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Jul 14

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LIBOR Manipulation Story Is Probably Different Than You Heard

UK-based Barclays is the fourth largest bank in the world, with operations in over 50 countries. Barclays recently received huge publicity pertaining to its manipulated reporting of interest rates that go into the calculation of both Libor and Euribor rates. The U.S. (through the Commodity Futures Trading Commission or CFTC) and the UK (through the Financial Services Authority or FSA) fined Barclays more than $450 million for attempting to manipulate these rates through their submissions. Barclay’s Chairman, CEO and COO all resigned in connection with the investigation.

Although I do not want to appear to excuse the misreporting, the incorrect information reported by Barclays was actually relatively infrequent (given the large number of daily submissions), and generally involved only around one-half to two basis points (0.005% to 0.02%) for the derivative trading issue, and up to 20 basis points (0.2%) for the credit reporting issue. Additional background, and explanation of what occurred appears n this article.

Despite all the press and political speculation about homeowners and small businesses paying more for their loans and mortgages because of the Barclays’ misreporting, the expected outcome of most of the conduct is just the opposite. In this circumstance, those who really were hurt are bankers and investors in mortgage and other lending instruments who received less interest, but the populist press and politicians are not mentioning those groups as victims.

In some respects, it is no secret that governments wanted low interest rates to stimulate the economy in 2008. In the U.S., the Federal Reserve both publicly and dramatically decreased interest rates, as have central banks in other countries. The manipulation of Libor and Euribor are another means of artificially lowering interest rates, although this method was done surreptitiously.

The larger story, which is just unfolding, involves a combination of similar misreporting by a large number of other banks, and the likely encouragement of such misreporting by UK political officials. The U.S. press has largely gotten this story wrong, and/or has not provided the correct focus. This is a big deal that will provide additional penalties for other banks, and possible political embarrassment for the regulators and politicians involved. Also expect changes in the way that Libor is calculated and controlled.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/07/libor-manipulation-story-is-probably-different-than-you-heard/

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