The LIBOR Scandal

What We Know, What We Don’t, and What to Expect

Aug 02 2012

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On June 27, 2012, representatives of the British bank Barclays agreed to pay a $453 million fine to U.S. and U.K. regulators to settle allegations that Barclays manipulated the London Interbank Offered Rate (LIBOR). LIBOR is a set of indices that represent the prevailing interest rates in London money markets. More importantly, LIBOR interest rates impact the settlement of nearly $800 trillion in financial instruments globally—including corporate debt, mortgages, student loans, interest rate and currency swaps, and other derivatives.

The Barclays settlement spans mid-2005 through mid-2009. On several occasions during the relevant time period, Barclays’ employees intentionally submitted false information about the bank’s cost of funds to Thomson Reuters, the publisher of LIBOR, in order to manipulate the published LIBOR rates. These misrepresentations occurred for different reasons at different times. In some cases, Barclays’ LIBOR submitters under-reported the bank’s cost of funds, while at other times the LIBOR submitters over-reported or held constant the bank’s cost of funds.

Details in the statement of facts released by the Department of Justice (DOJ) suggest that Barclays was not the only bank manipulating LIBOR. In fact, certain employees at Barclays communicated with employees at other LIBOR contributing banks to request intentionally misleading LIBOR submissions. Although Barclays is the only bank to have been singled out thus far, more than a dozen major banks are now being investigated related to the LIBOR scandal, including domestic banks Citigroup and JPMorgan Chase and several foreign banks.

This brief presents background on LIBOR—its formulation and use—as well as the information we know about the intentional manipulation of LIBOR, outstanding questions that have yet to be answered about this developing scandal, and what to expect going forward.

 

See the entire JEC report in pdf format attached below.

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