It seems there is no shortage of financial scandals to write about these days. By now you have no doubt heard about the latest financial scandal involving LIBOR, the London InterBank Offering Rate.
From a writer’s standpoint, this is like the gift that keeps on giving. You can’t make this stuff up.
Barclays Bank admitted to manipulating LIBOR in 2008, at the height of the financial crisis. Their excuse? Not only did they get the hint from the Bank of England that they should hold LIBOR lower than it would otherwise be, but they said almost everyone else was in on the game too. Well, maybe not everyone.
For those not familiar with it, many bank loans around the world use LIBOR as a benchmark for the interest rate charged on a given loan. It will usually be expressed as LIBOR plus a certain percent. Trillions of dollars in loans are tied to LIBOR in some way.
So why is this scandal such a big deal? Borrowers who have loans outstanding at LIBOR or LIBOR-plus got a good deal. This includes many Americans who financed their homes on an adjustable rate, which was usually the prevailing LIBOR plus some number, like 2.25 percent.
With LIBOR held lower, borrowers paid less interest. For a borrower, this is a good thing. However, if you were the lender, it was not so good.
Many of these types of loans are included in securitized baskets of mortgages that were bought up by pension funds, insurance companies, and others. These institutions became the lenders to many of the borrowers - the homeowners.
So as homeowners got the gift of paying a lower interest rate than they should have, the lenders – the pension funds and insurance companies – got less than they should have received. So we have pensioners, insurance contract holders, and other fixed income investors that basically had their interest stolen from them.