Premium Essay

Libor Scandal

In: Business and Management

Submitted By taichen
Words 712
Pages 3
What is LIBOR Scandal
In June 2012, Barclays was involved in alleged manipulation of London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) scandal .The scandal led to more serious manipulation events in the whole world afterward. These violations reflected not only the defects of the mechanism, but also a huge loophole in regulation.
June 29, 2012, Barclays Bank reached a settlement to the United States Commodity Futures Trading Commission, the US Justice Department and the UK Financial Services Authority on its alleged manipulation of LIBOR and EURIBOR scandal. According to the investigations from the three regulatory agencies, Barclays bank executives and traders requested quoters manually adjusted LIBOR and EURIBOR rates for more than 257 times from year 2005 to 2009. They tried to raise or lower interest rates in order to increase profits from derivatives transaction or to mitigate the losses. In the end, Barclays agreed to pay the fine of 290 million GBP (equivalent to 450 million US dollars). In terms of the lawsuit against LIBOR manipulation to Barclays Banks, US Municipality sued Libor setting banks for the manipulation of LIBOR. Since municipalities started adopted interest rate swaps to hedge their municipal bond sales in the late 1990s, they used variable interest rate which typically had interest rates as much as one percentage point lower than fixed interest rate. States and localities bought $500 billion in interest rate swaps to hedge their municipal bond sales. It is estimated that the manipulation of LIBOR cost municipalities at least $6 billion. However, this was because most interest rate swaps are linked to the Libor interest rate, while municipal bond rates are linked to the SIFMA Municipal Bond Index interest rate. These losses were in addition to $4 billion that localities had already paid to unwind backfiring…...

Similar Documents

Premium Essay

Libor

...Title: LIBOR scandal and where do we go from here? A brief about LIBOR: London Interbank Offered Rate or LIBOR is a set of indices that represent the interest rates in the London money market. In simple terms, these are the rates at which various banks in London borrow funds from each other. It may happen that due to excessive withdrawals than deposits, a bank faces shortage of funds on a short term basis. So the bank has to borrow from its rival bank to cover this shortage of cash. On the other hand the bank with a surplus of cash can make an extra profit by lending its money to another bank. But in essence, LIBOR is much more than just an indicator of interbank borrowing rates in the local London money market. Since its inception in 1986 it has grown to become one of the most important benchmark interest rates with financial instruments worth nearly 800 trillion US$ using the reference of LIBOR in some way. It is daily calculated by the private British Banker’s Association (BBA) and published by Thomson Reuters on every business day. LIBOR rates are measured in 10 different currencies for 15 different periods (overnight to one year).Every day each of the 16 banks in London informs the BBA about the rate it is charged to borrow money. LIBOR rate is calculated by discarding the top 25% and the bottom 25% of the submitted interest rates and by taking the mean of the remaining middle 50% of the data.[Fig-1]. Since London is located in a prime time zone, it is able to......

Words: 2490 - Pages: 10

Premium Essay

Libor

...its assets. When the lender makes a loan to a borrower, it reviews the current market price for money (interest rate). There are various benchmarks used by lenders to determine the market value of loaned money. This memorandum will discuss the London InterBank Offering Rate (LIBOR), one of the most widely used benchmarks, and how it affects our economy. What is the Libor? The LIBOR is a widely used measure of the current market price for interest rates. It is defined as “The rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting interbank offers in reasonable market size, just prior to 11.00am London time” (British Bankers Association, 2012). The British Bankers Association (BBA) created the LIBOR in 1985 to provide a measure of the interest rates charged between London banks. The high percentage of financial transactions occurring in London resulted in a broad acceptance of the LIBOR. More than 20% of all international bank lending and more than 30% of foreign exchange transactions take place in London (British Bankers Association, 2012). In essence, the LIBOR is the equilibrium price between banks for lending money. The LIBOR is produced for several currencies and loan durations. A panel of banks is selected for each currency. The current panel of banks for the U.S. dollar is: Bank of America Bank of Tokyo-Mitsubishi UFJ Ltd Barclays Bank plc BNP Paribas Citibank NA Credit Agricole......

