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Answers to the headline questions first, then explanations.
■ What is it? LIBOR is the London InterBank Offered Rate — it's the rate at which banks loan each other money. (More on why that matters below.)
■ Why should you care? The LIBOR scandal is the biggest financial and political threat since the Masters of the Universe almost took down the world in 2007–2008.
Most U.S. mortgages were hooked to the 2008 fraud crisis. At least $800 trillion in loans and contracts are hooked to LIBOR.
When you see what the LIBOR rate actually is, you'll see why this is cheating on a monstrous scale, with monstrous consequences for the Littles as the Bigs play their money-sucking games. (Money-sucking: Sucking money out of a financial system the way you divest an orange of its juice.)
Let's take this one piece at a time.
What is LIBOR?
LIBOR is the London InterBank Offered Rate. Its two aspects (it's a rate and a benchmark) are expressed well here (some reparagraphing):
The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. ...What to notice:
It is a benchmark ... for interest rates all around the world.
Libor rates are calculated for different lending periods - overnight, one week, one month, two months, six months, etc. - and published daily at 11am by the British Bankers' Association.
Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to (and typically higher than) Libor.
■ LIBOR is simply an interest rate on bank-to-bank loans. That's really all you need to know.
Banks need to borrow; they frequently go to other banks for loans (after all, that's where the money is).
If I'm Barclays Bank (say) and want a loan from the Royal Bank of Scotland (RBS), they charge me interest. Just like a car loan.
■ Like every other borrower, banks have borrowing costs based on their credit-worthiness. The less credit-worthy, the higher the interest rate they have to pay. Just like a car loan.
If I'm Barclays (say) and I'm suddenly not doing so well, that RBS loan comes with a higher interest rate than before. It's pretty clear, therefore, that the rate I'm being charged is a public — at least to other banks — measure of my financial condition.
Can you see where this is headed?
■ LIBOR is an average of self-reported rates.
Barklays is responsible for reporting just its own borrowing costs (the interest rates it would have to pay as a borrower), not anyone else's; Royal Bank of Scotland reports its borrowing costs; and so on with other banks. LIBOR is the average of those self-reported costs.
■ But LIBOR's not the average of real costs. It's the average of estimated, hypothetical costs.
Look at the conditionals in the definition quoted earlier (highlighted below):
The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks.So what is LIBOR? LIBOR is the calculated average of self-reported, unverified, estimated borrowing costs if banks were to borrow from each other at some theoretical time loosely associated with Now.
Are you noticing the incentives? Banking is all about incentives. So let's try again.
What is LIBOR? LIBOR is the sum of Lies. LIBOR is the average of all lies told by all member banks to (a) make each other think they're in better shape than they are, and (b) to sweeten the price of deals they're also on the other side of.
What's the likelihood that they're all lying? What's the likelihood that they all know they're all lying?
I'd put those odds at, carry the two ... Why, you'd have to be nuts to be on the wrong side of that bet.
Barklays has already confessed. So has RBS. There will be others, folks; this is just the start. They're all in on it.
Why does it matter if LIBOR is Lies?
The consequence of the LIBOR Lie is huge. Because this piece is already long, let's just list a few and expand later:
■ LIBOR is a benchmark — now known to be a false one. Taibbi says:
The furor is over revelations that Barclays, the Royal Bank of Scotland, and other banks were monkeying with at least $10 trillion in loans (The Wall Street Journal is calculating that that LIBOR affects $800 trillion worth of contracts).Here's what that "monkeying with" means in the real world:
This is unbelievable, shocking stuff. A sizable chunk of the world’s adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions.That's fraud.
The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money.
Remember, LIBOR rates are calculated for a number of lending periods — "overnight, one week, one month, two months, six months, etc." An awful lot of loans are hooked to LIBOR.
■ LIBOR presents a false financial picture of the state of its member banks. See above for that one.
This means that the banks are manipulating rates affecting hundred of trillions worth of loans and contracts for the benefit of their stock price (which is where much executive compensation is parked).
■ LIBOR is a corruptly manipulated rate. That means I can be on both sides of a deal — as the recipient of loans or contracts pegged to the LIBOR rate, and as the guy who controls the rate itself.
Or I can do LIBOR-rate favors for friends on the other side of their own deals. Fix a rate, help a friend. Presumably that "friend" will do me one back some day, and in kind.
Taibbi again from a different article (he's all over this) quoting Allison Frankel at Reuters (my paragraphing):
Barclays employees agreed to manipulate the rates they submitted to the banking authority that oversees the daily Libor report for seemingly anyone who asked them to monkey with it:
We're talking naked, blatant manipulation. Here's one exchange cited in the DOJ filing:
- senior Barclays officials concerned that the bank would look weak if it reported too high a borrowing rate;
- interest rate swap traders trying to improve Barclays' derivatives trading position;
- even former Barclays traders begging for favors.
Trader: "Can you pls continue to go in for 3m Libor at 5.365 or lower, we are all very long cash here in ny."
Libor rate submitter: "How long?"
Trader: "Until the effective date goes over year end (i.e. turn drops out) if possible."
Submitter: "Will do my best sir."
■ LIBOR is the next test of Rule of Law in the U.S.
If LIBOR manipulators aren't hauled into a U.S. court by the U.S. government and made to pay significantly; if there are no criminal prosecutions — just patty-cake wrist-slaps; if guilty LIBOR banks are given the Jon Corzine treatment, what does that say about Rule of Law in the U.S.?
It will say it's in shreds.
And more — it will hasten the day when the U.S. government has not just the reality of corrupt capture, but the appearance as well.
And that leads to no good place.
What's the bottom line?
Your bottom line is right here. (1) As stated above:
LIBOR is the sum of Lies. LIBOR is the average of all lies told by all member banks to (a) make each other think they're in better shape than they are, and (b) to sweeten the price of deals they're also on the other side of.And (2) protecting these criminals puts the credibility of the entire U.S. government at risk ... again. Soon we won't just be a banana; we'll look like one too.
Complex as this is, it's not beyond comprehension. And this really is the next big thing in Banksters versus The World. Stay tuned.
Hoping to have helped,
GP
To follow or send links: @Gaius_Publius
