The LIBOR scandal -- the latest debacle to send ripples through
the global financial system -- centers on the alleged rigging of a
somewhat obscure banking survey. But the actions of some of the
bankers involved may have impacted interest rates all over the
world.
Here is a brief explanation of the LIBOR scandal and a run-down
of some of its likely implications:
Rigging the survey
LIBOR stands for the London inter-bank offered rate. It is a
measure of the interest rate banks in London use to borrow
short-term funds, and it is measured by a survey of several banks.
The scandal became public when allegations surfaced that Barclays
had falsified its survey answers in an attempt to influence the
LIBOR rate for its own benefit.
This would all seem very much like inside baseball -- or inside
cricket, given the location -- except for the fact that LIBOR is a
benchmark interest rate used the world over as the basis for
other lending rates
. In other words, if Barclays did manipulate its LIBOR responses,
it may have affected countless borrowers and lenders.
What does it mean?
The tricky thing about this scandal is that the impact was
subtle, indirect and possibly very widespread. All of that makes
specific damages hard to pin down, but here are some general
outcomes:
-
Only very large investors will be able to point to
damages.
By nature, the impact of rigging the LIBOR survey was very small
-- fractions of a percent -- but if there was a prevailing
direction to it, that direction may have been to lower certain
interest rates. Anyone owning lending instruments may have been
hurt, but only very large investors are likely to be able to
quantify any significant impact.
-
Some borrowers actually may have benefited.
Some adjustable-rate mortgages are based on LIBOR. These
borrowers may have benefited from artificially low rates -- but
only very slightly.
-
Liability will be hard to trace.
The LIBOR survey is based on responses from several banks, and
then the results are used to set interest rates for countless
numbers of completely unrelated borrowers and lenders. Tracing a
line from a victim to a perpetrator is going to be very
difficult.
-
It will be a field day for lawyers.
Liability may be hard to trace in this case, but some lawyers
will get rich trying. They'll find no shortage of potential
victims willing to participate in a lawsuit, hoping for a
windfall. In this financial environment, everybody already feels
like a victim. Now they're just looking for someone to
blame.
-
Situations like this raise the cost of banking.
Any wrongdoing in the
banking system
can hurt people on the front end, but ordinary people with
savings accounts, checking accounts and mortgages may also pay in
the long run as the cost of policing the system ultimately gets
passed along to bank customers.
Because there were innocent borrowers and lenders on both sides
of the interest rate equation, the immediate impacts were probably
something of a wash, and almost imperceptible in most cases.
However, everyone who participates in the financial system stands
to be hurt by the loss of confidence and cost of regulation that
follows when a scandal like this comes to light.