In the last two weeks there have been important developments in what is commonly referred to as the “LIBOR Scandal,” a scam concerning the manipulation of the London Interbank Offered Rate (LIBOR). Britain’s Serious Fraud Office has notified twenty-two people at various banks of potential prosecution.
The LIBOR is an average interest rate calculated based on the predictions that the major London banks make on the interest rate they would expect to pay on interbank loans. The scandal broke out in mid-2012, when it was discovered that some banks were fraudulently inflating and deflating their interest rates predictions to their own advantage, so as to profit from trades or alter their creditworthiness on the market.
Since the LIBOR is used as a benchmark interest rate in both Europe and U.S. derivative markets, its manipulation constitutes a colossal scam—one that “dwarfs by orders of magnitude any financial scam in the history of markets” in the words of MIT Professor of Finance, Andrew Lo–involving numerous and repeated criminal violations, that authorities in both countries have been investigating ever since the scam was discovered.
Three weeks ago, Britain’s Serious Fraud Office notified some twenty-two people at various banks that their names had emerged in the course of the criminal proceedings brought earlier this year against Tom A.W. Hayes, former Citigroup and UBS trader, and two other former brokers at RP Martin Holdings in London. These individuals, identified as co-conspirators, may face criminal charges in the U.S. as well. Mr. Hayes, the first person to have been criminally charged in the British inquiry on the LIBOR Scandal, is also under separate criminal proceedings in the United States.
The names of the 22 people have not been made public and Queen’s Bench High Court Justice, Jeremy Cooke, has cautioned the media against publishing the names if improperly acquired. It has also been reported that during the hearings held on, October 21st, the lawyers of the 22 co-conspirators have argued before the Court referring to their own clients as “Mr. X” or “Client A,” in order to keep their names off the public record.
On Tuesday last week, the news broke out reporting that U.S., British and Dutch regulators have fined Dutch Rabobank for $1 billion, after 30 of its staff were found to have been involved in the LIBOR Scandal. The Chief Executive Piet Moerland resigned, declaring himself shocked by the language used in the e-mails exchanged by the accused staff and discovered in the inquiries. Rabobank is now the fifth bank to have been punished in the LIBOR manipulation scandal, and it has received the second largest penalty to date, behind UBS’s $ 1.5 billion fine last December.
The scandal has deeply undermined the credibility of the financial institutions involved and, on a more general level, the reliability of the markets. However, the problem still seems far from being solved. Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, has been clear about this: “I wish I could say that this won’t happen again”, he said, “but I can’t,” “LIBOR and Euribor are not sufficiently anchored in observable transactions. Thus, they are basically more akin to fiction than fact.”
While one can praise the regulator’s thorough investigation and efforts to pursue criminal penalties, there definitely remains a great need for more effective preventive solutions that would significantly reduce the chances of misconduct and reassure the public on the trustworthiness of market indicators.