Words: 2087 - Pages: 9

Premium Essay

Libor Case

...TOPIC – LIBOR SCANDAL ........................................................................................................................ 3 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. INTRODUCTION TO THE CASE ..................................................................................................................................... 3 LIBOR AND ITS USAGE .......................................................................................................................................... 3 DETAILS OF THE CASE AND IMPACT ON STAKEHOLDERS ...................................................................................................... 4 UNETHICAL BEHAVIOUR OBSERVED ............................................................................................................................. 5 REMEDIAL MEASURES ........................................................................................................................................... 6 SUMMARY & CONCLUSION REMARKS .......................................................................................................................... 8 MISCELLANEOUS - ASSIGNMENT DOCUMENT RECEIVED .................................................................................................... 8 REFERENCES ......................................................................................................................................................... 8 Assignment 2 1. ABOUT THE TOPIC – LIBOR......

Words: 1969 - Pages: 8

Premium Essay

Libor Schandal

...The LIBOR scandal One of the most important and crucial interest rates in finance, the LIBOR (London Interbank Offered Rate) has recently been involved in a very serious scandal that has shocked many beyond the financial world. Many billions worth of financial contracts (approx. 800 trillion) rest upon the London interbank lending rate, and therefore it has become so shocking. The LIBOR is regulated every day by a group of leading worldwide banks, and takes into account the currency rates of 10 different currencies and as well the rate for 15 different lengths of loans (from overnight to 12 months). However the most important is the 3-month US dollar LIBOR. Banks use these rates in order to establish the interest for three months dollar loan to other banks. The LIBOR is published daily at 11:30 am (London time) by Thomson Reuters. It measures the cost of funds to large global banks operating in London financial markets. Each day, the BBA ( British Bankers' Association) asks a group of 18 major global banks the following question: “At what rate could you borrow funds, if you wanted to ask and accept a inter-bank offer in a reasonable market size just prior to 11 am?” The highest 4 and lowest 4 responses are excluded, and the average of the remaining 10 is calculated. There are separate LIBOR rates for all 15 different maturities (from 1 day to 1 year) for each of 10 currencies. However, because these rates submitted by global banks are only estimations, and not......

Words: 610 - Pages: 3

Free Essay

Rbs & Libor

...F&C Y3 Q4 1213 CASE 1 Royal Bank of Scotland and Libor The wrong stuff A widening scandal threatens to suck in more banks, and ruin more careers Feb 9th 2013 |From the print edition The Economist THEY were said to be among the most talented of their generation, recruited after exhaustive interviews and gruelling internships. They worked at firms prepared to spend small fortunes to attract and retain them lest they take their skills elsewhere. Yet the moral bankruptcy of traders implicated in the rigging of the London Interbank Offered Rate (LIBOR), one of the world’s most important interest rates, is matched only by the incompetence with which they covered their tracks. Take traders at the Royal Bank of Scotland (RBS), who left a trail of evidence in a trove of e-mails and audio recordings detailing how they set about trying to manipulate LIBOR, even after they knew investigators were looking into the issue. “We’re just not allowed to have those conversations over Bloomberg anymore,” said one trader, laughingly, in a call to another who a little earlier had asked in writing for a rigged rate. “Its [sic] just amazing how libor fixing can make you that much money,” was the verdict of another trader. These exchanges, and many others, were part of a settlement announced on February 6th in which RBS admitted to rigging rates. It agreed to pay fines of $475m to American regulators and another £87.5m ($137m) to Britain’s Financial Services Authority. By the arcane mathematics......

