Does the LIBOR scandal really matter? Well, the media certainly thinks so

11th July 2012

The day the scandal of bankers fixing to make a fast buck broke may be seen as the equivalent of the day Lehman collapsed, says Simon Nixon on the Wall Street Journal.

Meanwhile, Yves Smith takes aim at The Economist on Naked Capitalism, saying the newspaper's prescription is too mild and a large-scale clean up of the industry is needed. And Robert Reich writes on Business Insider that this is the "Wall Street Scandal Of All Scandals" and "insider trading on a gigantic scale".

Yet while hyperbolic headlines condemn the banks, what about the detail?

There is the Libor scandal at the height of the financial crisis, around 2008, when Barclays and other banks submitted fake Libor rates lower than the banks' actual borrowing costs in order to disguise how much trouble they were in, while the other scandal involves a more general practice of rate-rigging  from 2005 onwards.

However, action was taken by management as soon as it came to light that traders were trying to boost their positions and the individuals involved were sacked, or are subject to ongoing disciplinary procedures, while the FSA has investigated and cleared Diamond and Del Missier of wrong doing regarding Libor fixing post-Lehmans.

And what about the impact on human suffering?

Forbes notes: "My best guess is that the Libor manipulation that went on before the financial crisis had a small effect on human suffering and it's not clear whether it increased human suffering or decreased it. My best guess is that the Libor manipulation during the crisis reduced human suffering."

Libor is used to calculate the rate of interest on some adjustable rate mortgages. So increases in this rate would see borrowers suffer as it means higher interest rates. "For this reason it is extremely important to know whether or not Libor manipulation tended to raise adjustable mortgage rates. Based on the information that we have now the answer is no."

Neville White, Senior SRI Analyst at Ecclesiastical Investment Management, adds on his Mindful Money blog: " On the BBC's Question Time last week, one member of the audience alluded to the anger ordinary people feel (correct) and referred to those who have lost homes and businesses as a result of rate fixing.

"This is simply unknowable, as yet, and nothing I have read or reviewed has tried to ‘unpack' exactly what the implications of rogue fixing has been on markets and individuals over the long term. What is felt implicitly is that something failed to check behaviours that were clearly wrong, morally, ethically, and corporately."

Granted, the disclosures and regulations needed to be tightened up here and the LIBOR scandal is more evidence of this, but it's nothing we didn't already know, says Pragmatic Capitalism.

"This all makes for tantalizing reading and it's compounded when people throw out huge figures like "$800 TRILLION", but the reality is that this scandal doesn't tell us anything we didn't already know."

Some say the story has been framed as yet another sensationalist anti-bank story to sell papers.

An ex-Barclays director on the corporate banking side controversially told Mindful Money: "The media should address another issue as well – Regardless of whether or not the government encouraged Libor submissions to be lowered after Lehmans, would it have been irresponsible of banks not to do it?

"In a market driven by fear rather than fundamentals, where traditional policy responses would make no difference, isn't the responsible course of action for market-makers to try and stabilise the market, even if by unconventional means?

"Otherwise perfectly sound institutions may have gone down the tube – not just banks, but thousands of businesses."

He adds: "There simply isn't enough of a distinction made between the type of banking which caused the crisis, and other forms of banking. The media should educate the public with regard to all types of activity that takes place at banks, from trading down to retail banking."

Whether you agree or not, some reason and education amid the overriding sense of anger seems needed – what do you think?

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