Libor Scandal Part II

Picking up from where I left off on my previous post – the Libor Scandal. So now that we have the necessary background (hopefully) to understand why the Libor rate exists lets talk about what happened. As my mentor gave me some research I discovered some horrifyingly shocking acts of greed and stupidity. The people who set the Libor rate had documented emails and phone calls that were being tracked by various agencies and governments. Attached below is an expert from on the most obviously rigging conversations -

Mohideen: "What's the call on the Libor?”
Trader 2: "Where would you like it, Libor that is?”
Trader 3: "Mixed feelings, but mostly I'd like it all lower so the world starts to make a little sense."
Trader 4: "The whole HF [hedge fund] world will be kissing you instead of calling me if Libor move lower."
Trader 2: "OK, I will move the curve down 1 basis point, maybe more if I can."

Yet the banks that were responsible for fixing this rate, and more specifically the traders had vary little remorse for robbing millions of peoples out of trillions of dollars. In fact if you look at the attached graphic below you will notice that the Libor rate in one shape or form affect over 800 trillion dollars worth of financial transactions.


Even a change in one basis point up or down is representative of hundreds of billions of dollars and traders understood this. That’s why in the conversation below one trader offers 100,000 dollars in exchange for the Libor setting man to fix the rate at the traders wish.

if you keep 6s [i.e., the six-month JPY Libor rate] unchanged today … I will f—ing do one humongous deal with you … Like a 50,000 buck deal, whatever … I need you to keep it as low as possible … if you do that …. I'll pay you, you know, 50,000 dollars, 100,000 dollars… whatever you want … I'm a man of my word.

When, dirty laundry began getting aired, the punishment was mild. Despite costing billions, if not trillions of dollars in market manipulation, the largest fined leveed was some 60 million dollars – pennies compared to their profits. Yet, the importance of the Libor scandal extends beyond just the monetary cost. This was the first step in many down the path to a tighter regulation and the respective formation of Dodd Frank, and Basel III regulations.

Tim P.