By James Nye
PUBLISHED: 01:25 EST, 12 July 2012 | UPDATED: 02:43 EST, 12 July 2012
As the investigation into the LIBOR interest rate-rigging in the United Kingdom becomes a financial scandal of tsunami-like proportions, some analysts are openly wondering whether 16 of the world’s largest banks have perpetrated the biggest fraud in history.
With the public coming round to the global significance of banks potentially colluding like a cartel to favourably set the LIBOR, those same analysts predict lawsuits worth tens of billions being brought against the Western world’s largest financial institutions by average consumers.
Early analysis suggests that for a period of several years before and after the 2008 financial crisis, the London interbank offered rate (LIBOR) was manipulated to such an extent that a family with a $100,000 mortgage would have been $50 to $100 worse off a month because of the fixing.
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As the fallout from Barclay’s $453 million fine for admitting influencing the LIBOR hits the U.S., Europe and Japan, banks such as Citigroup, JPMorgan Chase, HSBC and Deutsche Bank have admitted they are now under investigation for interest rate manipulation.
Economist and financial analysts are predicting that as the scale of the potential fraud becomes clear, the fines and litigation that engulfs the banking sector could dwarf the penalty handed to Barclay’s and even herald further, more stringent regulation on Wall Street and multinational banks.
Central to this is the fact that the LIBOR affects everyone from the ‘one percent’ who run the banks down to the man on Main Street who is paying off his credit card or car loan and affects the rate of return he will see on his pension or 401k savings.
Taken altogether, an awesome $360 trillion dollars in loans around the world are indexed to the LIBOR, a figure which is five times the value of the world’s entire annual GDP.
Despite being set in London, the LIBOR is the average interest rate agreed by the world’s largest international banks and indexes the short and long term interest rates for 10 currencies across 15 different time zones.
The LIBOR impacts every financial service and product across the planet and in the U.S. in 2008, 60 percent of prime adjustable rate mortgages and almost all of sub-prime mortgages were tied to LIBOR.
It has been alleged that the world’s largest banks have been fraudulently fixing interest rates around the world for at least the past decade, if not for a much longer period of time.
The fraud was uncovered when Barclay’s Bank in London was discovered to have been submitting false figures to the LIBOR to improve their trading postion.
By manipulating the LIBOR, by raising or lowering it, banks allegedly could make their balance sheets appear healthier than they were, while consumers and members of the public apparently paid the shortfall.
‘LIBOR hearkens back to a time when finance operated like a gentlemen’s club, and its leading members behaved honestly,’ said Robert Shapiro, the former Under Secretary of Commerce for Economic Affairs in the Clinton administration and now chairman of Sonecon, an economic consultancy firm.
‘That is a universe away from the current Wall Street culture and behavior.
‘They take out bets and pay themselves fortunes for doing so, even when they cannot make good on those bets without taxpayer bailouts.
‘And now, we also know that when they bet on interest rates rising or falling, they stacked the LIBOR deck to nudge rates in the direction that made money. And they left everybody else with the bill.
‘So long as big finance will do almost anything to goose its own profits and bonuses, ‘self-regulation’ is a dangerous myth.
‘It should give way to sound law enforcement, which in economic terms is government regulation.’
Indeed, Shapiro breaks down the depth of the alleged fraud by noting that in his calculations, LIBOR was off by an average of 30-40 basis points on the interest rate for the best part of a decade.
With one hundred basis point equaling a full percentage point in the set interest rate, this would have added $50 to $100 to the monthly repayments on a $100,000 loan.
In addition, between 2007 and 2008, Americans held $11.1 trillion in residential mortgage debt during the time period of interest rate manipulations of 30 to 40 percent.
‘If the bankers’ manipulations of the LIBOR was responsible for raising LIBOR rates by just 20 basis points in that period, their shenanigans added between $1.1 billion and $2.2 billion to the yearly interest paid by American homeowners.’
In fact, the scandal has developed to include Washington lawmakers too, as the Senate Banking Committee seeks to understand the level of impact the rate manipulation has had on average U.S. citizens.
‘It is important the we understand how any manipulation many impact American consumers and the U.S. financial system,’ said Senate Banking Committee Chairman Tim Johnson to MSNBC
Already, cities and states have begun to sue some of the world’s largest banks as the LIBOR scandal washes across the globe.
Claiming that the credit derivatives or interest rate swaps they bought from banks would have been adversely affected by interest rate manipulation, cities, states and even hedge funds could have a case against the banks.
Nassau County in New York is claiming that LIBOR fixing cost them $13 million dollars and in Pennsylvania, 107 school districts owned derivatives during the time that rates were allegedly being manipulated.
As an indication of the financial size of the lawsuits facing the banks, experts point out that if in one state there are 107 school districts that have lost millions due to fraudulent rate manipulation, how many other claims are to be made by mortgage holders, car owners and school districts in other states?
‘If the lie was big enough and for a long enough period and anyone entitled to receive payment based on LIBOR can make the claim, the potential damage to the bank is enormous,’ said Peter Tchir of TF Market Advisors.