Worldwide Financial Crisis: Libor Scandal goes Global
by Robert Stevens
August 5, 2012
The UK Conservative/Liberal Democrat government this week announced the terms of a review into the deepening London Interbank Offered Rate (Libor) crisis.
The review was commissioned by Chancellor George Osborne, and will be led by Martin Wheatley, managing director of the Financial Services Authority (FSA) and chief executive-designate of the Financial Conduct Authority.
Libor is a daily rate covering 10 currencies and is supposed to measure the average cost of short-term loans between major banks. It is set in London by 16 banks and is run by the British Bankers’ Association. The interest rates for tens of trillions of dollars in home mortgages, student loans and credit cards are pegged to Libor, as are derivatives valued at $350 trillion and eurodollar futures worth $564 trillion.
Last month, Barclays Bank was fined a total of £290 million ($455 million) for illegally manipulating its daily Libor submissions between 2005 and 2009.
The Wheatley Review is a damage limitation exercise, proposing only to “undertake a review of the framework for the setting of LIBOR.”
While it is to examine “The potential for alternative rate-setting processes”, the interests of the banks will be prioritized, as its remit will also consider “The financial stability consequences of a move to a new regime and how a transition could be appropriately managed.”
Wheatley has acknowledged that the rigging of Libor was “extremely serious”, but instead of calling for any criminal action to taken against those found guilty he declared it showed that “urgent reform of the Libor compilation process is required”.
The Wheatley Review avoids dealing with any of the illegal practises of Barclays that gave rise to it in the first place. The terms of the review state that it “will not consider any issues relating to the actions or alleged actions of specific financial institutions in attempting to manipulate LIBOR or other benchmark rates. These issues will continue to be investigated by the FSA and other regulators around the world.”
The review is to conclude in just four weeks in order for any recommended legislation to be included in the Financial Services Bill, currently going through Parliament.
Last Friday it emerged that the offices of Barclays in Milan, Italy had been raided in relation to the Libor crisis. Italian police officers seized documents, emails and other electronic communications during the raid. According to the Financial Times, the raid was “part of an investigation that seeks to see if Italian consumers were hurt by the British bank’s manipulation of Libor, the London Interbank Offered Rate, and its euro equivalent Euribor.”
Two consumer watchdogs have estimated that 2.5 million Italian families with mortgages linked to Euribor were financially damaged—to the tune of €3 billion by the rigging of Euribor.
Each day sees a global spread of the crisis.