Words: 1566 - Pages: 7

Premium Essay

Libor Case

...What is LIBOR and how is it calculated? How has LIBOR ben used historically? London Interbank Offered Rate is an interest rate estimated by the member banks of the British Banker’s Association. It is the rate that they would charge for borrowing from other banks. Until 1984 there was no uniformity in trading activities between the banks, hence the BBA formed a rate to create uniformity to create more business and greater depth to the London Interbank market. The official definition is “The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11:00 London time.” What problems with LIBOR have been identified? The major banks submitted the interest rates from major banks and took an average to calculate the LIBOR. The problem with this was that they banks inflated their interest rates in order to make them seem more profitable. The LIBOR is used worldwide hence falsifying the interest rates will manipulate the US derivative market. The traders fixed the LIBOR rate in order to make more profit. There is also an cultural problem with calculating LIBOR. The Banking industry and the regulatory agencies are very friendly and there is no healthy separation between them. Which Institutions are involved? How many have they been prosecuted? Why is there not a standard fine amount? The major institutions involved in the fixing were the Barclays Bank and......

Words: 762 - Pages: 4

Premium Essay

Libor Manipulation

...Comments on “The Turmoil at Barclays” The article briefly summarizes the Libor scandal that involved the world’s biggest banks and its impact on Barclays. Mr. Bob Diamond, the head of Barclays for over 15 years, took the blame and was forced to resign. Barclays was fined near a half billion dollars and might have to pay more to settle the lawsuit. The misdeed is expected to be explained by the executive’s and traders’ misunderstanding of the indication conveyed by the bank of England, but the prevarication did not excuse Mr. Diamond’s breach of duty. Apart from Barclays, there are other dominant banks that being investigated. The large scale of involvement infers interest manipulation is ubiquitous in the financial market. Because Libor is determined by taking the average of the world’s most influential banks’ reported interbank offered rate after omitting the highest and lowest 25 percent of submissions, it is a critical reference when banks set interest rate on consumer and corporate loans. This is not the first time Barclays had manipulated London Interbank Offered Rate in favor of its earnings. During the global economic upswing in 2007, they conspired with other banks to report the artificial interbank rate. Libor was maneuvered somehow higher or somehow lower so as to generate profit from derivatives pegged to the benchmark rate. The previous head, Mr. Diamond resigned after pressure from senior investigation department increased and the impact of the misconduct......

Words: 886 - Pages: 4

Premium Essay

Scandal

...Lehman Brothers Scandal Corporate governance is defined as a system that control and direct a corporation (Shleifer 1997). Governance arrangement specifies dissemination of responsibilities and rights among different contributors in the corporation like financial managers, board of directors and shareholders. It also specifies procedures and rules of decision making in corporate affairs. Besides, corporate governance has plays its role to encourage organization to produce value through innovation as well as development process. Lehman Brothers would be further analyze and discussed in term of accounting scandal below. Lehman Brothers was the fourth largest United States investment bank when it collapsed and this has affected 25,000 employees worldwide. Thus, the significant factors that cause this scandal of corporate failure to be happened would be analysed below. Firstly, Lehman has high degree of excessive debt and leverage which mean ratio of total assets to shareholders’ equity in 2007. Furthermore, it has a huge mortgage securities portfolio that cause this corporate to becoming expose to declining market conditions (Chiquier 2004). Besides, it has the largest debt of $619m, which is the largest bankruptcy filling in history which surpasses Enron. Lehman’s shares decreases a huge amount of 48% concerning it would be the next firm to fail in its corporate governance as it is the second largest underwriter of mortgage-backed securities. Consequently, the declining......

Words: 572 - Pages: 3

Premium Essay

Libor Scandal

...Corporate Finance Causes and Consequences of the LIBOR scandal In 2012, as a worldwide investigation was made to the way interbank manipulated and offered their lending rates, a scheme was revealed and major banks were part of it; basically they leverage the mention interest rate to obtain a profit. Most notable banks were the Royal Bank of Scotland, UBS and Barclays. However as the investigation continued, new banks were found to be part of the scheme and were made to pay for lawsuits and penalties, as of now, a total of 3.7 billion, a number that can still rise. What they mostly did was to manipulate the London Interbank Offered Rate or LIBOR during several years. LIBOR works as a benchmark interest rate which is created by the rates at which the banks lend their unsecured funds between them on the interbank London market. Libor it is used by many banks as a base to set consumers and corporate loans rates. By 2005 to 2007 it was reported that Barclays was manipulating the LIBOR rate, meaning that they traders would be able to make profit on derivatives that were connected to the base rate. The swaps traders would ask to the banks employees who were in charge of submitting the rate to alter the figures that will benefit the traders, instead of submitting the real rate that Barclays used to borrow money. Then these employees giving wrong numbers would coordinate with other banks so others rates got alter. During this time the LIBOR rate was maneuvered as it was necessary......

