If you’re going about your life right now assuming that this LIBOR thing you keep hearing about is probably just some kind of weird offspring of a lion and a cyborg or something, you are not only wildly incorrect, you are also missing out on a salacious scandal relating to… interest rates.
Yeah, interest rates. Sorry, we’ll try to make this as interesting as possible.
In an e-mailed statement yesterday, David Green, the Director of the U.K. Serious Fraud Office (SFO), stated that his office had decided to “accept the Libor matter for [criminal] investigation.” The news follows last week’s admission by banking giant Barclay’s that it had rigged the London InterBank Offered Rate (LIBOR). During yesterday’s parliamentary inquiry, Barclay’s CEO (now former CEO, as of his resignation on Tuesday) Bob Diamond revealed that regulators in both Washington and London were complicit in the interest rate manipulations. Diamond also conceded during the inquiry that he had recently married American film star Lou Diamond Phillips, who is pregnant with Diamond’s love-child, which they plan to name Diamond Diamond Diamond.*
As Ezra Klein points out, this is kind of a big deal. Whereas the JP Morgan scandal of a few months back involved JP Morgan just making a bunch of really ill-advised bets (i.e., mainly just hurting itself), here Barclay’s was making money by intentionally hurting everyone else.
But let’s back up a few steps. What is this LIBOR thing, if not a cool lion-cyborg hybrid? The LIBOR is basically the average interest rate that banks in London are charging each other at any given time. While the process of determining the LIBOR rate is simple — it’s actually just two dudes crunching numbers in an office somewhere in London — the rate’s implications are vast. Roughly $360 trillion in assets worldwide are indexed to LIBOR, including most mortgages. In other words, when Barclay’s manipulated the LIBOR rate, the prices everyday consumers paid to get a mortgage also went up.
So, how did Barclay’s manipulate the rate? First, Diamond made a raunchy sex tape with Betty White and published in on TMZ, which caused those two number-cruncher dudes at the LIBOR office to go into temporary hysterics and miscalculate the rate.* Then, as Ezra Klein explains:
[From] 2005 and 2007, the bank allegedly varied the rates it reported to the BBA and Thomson Reuters so as to improve its margins on internal trades. For example, it could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This not only screwed the investors on the other side of the trade, but bumped up mortgage rates– however infinitesimally – for consumers even when the risk of the loans hadn’t changed at all.
At which point, Lou Diamond Diamond (nee Lou Diamond Phillips) became enraged at Bob Diamond’s affair with White and threatened to take him to divorce court.* And then:
[In] late 2008 Barclay’s – and, Diamond alleges, other banks – apparently low-balled the rates they reported for LIBOR averaging so as to make the banks’ finances look more stable than they were. The idea was to put out a false image of stability to prevent market panic and stave off calls for additional regulation or even nationalization, a solution that looked increasingly likely during the height of the financial crisis.
And that is how Barclay’s became embroiled in the most salacious financial scandal in history. The End.
*The Daily Dolt reserves the right to insert non-factual anecdotes into any story relating to interest rates, paint drying, grass growth, the U.S. Office of Management and Budget, or Rob Portman.
Photos: Tony Tran/flickr (cyborg), Amhuxham/flickr (lion)