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The banks get together and they agree on what is the rate on the basis of which every other bit of financing is priced. So, for example, my company did a bond issue recently, and it was based on, say, 125 basis points or one and a quarter percent above LIBOR for that period of time. They measure it for 30 days, 60 days, 90 days, six months, a year, two years, three years. And everything gets priced off of that. So the real issue is, now we find out they've been manipulating this for several reasons. One of them is they're actually hedging. In effect, they're gambling on where interest rates are going to be. And so if they want the interest rates to go up, they frankly play around with what the LIBOR is. And if they want it go down, they play around in a different way. So that's going to be a huge scandal...Bernanke doesn't want to have the whole interest-rate structure of the United States fixed by a group of people in London who fix these rates, and fix them for their own personal purposes.
-Mortimer Zuckerman |
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In his testimony to the U.S. Senate, Federal Reserve Chairman Ben Bernanke called the LIBOR system – the London Interbank Offered Rate – structurally flawed, and added that he would like to see additional reforms to the LIBOR process, assuming the rate continues to be a benchmark for financial contracts. The LIBOR rate is calculated daily. That rate becomes the standard interest rate adopted by banks worldwide. The U.S. House of Representatives Financial Services Committee is now investigating whether banks distorted LIBOR's key rate. The committee is noting that three Barclays top executives have already resigned for manipulating the rate. Barclays was fined $450 million and has agreed to pay to settle the rate manipulation accusation. Successful manipulation of LIBOR would reach down into student loans, mortgages, financial derivatives, all of which rely on LIBOR as the safe and operative rate. |