Words: 491 - Pages: 2

Premium Essay

Scandal

...run-on bank scenario. If Enron’s customers were willing to continue and use the company’s service, Enron would have been able to avoid bankruptcy. Enron might have had large debts and obligation but they had also large revenue, once Enron lost their credibility they also lost their customers, as they were not willing to continue to use their services. Andersen was a large and established firm, and losing a company like Enron, as their client would not had led to their end, but the company lost their credibility in the eyes of their clients. As a result of that, many clients decided to terminate their contracts Andersen. Following the scandal with Enron, Andersen lost a huge amount of customers, which led the to declare bankruptcy. There are different reasons why so many companies fired Andersen. A strong opinion is that once the scale of the scandal was known, the clients felt betrayed; it is sort of un-American to do such thing. Clients did not want to be involved with a company that causes so many people to loss their job, and causes much harm to many more. Lack of integrity was linked to both Enron and Andersen. Once a perceived lack of integrity is attached to a person, it is really hard to recover from that; it causes irreparable damage. If a lack of integrity is linked to a person, all of his actions will be looked over with suspicions. For example if a tax accountant is caught filling his own taxes unlawfully, any other tax return that he will work on will be......

Words: 2037 - Pages: 9

Free Essay

Scandals

...was “a healthy product” that was merely mislabeled (Mintz, 1987). In court, when Hoyvald was asked why he didn’t immediately order a product recall upon first learning of possible adulteration, he replied, “And I could have called up Switzerland and told them I had just closed the company down. Because that is what would have been the result of it” (Traub, 1988). Hoyvald first claimed to have known nothing of the adulterated juice concentrate, then later said he had no proof of adulteration, and in any case he had been acting on the advice of Nestlé attorney Thomas J. Ward (who, by the way, had been involved in Nestlé’s response to the boycott against its infant formula marketing practices and, more recently, the Guinness financial scandal in Great Britain). Lavery claimed that he knew of allegations that the concentrate was adulterated, but had no proof. Nestlé attorneys, who defended the two, claimed that the blame belonged solely on the shoulders of lower-level employees (Welles, 1988). The Trial Ends The New York State case against Beech-Nut came to an end in March 1988, when the company paid a $250,000 fine in restitution for the crime of selling adulterated apple juice. The company was fined another $2 million by federal courts for the violations of federal food and drug laws to which it had pleaded guilty in the fall of 1987 (“Beech-Nut Pays,” 1988: D10). The final sanction levied against Beech-Nut came in April 1989, when it was barred from doing......

Words: 3659 - Pages: 15

Premium Essay

Scandal

...asset of 556 billion, provides insurance service for more than 150 different countries and it has over 630, 000 employees over the world. Even though AIG is such a giant corporation, it has encountered financial problems in the early 2000s. Under financial pressure and a lack of internal control, AIG have committed frauds resulting in several scandals. One of the accounting scandals was disclosed during 2005 which involved a material mis-statement due to false transactions during 2000. This scandal set to prelude leading the downfall of AIG in 2008. In this paper, I will analyze the cause, the transactions and finally effects of the scandal. The Accounting Scandal The Players The CEO of AIG was Maurice “Hank” Greenberg. Greenberg joined AIG in 1962 and led AIG for thirty eight years until his retirement in March 2005. Greenberg was not only the CEO, but also the chairman of the board of AIG. AIG also have several subsidiaries, which include National Union Fire Insurance Company of Pittsburgh (NUFIC) and Hartford Steam Boiler Inspection (HSB). Their financial information are consolidated in AIG’s financial statements. The scandal also involves another corporation General Re Corporation. General Re is a subsidiary of Berkshire Hathaway, Inc., an investment group run by the billionaire Warren Buffet. General Re also has subsidiaries all over the world and together and it is one of the biggest reinsurance companies in the World. Reinsurance companies are entities......

