Libor scandal

This dwarfs by orders of magnitude any financial scam in the history of markets.

The Libor scandal was a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) and also the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were. Libor underpins approximately $350 trillion in derivatives. It is currently administered by NYSE Euronext, which took over running the Libor in January 2014.

The banks are supposed to submit the actual interest rates they are paying, or would expect to pay, for borrowing from other banks. The Libor is supposed to be the total assessment of the health of the financial system because if the banks being polled feel confident about the state of things, they report a low number and if the member banks feel a low degree of confidence in the financial system, they report a higher interest rate number. In June 2012, multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the scandal.

Libor

The London Interbank Offered Rate is the average of interest rates estimated by each of the leading banks in London that it would be charged were it to borrow from other banks. It is usually abbreviated to Libor (/ˈlaɪbɔːr/) or LIBOR, or more officially to ICE LIBOR (for Intercontinental Exchange Libor). It was formerly known as BBA Libor (for British Bankers' Association Libor or the trademark bbalibor) before the responsibility for the administration was transferred to Intercontinental Exchange. It is the primary benchmark, along with the Euribor, for short-term interest rates around the world.

Libor rates are calculated for 5 currencies and 7 borrowing periods ranging from overnight to one year and are published each business day by Thomson Reuters. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the Libor.

In June 2012, multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the Libor scandal. The British Bankers' Association said on 25 September 2012 that it would transfer oversight of LIBOR to UK regulators, as proposed by Financial Services Authority managing director Martin Wheatley's independent review recommendations. Wheatley's review recommended that banks submitting rates to LIBOR must base them on actual inter-bank deposit market transactions and keep records of those transactions, that individual banks' LIBOR submissions be published after three months, and recommended criminal sanctions specifically for manipulation of benchmark interest rates. Financial institution customers may experience higher and more volatile borrowing and hedging costs after implementation of the recommended reforms. The UK government agreed to accept all of the Wheatley Review's recommendations and press for legislation implementing them.

Scandal

A scandal can be broadly defined as an accusation or accusations that receive wide exposure. Generally there is a negative effect on the credibility of the person or organisation involved. Society is scandalised when it is made aware of blatant breaches of moral norms or legal requirements. In contemporary times, exposure is often made by mass media. Such breaches have typically erupted from greed, lust or the abuse of power. Scandals may be regarded as political, sexual, moral, literary or artistic but often spread from one realm into another. The basis of a scandal may be factual or false, or a combination of both.

Contemporary media has the capacity to spread knowledge of a scandal further than in previous centuries and public interest has encouraged many cases of confected scandals relating to well-known people as well as genuine scandals relating to politics and business. Some scandals are revealed by whistleblowers who discover wrongdoing within organizations or groups, such as Deep Throat (William Mark Felt) during the Watergate scandal in the 1970s in the United States. Whistleblowers may be protected by laws which are used to obtain information of misdeeds and acts detrimental to their establishments. However, the possibility of scandal has always created a tension between society's efforts to reveal wrongdoing and its desire to cover them up.