Who is Affected by LIBOR Manipulation?

The Market Mogul

The London Inter Bank Offered Rate is a complex and important figure which affects a plethora of financial products. In short, it is the interest rate which banks use when lending money to each other, being defined as:

“The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time” tweet

LIBOR manipulation, as part of a criminal enterprise, has the intended effect of artificially altering the value of a financial product or commodity, so as to alter its value with the intention of making additional profit for the trader or traders in question, and , in the case of trader Tom Hayes of UBS, involved a vast number of individuals. Not only were Hayes and several of his immediate colleagues directly involved, but numerous employees at interdealer brokerage firms, whom are often involved in trades in over-the-counter markets. For these individuals, the intended effect of their LIBOR manipulation was to adjust the position held by Hayes in the Yen derivatives market in order to make Hayes additional profits for both himself and his employer. However, LIBOR, being an intrinsic and important aspect of sales and trading, has a widespread effect on a variety of financial instruments , as does manipulation of it.

The interest rate banks use to lend money to each other will of course have ramifications for the interest rates offered by banks to consumers, whether corporate or personal, with banks of course requiring higher interest rates to retain profitability due to higher costs should the LIBOR rate increase, or vice versa, thus demonstrating the effects that LIBOR can have on individuals.

Furthermore, LIBOR is utilised as a reference point for a plethora of financial products, many of which are merely securitised assets, backed by and contingent upon, mortgages and loans provided to individuals. Not only this, but financial instruments typically offered to corporations, such as derivatives, interest rate swaps, collateralised debt obligations, and interest rate futures, amongst others, will be inextricably linked to LIBOR, with it underpinning around $350 trillion in derivatives.

The vast extent of LIBOR’s influence over not only financial markets but also seemingly uninvolved citizens can be seen in statistics from the USA, with the majority of subprime mortgages and around 60% of prime-adjustable rate mortgages being linked to the US dollar LIBOR. Furthermore, in the UK around 2% of home mortgages would have been linked to the LIBOR rate, which whilst not sounding like a significant figure, actually represents around 250,000 mortgages, and by extension at least 250,000 people, who could have paid significant premiums as a result of criminal activity from LIBOR rigging. Not only this, but it has been confirmed that the US government has paid a total of $6 billion in additional interest payments as a direct result from LIBOR manipulation, thus demonstrating the vast extent of not only LIBORs influence, but also the widespread effects of criminal actions related to it.

One Comment on “Who is Affected by LIBOR Manipulation?

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