Curious Capitalist

How Barclays Loaded the LIBOR Dice

The LIBOR scandal unfolding across the Atlantic has huge ramifications for American consumers.

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Ever wonder why surveys about very personal topics (sex, money) are done anonymously? Of course you don’t — because it’s obvious people wouldn’t tell the truth if their comments were on the record. That’s the key to understanding the current LIBOR scandal unfolding across the Atlantic, a scandal that also has huge ramifications for American consumers.

LIBOR is shorthand for the interest rate that banks charge to loan each other money. It’s a measure of their trust in their own solvency — when rates go up, its clear banks are worried about one another. When rates are low, all is well. Around the time of the financial crisis, for example, Barclay’s rate was going up. But it continued to report a lower rate to reassure lenders, and the markets, that the financial picture was prettier than in fact it was. Barclays is now paying $450 million in fines for its misbehavior, and 20 other major banks are under investigation.

All this has several important consequences. For starters, to the extent that banks lied about rates around 2008, we were denied an important red flag for the looming financial crisis. Second, banks that lowered rates to benefit themselves may also have cost pension funds and insurance companies lots of money. Third, any consumer with a LIBOR-pegged loan — a mortgage, car payment, or student loan — was directly affected. For more on exactly how, and who the winners and losers in this crisis will be, read my Curious Capitalist column in TIME magazine this week.