Words: 281 - Pages: 2

Premium Essay

Watergate Scandal

...It was suggested that the President had tried to repair the damages that were caused the Watergate scandal in the first article. From a speech President Nixon had given, it showed that there were a lot things that still needed to be done regarding the scandal. The article stated that the officials under the Watergate scandal were cheating, lying and engaging in illegal activities while in high positions of the government. The people believed that the president did not stand up to the crisis and that he had only done the bare requirements for the situation at hand. The people stongly believed that President Nixon should have done something more to eliminate the Watergate scandal as soon as it was leaked. The article had also showed that the people were not happy with President Nixon’s actions by only accepting the resignations of H.R. Haldeman and John Ehrlichman, (Genovese, 1999). He had also accepted the resignation of Attorney General Kleindienst and appointed Elliot Richardson and instructed him to handle the crisis. Finally, the President had made the correct decision by dismissing his White House Counsel John Dean. The second article portrays President Nixon as a good, moral leader. It tried to defend the President from being impeached by acknowledging his achievements. The article also showed that he was human and not perfect. The actions of the President by trying to resolve the crisis, led to speculations by the Chicago Tribune's editorial to leave office...

Words: 780 - Pages: 4

Premium Essay

Libor

...LIBOR & LIBORGATE Recently there was a news that Barclays would pay $453 million to U.S. and British authorities to settle allegations that it had manipulated LIBOR , a benchmark interest rate that affects some $350 trillion worth of financial transactions. The scandal has since spread to implicate major banks and government regulators around the world, and could be one of the most expensive to hit the financial industry since the 2008 financial crisis. Now the questions which arises in our mind are What is LIBOR exactly?, How it is calculated?, How did Barclays manipulate LIBOR etc. LIBOR IN BRIEF LIBOR is an acronym for the London Interbank Offered Rate, a benchmark interest rate that is published daily. Libor is published under the auspices of the British Bankers’ Association (“BBA”),a trade association with over 200 member banks that addresses issues involving the United Kingdom banking and financial services industries. The BBA defines LIBOR as: The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11:00 [a.m.] London time. We can also define LIBOR as an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market. Investors around the world use the LIBOR to calculate the interest rate on myriad forms of debt, from......

Words: 1763 - Pages: 8

Premium Essay

Birth of Libor

...Birth of LIBOR LONDON (Reuters) - Minos Zombanakis, born 86 years ago on a Greek island, remembers the birth of the interest rate benchmark now at the heart of a global rigging scandal well. "I was, more or less, if you excuse the lack of modesty, the one who started the whole thing," he laughs, speaking by telephone from his village among citrus orchards in Crete. Zombanakis was running the newly-opened London branch of Manufacturer's Hanover, now part of JPMorgan, when the bank organised one of the first syndicated loans pegged to what he dubbed a London interbank offered rate (Libor) in 1969. The $80 million loan, for the Shah of Iran, embodied the way cross-border financial markets that had been effectively closed since 1929 were being prised open - sowing the seeds for London to flourish as a global financial centre. The ambitious bankers of that era had little idea that the rate they were using to price these loans would become a central cog in the global financial system and a benchmark for $550 trillion in contracts ranging from interest rate derivatives to home loans and credit cards. Four decades on, that rate has been discredited by the brazen attempts of traders to game it, by the banks that have lied about their true costs of borrowing and by the regulators accused of either condoning or failing to stop manipulation. Libor, designed to reflect a bank's borrowing costs accurately, burst into the headlines in June when Barclays (BARC.L) was fined a record......

Words: 1495 - Pages: 6