Probe reveals scale of Libor abuse Financial Times, February 9 2012 By Megan Murphy, Brooke Masters and Caroline Binham When the news first broke in March 2011 that big US and European banks were being investigated over whether they manipulated a crucial global lending rate, regulators appeared to be focusing on one of the most persistent rumours of the financial crisis. For years, analysts, academics and bankers have believed that, as fears of an impending banking collapse escalated in late 2007 and into 2008, some of the weakest institutions tried to conceal the fact that they were having to pay more to borrow from other lenders. US regulators and prosecutors wanted to know whether banks were lowballing their daily submissions to the panels that set the benchmark interest rate that banks charge to lend money to each other, known as the London Interbank Offered rate – “Libor”. The Libor setting process is public and closely watched, so a bank that put in relatively high rate estimates could spark investor concern about its strength. Critics have long claimed that the rate-setting process lacks transparency and could be subject to abuse if banks tried to co-ordinate their submissions. UK, Japanese and European Union regulators soon joined the investigation into whether banks had colluded on their Libor submissions. What they began to uncover included a separate, equally troubling pattern of behaviour, according to more than a dozen officials, lawyers and senior bankers familiar with the probe interviewed by the Financial Times. From Tokyo to Singapore to London, certain traders at different banks appeared to be attempting to influence the movement of Libor and similar benchmarks in order to profit from derivatives connected to the rates, information submitted to national regulators suggests. “This is just another example of the slow drip of sleaze across the industry,” said one senior industry figure. “How much more can it take?” In the case of several banks, including Barclays, UBS and Citigroup, the banks came to the authorities with information about potential abuse of the rate-setting process themselves after uncovering email traffic or other evidence during the course of their own internal investigations, according to people familiar with the matter. The interbank rates are daily measurements of how much banks are paying to borrow from one another, writes Brooke Masters. But Libor, Tibor and Euribor, as the main interbank rates are known, have wider influence, helping to set the price of many financial products, from mortgages to credit cards. So allegations that they may have been manipulated have sparked probes by at least nine different regulators on three continents. Libor is used as the benchmark for about $350tn of financial products, meaning small movemen ts in the rate have significant knock-on effects on the broader economy. All three rates serve as the basis for settlement of interest rate contracts on many of the world’s major futures and options exchanges and banks use them to set interest rates on many loan agreements.
