LIBOR Scandal Latest Sign of Financial System’s Rotten Core
By Aaron Task
July 9, 2012
During the 2008 financial crisis, the London Interbank Offered Rate (LIBOR) was a key barometer of the failing health of the banking sector. When LIBOR spiked in late summer 2008, it was a clear sign banks weren’t willing to lend to other banks and the term “counter-party risk” became part of the vernacular.
LIBOR is the rate at which banks will lend to other banks and a critical component to the inner-workings of the global financial system. As with the 10-year Treasury note and fed funds rate, literally trillions of dollars of other financial instruments — including corporate loans and mortgage rates — are pegged to LIBOR, making it one of most important financial indicators in the world, if not the most important.
Fast-forward to today and the events of 2008 still resonate.
Last week, Barclays paid roughly $450 million to settle charges by U.S. and U.K. regulators that its traders had manipulated LIBOR. A day after he resigned as Barclays CEO, Robert Diamond appeared before U.K. Parliament last week and testified that regulators on both sides of the Atlantic were aware of irregularities in the LIBOR market as far back in 2007 and did nothing about it.