As we continue our slow recovery from the recession, most, if not every last one of us, want to leave thoughts about housing market bubbles, subprime lending and bank failure rates far behind us. It only seems appropriate that the credibility of one of the world’s most important financial indicators, LIBOR, would be called into question at this already uncomfortable time.
The London Interbank Offered Rate, or LIBOR, is the world’s most common benchmark for determining short-term interest rates. Eighteen prominent banks in London determine LIBOR as the average interest rate that they would expect to be charged to borrow from other banks. The rate, determined each day, is used as a benchmark to determine payments on trillions of dollars in financial instruments, including derivatives, mortgages and corporate loans issued throughout the world. Manipulating LIBOR could have a very significant negative impact on financial markets worldwide.
In early July, Barclays, a British bank that assists in determining LIBOR, paid approximately $450 million to settle charges from U.S. and U.K. bank regulators that its derivative traders had manipulated LIBOR over at least the past five years. Traders at Barclays allegedly influenced the final LIBOR to increase profits or reduce losses on their derivative exposures. Even relatively small changes in the value of LIBOR could have resulted in millions of dollars in daily profits and losses. Barclays insists that only a few traders were responsible for the misconduct, but the environment on the Barclays trading floors suggests that this type of behavior is at least widely tolerated, if not pervasive. Another scheme being called into question in the Barclays settlement, which may be common among banks worldwide, is submitting fabricated low estimates of bank borrowing costs (by as many as 30-40 basis points) over the past two years. Barclays claims that its regulator and the Bank of England supported the lower estimates so that failing banks could be more easily supported during the recession.
Bank regulators in several other countries, including Canada, U.S., Japan, the European Union and Switzerland, are investigating allegations that LIBOR is being manipulated by a large number of other banks. There are known lawsuits or investigations against as many as 20 large banks, including Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, RBS and UBS, that were alleged to have manipulated LIBOR.
Corporations and lawyers are currently exploring options to sue Barclays and other banks for damages suffered from these acts. Investigators are needed to quantify the dollar amounts at issue in these cases, which will be a long and daunting task.
While fraud may permeate international financial markets, as discussed above, fraud can also exist among the smallest private businesses. Schneider Downs can assist with detecting fraud in your business. Contact Joel Rosenthal, Shareholder, if you have any questions.
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