Libor reveals a rotten financial system

Posted: July 24, 2012

The Libor scandal is more than just the latest financial deception to come to light. It exposes a fraud that runs to the heart of our financial system.

Libor, the London interbank offered rate, is a benchmark for a range of interest rates, and the misdeeds making headlines have to do with how those rates are set. If insiders can manipulate the basic measurement of a loan — the interest rate — there is rot at the core of the financial system.

The British financial giant Barclays has admitted to manipulating the rate from 2005 to at least 2009. When the bank bet on the direction of interest rates, the Barclays employees who submit data for calculating interest rates would fake their numbers to help Barclays traders win the bet. Day after day, year after year, bet after bet, Barclays made money by fixing bets for its own traders.

We don't know who else was fixing bets. Other big banks, including some of the largest in the United States, are under investigation. Barclays doesn't appear to have acted alone, and it is clear that its fixes weren't secret deals by rogue traders. Traders put their requests to manipulate the rates in writing and even joked about delivering champagne to those who helped them.

Many consumers, community banks, and credit unions lost money as a result. Barclays padded its bottom line by taking money from everyone else: It won when it shouldn't have won, and others lost when they shouldn't have lost.

The amount of money involved is staggering. On any given day, $800 trillion worth of credit-related transactions are linked to Libor rates.

In most markets, consumers can simply take their business elsewhere once they learn the scales are rigged. But interest rates are different. Everyone who borrows money on a mortgage, credit card, or loan — basically, everyone — is affected. According to the Federal Reserve Bank of Cleveland, in 2008, more than half of all adjustable-rate mortgages were linked to Libor. Even those who didn't borrow but saved for retirement or their children got hit with faked interest rates.

It gets worse. During the financial crisis, Barclays and other banks also appear to have consistently manipulated Libor to show lower borrowing rates and convince the world — and their regulators — that the bank was stronger than it was.

With a rotten financial system once again laid bare to the world, the only question remaining is whether Wall Street has so many friends in Washington that meaningful reform is impossible. Real accountability would mean prosecuting the traders and bank officials who violated federal laws, as well as the executives who knew what they were up to.

Going forward, the rules should be changed so that Libor is calculated using actual borrowing costs, not estimated or claimed costs. And enforcement agencies should have the resources they need to launch investigations and fight the armies of private lawyers the banks hire.

Accountability would also mean acknowledging that we cannot trust the financial industry to regulate itself — not in New York, London, or anywhere else. The club is corrupt. When Mitt Romney says he will move to repeal all the new financial regulations, he is supporting a corrupt system. When members of Congress grill regulators for being too tough on Wall Street and slash their budgets, they are propping up a corrupt system.

Financial services are critical to the economy. That's why everyone has a stake in an honest system. The Libor fraud exposes rot at the core. Now who will stand up to fix it?

Elizabeth Warren is the former chairwoman of the TARP Congressional Oversight Panel and the Democratic nominee for U.S. Senate in Massachusetts. She wrote this for the Washington Post.

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