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Why the U.S. Justice Dept is investigating the LIBOR scandal

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This LIBOR scandal is both deep and wide. Wide enough to reach both sides of the Atlantic.

Why both sides, you ask? Good question, since LIBOR stands for the London Interbank Offered Rate. We're still digging to understand, we at La Maison, but the two bits below may help.

(By the way, you may find our earlier piece — "LIBOR for Laymen" — helpful to get you started. It explains the basics.)

Robert Reich says this in The Guardian (my emphasis and some reparagraphing throughout):
There are really two different Libor scandals, and both are about to hit America's shores. The first has to do with a period just before the financial crisis, around 2007, when Barclays and, presumably, other major banks submitted fake Libor rates lower than the banks' actual borrowing costs in order to disguise how much trouble they were in. This was bad enough. Had American regulators known then, they might have taken action earlier to diminish the impact of the near financial meltdown of 2008.

But the other scandal is worse, and is likely to get the blood moving even among Americans who assume they've already seen all the damage Wall Street can do. It involves a more general practice – starting around 2005 and continuing until … who knows, it might still be going on – to rig the Libor in whatever way necessary to assure the banks' bets on derivatives would be profitable. This is insider trading on a gigantic scale. It makes the bankers winners and the rest of us – whose money they've used to make their bets – losers and chumps.

Obviously, Libor is not limited to the UK. As the benchmark for trillions of dollars of loans worldwide – mortgage loans, small-business loans, personal loans – it affects the most basic service banks provide: borrowing money and lending it out. People put their savings in a bank to hold in trust, and the bank agrees to pay interest on those. And people borrow money from the bank and agree to pay the bank interest.
Note: Two scandals.

One involves self-dealing — the banks were rigging LIBOR so derivatives deals they were involved in would be profitable. This amounts to being the both the pitcher and the umpire in a baseball game.

The other involves LIBOR as a benchmark for hundreds of trillions in other deals — loans, mortgages and contracts. If the rates are wrong, people who should have been paid a higher interest were cheated. As I said earlier, this is fraud, and the victims are world-wide, including in the U.S.

One more piece of information from Reich:
Wall Street will almost surely be implicated in the scandal. The biggest Wall Street banks – including the giants JP Morgan Chase, Citigroup and Bank of America – are likely to have been involved in similar manoeuvres. Barclay's couldn't have rigged the Libor without their witting involvement.

The reason they'd participate in the scheme is the same reason Barclay's did – to make more money.In fact, Barclays' defence has been that every major bank was fixing Libor in the same way, and for the same reason.
I'll have more on this scandal, including a list of which banks are LIBOR banks. These three are among them:
  • The Bank of America
  • JP Morgan Chase
  • Citibank, NA
It may be a London rate; but it's not just London banks that set it.


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