Libor Scandel and the Honor System

Well well well.... people are greedy. If my project has taught me anything so far it is that people will never stop at enough. Especially people in power - they never stop searching for more power.

But I am getting ahead of myself. These past few days of project my task has been to get up to speed with why bank reform is necessary. My mentor gave me an hour long lecture (college style- got to get ready while I can) on a few of the problems that he is responsible for fixing in the upcoming months. Among those, the not so famous, but surly infamous Libor Scandal. 

In a nutshell the Libor scandal is representative of the whole problem that plagued the  financial system leading up to the 2008 crash. Libor (London Interbank Offered Rate) is a rate that is calculated by ten different groups each responsible for managing their own currency (For example 10 U.S banks set the Libor rate for the dollar). This rate is then used for things called swaps. Think of it like an exchange. An investor gives a person a million dollars, and then says that they expect to be paid 50k every year for five years, and then at the end of the five they get their million dollars back. In steps a company like AIG (Financial Center) who swaps with the person receiving a million dollars. They make a deal that the bank or insurance company will pay the flat fee and in exchange they say that the individual will pay say... libor +124 (libor + a 1.24% fee). This swap then carries risk for the bank as Libor could vary low and high. At the end of the day this system works ONLY when Libor is performing at its proper rate. 

Thats's where I will stop for now, but in the next edition of Tim's Senior Project Blog, I will know enough to detail everything that went down in London, and why Lehman Brothers was just a small stain in the whole financial mess.