Over the past few weeks we’ve brought you several reports regarding the increasingly worrisome LIBOR scandal. The investigation into interest rate-rigging debacle is quickly snowballing and analysts have now begun wondering if “16 of the world’s largest banks have perpetrated the biggest fraud in history.”

The LIBOR, the London Interbank Offered Rate, is the world’s benchmark borrowing rate and as concerns, both public and private, are growing that some of the world’s biggest banks may be colluding to set favourable rates, analysts are pondering whether this could be the biggest consumer fraud the world has ever seen. They are also predicting lawsuits from average customers which could be worth “tens of billions”.

Barclay’s costly fine was only the tip of the iceberg and the significance of the scandal is only now gaining the the public outcry that it rightly deserves as people begin to realise the impact it may have.

Despite being set in London, the LIBOR is the average interest rate agreed by the world’s largest international banks and indexes the short and long term interest rates for 10 currencies across 15 different time zones.

The LIBOR impacts every financial service and product across the planet and in the U.S. in 2008, 60 percent of prime adjustable rate mortgages and almost all of sub-prime mortgages were tied to LIBOR.

By manipulating the LIBOR, by raising or lowering it, banks allegedly could make their balance sheets appear healthier than they were, while consumers and members of the public apparently paid the shortfall.

It affects nearly everyone and does not differentiate between the financial elite and the average Joe on the street. As the investigation continues and the body of evidence grows, it is alleged that the world’s leading banks have been fraudulently fixing interest rates across the world for at least the past ten years, if not longer. In total, $360 trillion dollars are indexed to the LIBOR. In case the enormity of that figure is lost on you, it is more than five times the value of the entire world’s annual GDP.

Robert Shapiro, the chairman of economic consultancy firm, Sonecon, and the  former Under Secretary of Commerce for Economic Affairs in the Clinton administration, broke down the fraud and found that the LIBOR was off by about 30 to 40 basis points for the better part of decade. 100 basis points constitute one percent point in the set interest rate, meaning the seemingly incremental increase would have translated to an additional $50 – $100 per month on a $100 000 mortgage.

“If the bankers’ manipulations of the LIBOR was responsible for raising LIBOR rates by just 20 basis points in that period, their shenanigans added between $1.1 billion and $2.2 billion to the yearly interest paid by American homeowners,” said Shapiro.

He explains the root of the problem,

“LIBOR hearkens back to a time when finance operated like a gentlemen’s club, and its leading members behaved honestly. That is a universe away from the current Wall Street culture and behavior.

“They take out bets and pay themselves fortunes for doing so, even when they cannot make good on those bets without taxpayer bailouts. And now, we also know that when they bet on interest rates rising or falling, they stacked the LIBOR deck to nudge rates in the direction that made money. And they left everybody else with the bill.

“So long as big finance will do almost anything to goose its own profits and bonuses, ‘self-regulation’ is a dangerous myth.”

As the full effect of the scandal ripples across the globe, several states and cities have already begun to sue some of the world’s largest banks, and by the look of things they have legitimate cases. They are claiming that the credit derivatives or interest rate swaps they bought from banks may have been adversely affected by the data manipulation.

“If the lie was big enough and for a long enough period and anyone entitled to receive payment based on LIBOR can make the claim, the potential damage to the bank is enormous,” said Peter Tchir of TF Market Advisors.

[Source: Daily Mail]