixing conspiracy. California is the largest single municipal debt market in the United States, and one of the largest in the world. Collusive suppression of LIBOR rates by the BBA means that California local governments have paid untold millions to their interest rate swap counterparties (the banks) that could otherwise have remained in budgets and used to fund school construction, bus lines, street paving, water and sewerage services, etc.
The lead case is the City of Baltimore and the New Britain Firefighters' and Police Benefit Fund lawsuit against the 16-bank LIBOR panel, filed in April of 2012. More California cities, counties, and public agencies are expected to file their own lawsuits soon, however. CalPERS, which has numerous investments that fluctuate in value and yield with LIBOR, is also said to be investigating its own exposure to rate rigging.
