See that swirl on the weather map? Looks like a cat 5 hurricane headed for landfall on the big banks

In Blood in the water’, The Economist describes the swelling number of lawsuits against the big banks who are accused of manipulating LIBOR.

From the article:

So far, at least 28 serious lawsuits have been filed. The most recent, for fraud, came from Berkshire Bank, a small lender, on July 25th. It echoes a case filed in May by Wisconsin’s Community Bank & Trust under Wisconsin racketeering statutes against Citigroup, Bank of America, and JPMorgan Chase (the American banks on the LIBOR panel).

That would be 28 suits since the issue exploded about a month ago.

Q: If LIBOR fiasco is a world class scandal, then where were the regulators? A: They knew all along.

We are now supposed to think that cooking the LIBOR index is the crime of the century. Yet U.S. and U.K. regulators knew of it in 2007 and 2008. If this is now considered a horrid crime, then why didn’t the regulators do something about it at the time?

The nonchalant reaction of the New York Fed is described in The Wall Street Journal’s editorial New York Fed to Barclays: “Mm hmm”.

Here’s what the Fed says they did:

In June 2008, Timothy Geithner, then head of the New York Fed, sent Bank of England Governor Mervyn King two pages of recommendations for “Enhancing the Credibility of LIBOR” and wrote that he would be “grateful if you would give us some sense of what changes are possible.”

This is not exactly the language of a regulator who has just uncovered what we’re now told is the financial crime of the century.

Let’s keep an eye on the role of regulators in the LIBOR fiasco

In addition to the now-denied wink and nudge from Paul Tucker to Barclays that their LIBOR rates didn’t need to always be so high, the New York Fed was told repeatedly of the possible problems with LIBOR.

The Washington Post’s article, In 2007, New York Fed was told about problems with Libor, summarizes the communication from Barclays to the NY Fed.

The picture is starting to emerge on the severity of LIBOR scandal

The Economist has a very depressing article that describes the range and depth of the LIBOR disaster: The rotten heart of finance.  If you are following LIBOR scandal, you will really want to read this article. Be forewarned it makes for sad reading.

There are two different ways LIBOR rates have been manipulated.

First is a longer running and less severe manipulation. For number of years, at least since 2008, perhaps as long ago as 2005, and perhaps even earlier, the article says traders inside the banks have been moving the rate a little bit. Second is a larger amount of movement for a shorter period of time. This took place during the financial crisis of 2008 in order to understate borrowing costs.

Who suffers from playing games with LIBOR?

Earlier post discussed the blooming scandal over LIBOR rates.

Short version – Barclays has admitted it underreported borrowing costs which in turn affected the LIBOR rate, which is the base for calculating the interest rate on many loans.

The populist-type comments I’ve seen so far suggest that consumers are being ripped off. 

I don’t think so. Consumers aren’t the ones who suffer.  Here’s why:

Might be time to start paying attention to the LIBOR scandal

The fiasco over calculating LIBOR is a bit complicated, but it might be time to start paying attention.

The story is manipulation of LIBOR, a key interest-rate benchmark. Barclays Bank is one of the biggest banks in England. During the economic crisis in 2008, Barclays was underreporting their borrowing costs, which in turn artificially pulled down LIBOR.

So what?

This is a big deal because of the way LIBOR is calculated and how it is used.