Reports are surfacing that since 2007, and maybe even longer, banks have been manipulating the LIBOR (London inter-bank offered rate) down. This is the rate that banks use to set interest rates on loans, such as adjustable home loans.
LIBOR is set daily by a current panel of 18 banks. The banks submit a bid of “what they think they would have to pay to borrow money if they needed it.” The top and bottom four bids are thrown out, and the remaining estimates are averaged together to determine the rate.
This is supposed to be a silent bid, with banks not discussing their number with other banks. It seems this is not what was taking place. Reports are emerging showing that bankers would offer favors to other bankers in order to get the lower rate they wanted.
At first glance, having artificially lower rates does not seem that bad. It would, on the surface, appear to be a good thing for consumers the world over if money was actually cheaper to borrow. This might allow you to buy a bigger house, get a nicer car or open that business that you always wanted to start.
It was even good for the banks themselves. It allowed them to lend more money, when no one, it seemed, was rushing to borrow.
However, as we have seen in the past, everything in the world of economics has a consequence. While lower rates appear to be better for people borrowing the money, what about the investors who purchased bonds linked to these rates?
Investors often bought LIBOR-linked bonds in conservative portfolios such as pension funds, and it appears banks were lying to these investors. Money was basically stolen out of their pockets, as potentially millions of dollars of interest was lost over the years due to the artificial reduction in interest rates.
Remember, this benchmark is used to set interest rates on approximately $800 trillion worth of financial instruments. With this amount of money, any reduction in rate, even a few basis points, can make a huge impact.
We need to make sure that banks do not get away with this in the future. We need to have serious consequence for people who set out to manipulate financial markets. It seems that lawsuits are pending against these banks. In my opinion, this is a great start. I say we must make the banks pay for their negligence.
Joe Wirbick is president of the Lancaster financial services firm Sequinox. Joe specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.