How Big Banks Are Still Lying, Cheating and Ripping Us Off
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DD: It’s almost a bit unfair to single out Barclays Bank. Let me go through that, and then get into what happened with the LIBOR.
Barclays agreed to a settlement with the Justice Department over allegations that it rigged, or tried to manipulate, the LIBOR. It did that in a number of ways. In some cases their traders were asking for the LIBOR to be set up or down based on how they could make money off of derivatives trading. The spread in the rate would give them a leg up on the competition and improve their profits.
In a second deal, especially during the financial crisis, it was found that Barclays was submitting their rate for the LIBOR at the high end. Obviously if you’re a bank and you’re submitting an interest rate that’s higher than everybody else’s you’re asserting, in a way, that your bank is in more trouble than some of these other banks because you’re having to pay a higher interest rate. They were asked to submit a lower interest rate by their executives so that it didn’t look like Barclays was doing as badly during the financial crisis. So there are a number of different ways that Barclays was manipulating the rates.
The reason I say that it’s almost unfair to single them out is that they’re the one bank that has agreed to a settlement -- that has agreed to play ball here with the Justice Department. The LIBOR is set by a number of different banks submitting an overnight lending rate, and then the top and bottom are sort of thrown out, and the range is set that way.
There are plenty of allegations that every bank pretty much that was involved in creating the LIBOR was gaming the system in very similar ways to what has been alleged to have happened at Barclays. We only know about Barclays because they’ve come clean. We don’t know about all of these other banks that are under investigation. That includes banks in the United States like JP Morgan Chase, Bank of America, and on and on.
JH: The Wall Street Journal reports that a number of banks are being investigated for similar fraud. It also appears that Barclays may have colluded with other banks in this scam. We should also point out that it’s not just LIBOR. There’s another major benchmark rate called the EURIBOR. It also has been subjected to some manipulation.
The way this works is again -- let’s step back for a moment – is that the British Bankers Association publishes this LIBOR. What they do is get reports from major banks and they use those reports to come up with the rate. So when the banks had it in their interest to push those rates up or down they basically lied. They lied about what they were reporting.
DD: That’s why it’s called “Lie-bor.” That’s generally the idea. Because they sometimes pushed it up and sometimes they pushed it down it’s kind of harder to say exactly how people were affected in terms of their interest rates on their student loans or what have you.
I’ll tell you a way people were definitely affected whether it went up or down. That was in terms of local government. There are all these interest rate swap deals where local governments can lock in an interest rate at a certain level, and they do these deals with large, major banks. Banks are gaming the rate down – the locked-in rate makes them more money over time. When you’re talking about local governments you’re talking about local tax dollars. That really affects everybody. There are local governments across the country who engage in these local rate swap deals, who have been just completely ripped off, and the LIBOR gaming had something to do with it.