A brief primer on LIBOR (London Interbank Offered Rate):
- LIBOR is an index used to set pricing of between $300 and $500 trillion worth of mortgages, student loans, commercial loans and derivative contracts,
- small changes in the index can impact financial markets and borrowers - a 0.01% change can have a $30 to $50 billion impact,
- over 75% of U.S .commercial and mortgage loan valuations are dependent on the index,
- the rate is not set by market demand, but an “honor system” by bankers and traders at 16 major financial firms – many of the usual suspects,
- manipulating LIBOR can help traders make more money and improve their firm’s financial appearance and
- emails by bankers and traders related to potential LIBOR rigging are emerging such as “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.
While the scale of the LIBOR manipulation problem is amazing (the abuses extent back to at least 2007), the discovery of continuing problems in the global financial system and complacency and lack of oversight by regulators and policy makers is no longer shocking. Perhaps a factor contributing to the long recovery process from a major financial crisis is that it takes time to remove a generation of “bad actors” from the stage.