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The LIBOR Scandal -- And Why It's Important

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Late last month, Barclay's Bank, a multinational bank and financial institution based in the United Kingdom, admitted to regulators that it tried to manipulate something called "Libor" before and during the financial crisis in 2008. "Libor" is an acronym for London Inter b ank Offered Rate. It is a rate used as a benchmark for the cost of lending throughout the financial system, and it is also used as a reference rate for a wide range of financial products like car loans, adjustable-rate mortgages, student loans and credit cards. 

The Libor is not based on an objective measure of the interest for bank-to-bank loans. It is the average of a daily poll of the Association's member banks, who give an estimate of the interest rate they think they would pay if they sought to borrow from another bank. 

It is supposed to be the way the financial system assesses the overall health of the financial system, because if the banks being polled feel confident about the state of things, they report a low number, because they assume that if they had to borrow from another bank, their cost of borrowing would be low. If member banks feel a low degree of confidence in the financial system, they report a higher interest rate. And from that the Libor is calculated, affecting the interest rate on financial products around the globe.

What has emerged from the Barclay's Bank inquiry is evidence that banks may have in fact been deliberately manipulating Libor rates for years. The evidence so far is that one arm of a bank responding to the Libor poll would change their number based on what another arm of the same bank wanted -- and that other arm could consist of the bank's traders who make their money on whether the rate goes up or down.

This means that millions of consumers, investers and businesses have been paying the wrong interest rate. Or rather, they haven't been paying an interest rate that is set according to some legitimate benchmark. Instead they are paying a rate based on a gentlemen's agreement at financial institutions, a method that practically incentivizes those banks to game the system to maximize their profits.

And remember, the British Bankers Association, the group that is responsible for setting the rate, is not a government agency. It is just a trade group of big banks -- Bank of America, JPMorgan Chase and Deutsche Bank and others -- whose decisions on such a crucial number are not based on honest accounting or rules or regulatory oversight, but on a gentlemen's agreement of honesty.

We don't know just how deep this scandal goes. But the fact is that if a fundamental component of our financial system has been or is being manipulated, we have the right to know about it. Banks are not above the law and they should not be allowed to operate in secrecy, especially when they have a history of taxpayer bailout and when we are forced to rely on them to provide capital for economic growth.

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Dennis Kucinich is former US Congressman and two-time presidential candidate from Ohio who served 16 years in the U.S. House of Representatives. 

Visit his website at  KucinichAction

Follow him on Twitter at @Dennis_Kucinich

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Thank you Senator for this article.  Personna... by Burl Hall on Friday, Jul 13, 2012 at 2:21:23 AM
Hey Kucinich~   How about you wrestle Obama... by Ned Lud on Friday, Jul 13, 2012 at 7:40:53 AM
When Bush 43 invaded Iraq, the public justificatio... by John Reed on Friday, Jul 13, 2012 at 7:57:41 AM
Hugo Chavez has a lot of security in place because... by intotheabyss on Friday, Jul 13, 2012 at 2:55:37 PM
This is true in an ideal world.... by Josh Mitteldorf on Friday, Jul 13, 2012 at 8:37:49 AM
Dennis:We have been paying the "WRONG" interest ra... by David Snieckus on Friday, Jul 13, 2012 at 9:16:28 AM
explains the facts of what happens when one "buys"... by Daniel Geery on Friday, Jul 13, 2012 at 10:06:59 AM
First would be, they are not gentlemen so how migh... by James Tennier on Friday, Jul 13, 2012 at 10:04:15 AM
Banks are not above the law until ... *CLAP!* ..... by Hooker Jay on Friday, Jul 13, 2012 at 11:04:46 AM
They print our money, their Federal Reserve Notes,... by Lance Ciepiela on Friday, Jul 13, 2012 at 11:16:24 AM
Why in the world are interest rates allowed to be ... by Ernie Messerschmidt on Friday, Jul 13, 2012 at 11:35:52 AM
I read the other day that 40% of everything we buy... by Swamper Tom on Friday, Jul 13, 2012 at 12:10:35 PM
socially controlled. Banks could only operate with... by bogi666 on Saturday, Jul 14, 2012 at 6:57:30 AM
Amen, Ernie! ... by Joan Kelly on Saturday, Jul 14, 2012 at 12:33:56 PM
Financial Crime Bosses To Suffer Cranial Losses!-... by Deborah Dills on Friday, Jul 13, 2012 at 3:59:00 PM
Mr. Kucinich is truly speaking from knowledge.&nbs... by Bayard Waterbury on Saturday, Jul 14, 2012 at 12:03:37 AM
Dear Mr. Kucinich,First there is Ali Baba, that is... by syed mahdi on Saturday, Jul 14, 2012 at 8:57:57 AM