The LIBOR Scandal! Fuhgeddaboudit!

The Barclays (NYSE: BCS  ) LIBOR scandal looks like a big deal. It smells like a big deal. But what if it's really not a big deal at all?

Sure, LIBOR affects trillions of dollars of loans and hundreds of trillions more in swaps and other derivatives, but, as one commenter on a recent article put it, "if 1 guy from 1 bank put in one basis point lower than he actually should have ... it should have a negligible effect on LIBOR."

It's certainly a point to ponder. Should we care if Barclays really never had the ability to move the needle?

Or we could get even more cynical and consider that if many (most? all?) of the LIBOR-submitting banks were gaming the system, then all of their attempts to fudge in their own favor would just end up canceling out and leaving us with a middle ground that's pretty darn representative of real borrowing costs.

There may be a Barclays trader calling in a fix for three-month LIBOR because of a derivative about to settle, but somebody's on the other side of that trade. Perhaps it's a punter at Citigroup (NYSE: C  ) on the other side and he's calling down to his money market desk for a fix in the other direction.

And then of course, there's the issue of banks feigning strength. One of the reasons that Barclays fudged its LIBOR submissions was to signal to the market that it had access to the same low rates that other banks were claiming they could access -- the bank even went as far as roping in the Bank of England on this issue.

Barclays contends that it was only forced to fake its low submissions because the other banks were putting in unrealistically low bids. But if that really were the case, would we have wanted it otherwise? Would we have wanted Bank of America (NYSE: BAC  ) , Citigroup, Deutsche Bank (NYSE: DB  ) , and UBS (NYSE: UBS  ) -- all of which were reeling at the time from the financial meltdown -- letting the entire world know that they couldn't access low-cost funds? Or, at least, that the major global banks didn't trust each other enough to lend at low rates?

In short, perhaps regulatory bodies and an overzealous media are whipping this LIBOR molehill into a scandalous mountain.

Or... maybe not
It might seem reasonable to question whether Barclays could, indeed, move LIBOR single-handedly. After all, there are 18 banks that submit bids for U.S. dollar LIBOR and a healthy number of the bids from those banks -- on the high and low end -- get chopped before the final calculation. Maybe it was hubris on Barclays' traders' part to think they were doing a darn thing with their fixed bids.

But does the success of those traders' fraud attempts matter? When one fellow tries to kill another but doesn't succeed, our response isn't, "You're in the clear just as long as you didn't finish the job!" No sir, that's attempted murder. And if you try to rob a bank but bungle the job in the process, well, that's attempted robbery.

Legally, even if they didn't actually achieve what they were attempting, they're still in hot water. But then there's also the question of ethics and morality.

Deeper down the rabbit hole we go
Strip away all of the legal matters here, though, and we get to what's really meaningful, and really scary, about this scandal. A second-grader could tell you that what these traders were doing was wrong, but the traders made basically no effort to hide any of it. Between emails, instant message exchanges, and calendar appointments (don't forget the fraud!), these LIBOR shenanigans were right out in the open.

There are only a couple of interpretations for this that leap to mind, and neither is particularly encouraging.

  • Bankers don't know right from wrong. A second-grader may be able to figure out that this was wrong, but perhaps a real sense of right and wrong is lost when one becomes a banker -- sort of like Alice giving up on the idea of normal reality while meandering around Wonderland. If they no longer believed this was wrong, why bother hiding it?
  • Bankers feel that they're above right and wrong. What's fraud to a Master of the Universe? When you're playing with denominations in the billions or trillions maybe you suddenly start to think that your bottom line is so important that wrong is OK as long as it makes you money.

Regardless which of those bitter pills you want to swallow, the bottom line is that this scandal suggests that in the world of banking -- a world which, as we saw in 2008 and 2009, can bring the entire global economy to its knees -- words like "wrong," "illegal," and "fraudulent" may not carry the same meaning that they do for the rest of us. Former Barclays CEO Bob Diamond wants us to believe that this is all the work of a few scurvy miscreants, but considering that Diamond Bob's forthrightness has been called into question by Parliament, I'm not sure we want to lean too heavily on that.

Is it anything new to think that bankers might cut corners or even take blatantly illegal actions in order to make a buck? Alas, it's not, but it's just one more reason that as new regulations continue to take shape in the wake of the last meltdown, regulators should be taking industry push-back with an Everest-sized grain of salt.

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Fool contributor Matt Koppenheffer owns shares of Barclays and Bank of America, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 11, 2012, at 4:45 PM, neamakri wrote:

    Okay..new idea. "Billion dollar polygraph".

    A new federal law whereas any corporate executive or employee responsible for a billion dollars or more must take an annual polygraph.

    Whaddya think?

  • Report this Comment On July 11, 2012, at 7:23 PM, hank321 wrote:

    The problem is how to properly assess risk, consistently, in the context of rapidly changing circumstances. Lying has little to do with this, IMHO.

    Also, remember, the folks being quoted about these LIBOR rate submissions are TRADERS,...they work for banks, yes,...but they are not really bankers per se. They are way down on the food chain. I suspect they may not have realized what they were doing had adverse legal consequences,...their banter sounded very very young. They may have thought they were being clever, not criminal.

    Now, were they INSTRUCTED to do this by their managers? That would be very different. Any evidence of that? Or, any evidence that traders at different banks were orchestrated by their managers to skew the rate in one direction or another, systematically? That would be a smoking gun.

    If this kind of evidence exists, please produce it. If this kind of dispositive evidence does not exist, then what in blazes is going on here?

    What's going on? There is a key election in the US in 4 months; and the British Labor party is feeding this smoking pile of very timely allegations to the DC based Committee to Re-elect,...who passes it on to their favorite balanced journalists and pundits.

    I know when I am being played,...and i do not like it one bit.

  • Report this Comment On July 11, 2012, at 10:32 PM, TMFKopp wrote:

    @hank321

    You're making this sound an awful lot like it was a bunch of schoolyard kids who have no idea what they're doing.

    "Also, remember, the folks being quoted about these LIBOR rate submissions are TRADERS,...they work for banks, yes,...but they are not really bankers per se. They are way down on the food chain."

    While you're right that these are traders and not bankers, I'm not sure you've got the two sides of the business quite right. A trader does not work hard to grow up some day into a banker -- they're two separate businesses. There are young bankers that work up to be higher-level bankers. And there are young traders that work up to be higher-level traders. The fact that the folks involved here were traders doesn't mean that they were wet-behind-the-ear youngins.

    And who are they down the food chain from? The bankers? Look at Goldman Sachs -- traders bring home the bacon and run the show these days, not bankers.

    "Now, were they INSTRUCTED to do this by their managers? That would be very different. Any evidence of that?"

    The whole row over Paul Tuckers conversation with Bob Diamond about Barclays LIBOR submissions boils down to Diamond's contention that Tucker artfully instructed Diamond to bring Barclays' submissions down to a level more in line with other banks. Whether or not that was Tucker's intention is beside the point as far as your question. The bottom line is that after that, it became a bit of an institutional push to artificially keep Barclays' submissions in line with other banks.

    As the BBC put it:

    "Senior treasury managers instructed submitters to reduce Libor to avoid negative publicity, saying Barclays should not "stick its head above the parapet"."

    Matt

  • Report this Comment On July 11, 2012, at 10:34 PM, TMFKopp wrote:

    @hank321

    One further comment -- there were submitters that fought back but were basically strong-armed. This is one comment from a submitter in NYC that came out in the investigation:

    "Following on from my conversation with you I will reluctantly, gradually and artificially get my Libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices."

    Matt

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