London Calling: What LIBOR Means to You

AMA4-2-13cooperwebThe called them the bans too big to fail. But they haven’t been too big to get caught in a variety of fraudulent and deceitful practices. Still, the major US banks involved in the LIBOR fixing lawsuits have managed to beat back charges that they violated antitrust laws. Though the London Interbank Offered Rate is hardly a household term, its fate has consequences for US borrowers and investors large and small.

LIBOR represents the average interest rate that is estimated by major London banks if they were borrowing money from other banks. Now, it’s the primary standard for establishing interest rates for short term loans worldwide and is used by credit card companies, mortgage lenders and investors to set rates.

The LIBOR depends on estimates provided by leading banking institutions around the world, and there’s where the potential for fraud enters the picture. The 16 US banks implicated in the LIBOR cases were accused of manipulating their estimates

for their own profit and image in the financial world since 2008. Under some circumstances that might have some positive outcomes – reporting estimates lower than actual rates might end up benefiting some borrowers, for example. But by 2012 British banking giant Barclay’s had been fined for manipulating LIBIR rates, and the US Department of Justice had launched a criminal investigation into allegations of LIBOR fraud by US banks.

Those lenders were already enmeshed in settlements ad litigation stemming from practices related to the housing collapse of 2008 and the subsequent scandals involving fraudulent management of foreclosures and mortgagee lending. The accusations of LIBOR fraud followed on the heels of charges that the banks had fraudulently processed foreclosures and misled borrowers about interest rates and loan products.

But In a number of the LIBOR cases, prosecution depended on demonstrating that the defendants had violated antitrust laws designed to protect competition. The banks in the LIBOR cases, opined the Court, were not attempting to inflict harm by impeding competition. Rather, they were only misrepresenting data, and reporting that data constituted a cooperative, rather than competitive move. And although some LIBOR-related cases are still alive, the court’s ruling in favor of the banks represents one more successful attempt by the nation’s large lenders to play the heavyweight, pushing back against attempts to police the industry while refusing to police them.

Although LIBOR originated half a world away, the attempts by big US banks to rig their reporting has ramifications at home, For investors, such as those using Jason Hartman’s strategies for wealth building through income property, the banks’ fraudulent practices affect not just mortgage interest rates and the management of foreclosures – they also offer a glimpse of the future behavior of banks deemed too big to fail.  (Top image: Flickr/coopeweb)

The American Monetary Association Team

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