Sat July 21, 2012
LIBOR Spotlight Shifts To U.S. Regulators
Originally published on Sat July 21, 2012 7:35 am
SCOTT SIMON, HOST:
There's another dimension to that unfolding LIBOR scandal which cost Barclays, the British bank, its CEO and $450 million in fines after it was revealed that the bank had been manipulating international lending rates. Attention has shifted to why U.S. financial regulators, who knew about the rate rigging, didn't move to stop it more swiftly.
We're going to put that question to Robert Smith, correspondent for NPR's Planet Money. He joins us from New York. Robert, thanks for being with us.
ROBERT SMITH, BYLINE: My pleasure.
SIMON: Please give us a short refresher. What's this LIBOR scandal all about?
SMITH: Well, the scandal is whether banks lied about this rate. This rate is an indication of how much banks trust each other. It's how much they charge to lend to each other. But the problem was, they were coming up with this number by simply calling up the banks and asking them, hey, what's your estimate of how much it would cost for you to borrow money?
And the banks would tell them and then that number would end up being this benchmark for loans around the world. They think hundreds of trillions of dollars worth of financial bets were based on this number. And it's come out recently that Barclays was functionally lying about this rate when they were making this estimate. These emails came out where traders were betting billions and billions of dollars on this number, would say to their friends at the bank, hey, can we manipulate this number up a little bit or down a little bit? And that's the fundamental part of the scandal, that this number that everyone had counted on as sort of gospel has no basis in reality.
SIMON: How can it be that interest rates for so many mortgages and loans are based on something which, as you describe it, is essentially a shot in the dark, a guess?
SMITH: Well, I think part of it is this goes back to the sort of trust of the London banker and why would they like about such a thing? But it's also they thought they had this under control. They poll a number of banks, 16, 18 banks. They average them.
You know, normally rates move in very tiny increments. And they figure, well, if we throw out the top rates and the bottom rates, we average everything, it's going to come out with a number that's kind of hard to manipulate.
But then when then financial crisis happened, all sorts of rates started to just rocket up and rocket down. And that's when they started to see that, you know, maybe this rate that everyone thought was sacrosanct, maybe this is too easy to manipulate.
SIMON: Now, Federal Reserve Chairman Ben Bernanke told Congress on Tuesday - at first he said LIBOR, to use his words, is structurally flawed. He said he knew about the interest rate fixing back in 2008 and so did Timothy Geithner, now the U.S. Treasury secretary. This raises the question, not just what did they know and when did they know it, should they have done more to ring the alarm bell?
SMITH: Right now, people are pointing fingers at each other across the Atlantic. The people at the Fed, Tim Geithner - he was at the New York Fed at the time - he wrote a note to the Bank of England, which is their Fed. And he said in this note, well, you know, you're going to need to fix this LIBOR thing, because people here in the United States had talked to bankers who said, yeah, yeah, we're manipulating. It's being manipulated all over the place.
And now the Bank of England says, well, you didn't give us any evidence. You just gave us a list of recommendations. What are we supposed to do with those? You know, they looked back and they said, if you, Tim Geithner, knew all about this why didn't you do anything? And Tim says, Well, I sent you an email. So they're sort of stuck in this back and forth over who should've done something.
SIMON: Is this a British bank scandal or are American banks going to be caught up, too?
SMITH: No. There were American banks who were contributing to LIBOR, Specifically J.P. Morgan Chase and Citibank. So they're being investigated right now. We don't know if specific banks are going to be charged, if they're going to have the same sort of settlement that Barclays did. But we are expecting other banks to be implicated. And we're expecting a lot more explosive inside emails revealing exactly how this manipulation was going on.
SIMON: Is there a better alternative?
SMITH: There's already talk about something that can replace LIBOR. I mean, who's going to sign a document now that, you know, your home mortgage or your credit card is based on some variant of LIBOR? I mean, it's just embarrassing at this point. But, you know, there are still trillions of dollars of bets all tied up to LIBOR, so they have to transition over to something new.
And already they've talked about various things that could stand in for this - overnight lending rates. Ben Bernanke even suggested that perhaps you could use Treasury bills as a benchmark. But basically you're looking for something that you can prove this time. It's not just a survey.
SIMON: Robert Smith, correspondent for NPR's Planet Money. Thanks very much.
SMITH: You're welcome.
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