For borrowers with adjustable rate financial products such as credit cards, home mortgages, and commercial real estate loans, LIBOR is often the contractual and legal basis for interest rate changes. On an even larger scale, almost $500 trillion in financial derivatives are periodically readjusted based on the LIBOR rate.
When large sums of money are involved, there is always the possibility that cheating and stealing will occur by criminal elements. What is unusual about the LIBOR scandal is that the criminal elements were the banks themselves. Perhaps as a way of foreshadowing the legal looting that banks can orchestrate in a variety of ways, William K. Black wrote a 2005 book aptly titled as follows:
The Best Way to Rob a Bank Is to Own One
A little more than a year ago, Barclays Bank revealed that they had agreed to settle several criminal fraud charges involving themselves and member banks regarding the fraudulent collusion to artificially rig the LIBOR calculations. These criminal activities resulted in profits that would not have been realized by these banking institutions if they had not conspired to fix the LIBOR rates illegally.
There were many victims as a result of the LIBOR banking scandal. Anyone who saw their credit card and mortgage loan rates go up during the past several years has to ask themselves this question:
Was my interest rate change fake or real?
The British government is currently in the process of numerous legal reforms that are designed to prevent a recurrence of the criminal fraud from rigging the Libor rate. These procedural adjustments will not be finalized for some time, and several of the corrective measures will not be in place until 2014.
There are many lessons to be learned from the entire LIBOR scandal, but there will always be lingering questions such as the following:
- How many other examples are there in which banks faked financial data for their own profits while banking customers lost money?
- Did the LIBOR manipulations involve a longer time period than the banks admitted to in their settlement of criminal fraud charges?
- Can we really trust banks to do anything when their financial and legal interests are in conflict with the legal and financial interests of their customers?
As some indication of how long the rate fixing might have been going on, the origins of LIBOR date back to 1984. Do you think that the LIBOR problem has been solved or that it is simply the "tip of the iceberg" when it comes to banks and their "Dark Side" where their profits and financial interests are concerned?
Are there really any prudent and practical solutions that consumers can live with as a result of these startling revelations? Most of us still need to work with banks and bankers on an almost everyday basis. One solution that occurs to me is to eliminate variable interest rates in any bank services that are used from this day forward. Whether the cost is initially higher or not, fixed interest rates cannot be manipulated as time goes on.
It must be pointed out, however, that given everything said above, an average bank customer might still wonder how the bank determines the fixed rate to be used in either their home or business mortgage. Can that be manipulated? Will we ever think of banks and bankers in the same way that we did before Barclays Bank confessed to what I think is the new crime of the century?