LIBOR scandal & you: Even small interest rate differential is significant over time
Liberation by LIBOR? Well, here we go again. Type LIBOR in any search engine on the internet these days to review current multiple jurisdictional investigations, now against the third global financial institution (in what appears to be a continuous line of scrutinised banking establishments) facing huge settlement penalty fines to both the United Kingdom and United States regulatory authorities and governments for their roles in the manipulation of Libor rates.
The first bank to settle was Barclays, followed by UBS, and now Royal Bank of Scotland (RBS) on February 06, 2013. Who knows what big names will follow?
These are the latest malfeasance investigative reports to flood the media, tedious and discouraging as they are, surfacing after years of countless prior tales of legal suits, settlements and fines for dubious financial institution actions involving the CDO /subprime mortgage industry disaster, money laundering, tax evasion assistance, tax fraud and numerous other felonious feats.
What is Libor and how is it used?
The LIBOR (London Interbank Offered Rate) process evolved in my impulsive mental awareness as that of a group of kindly, courtly (or portly) old men appropriately dandified in wainscots and pince-nez glasses sitting around a large conference table agreeing on the interest rates for the day that they will charge each other for short term funds.
Hmm, I mused, do the BFFs (best friends forever) get the best rates? No, emphatically, this figment of my imagination in no way resembles the complete scene — far from it.
According to Investopedia, LIBOR is:
The LIBOR is the worlds most widely used benchmark for short-term interest rates and is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is derived from a filtered average of the worlds most creditworthy banks interbank deposit rates for larger loans with maturities between overnight and one full year.
Today, LIBOR has reached such stature that the rate is published daily by the British Banking Association at about 11:45am. Greenwich Mean Time. LIBOR is set by 16 international member banks and, by some estimates, places rates on a staggering $360 trillion of financial products across the globe
LIBOR is used as a reference in pricing of various financial products that include floating rate mortgages, savings accounts, interest rate swaps, other Over-The-Counter derivatives, student loans, corporate loans and credit cards.
An example of the impact on the average bank deposit holder is that they received less earned interest than they were due, or a corporation may have paid a higher interest rate for a line of credit due to upward manipulation of the LIBOR rate.
Even a small interest rate differential is significant over time. Some US mortgage holders have filed class action suits against US banks to recover excess interest charges attributed to LIBOR actions.
Reading through just a bit of the mountain of evidence from the most recent settlement charges against RBS is an insight into callous, casual behaviour of some of its financial representatives.
Anonymous emailers never appear a bit fussed over the deliberate changes in the rates, as long as they could capitalise on the rate swings. Who cares if some small student loan borrower, or some small business is affected by these actions? Business is business, after all.
According to various banking analyst reports, generally, only a small portion of banking institution profits will have to be disgorged as LIBOR settlements — barely affecting the bottom line. Imagine if those wasted fines had been ploughed instead back into profits, generating more competitive lending rates, higher depositor interest rates for the shareholders and account holders alike?
Feeling helpless against the giants. In the end it all comes down to this. Another financial scandal, another inquiry, then security commission regulatory bodies and justice systems assesses penalties and fines. Governments receive bonus top ups for their coffers.
The supposed responsible financial institutions receive another slap on the wrist for deceptive practices against their investors yet again.
As for the public, us, you and me, what do we get? Increased banking and investments fees may be a sure bet.
This is another tragedy for the little guys (who simply have no idea how these complex transactions develop) who must use (and hopefully trust) financial institutions to manage their affairs, and a financial insult to all individuals and entities who work to practice ethical responsible business dealings with the public.
Major financial news media and industry spokespersons often lament the long-term lack of involvement of the small investor in capital markets.
It seems that trust in the industry by ordinary investors has long departed — with good reason, yet we are asked again and again in those lovely touchy feely media ads to rely upon the strength, stability, security of these financial institutions. It is time for the financial industry to show us that they truly mean what they say.
Sources: Investopedia: The LIBOR Scandal by Marc L Ross, July 18, 2012
Financial Times: Libor Fallout To Test RBS Morale By Patrick Jenkins and Jennifer Thompson, February 06, 2013
CNNMoney: 9 More Banks Under Scrutiny In Libor Investigation by James OToole @CNNMoneyInvest October 26, 2012
Financial Times: US Woman Takes On Banks Over Libor By Caroline Binham in London, October 14, 2012.
Martha Harris Myron CPA PFS CFP TEP is an international financial columnist and a cross border financial planning specialist. Member of the American Citizens Abroad Professional Tax Advisory Council. www.americansabroad.org firstname.lastname@example.org
The opinions expressed in this article are those of the author alone, and not The Royal Gazette.
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