Last week, Congressman Kucinich released another video explaining what the London Interbank Offered Rate (Libor) is, how it affects world markets, and why the Libor scandal is important.
The text of the Congressman’s video follows.
“As millions of Americans struggle to make interest payments on car loans, student loans, and mortgages we are learning that a bedrock of the rates we pay on those loans was manipulated for private profit — probably for years.
“Last week I explained that something called Libor, or the London Interbank Offered Rate, affects almost everyone because the interest rates we pay on just about everything are tied to Libor. Manipulating that rate for profit could send tremors throughout the financial system.
“Here is what we know so far; Barclays, a British multinational bank manipulated Libor. I have seen transcripts of phone calls and emails describing the manipulation. We are also seeing evidence that suggests that other financial institutions were involved.
“The Federal Reserve is a private entity that is tasked, in part, with protecting the monetary system. They are one of the agencies that are supposed to protect consumers from ‘too big to fail’ and ‘systemic risk.’ On Friday, we learned that in 2008, the New York Federal Reserve knew that Libor manipulation was happening. Instead of cracking down on the banks, the New York Fed simply suggested some changes to the way the Libor is set. This is an enormous problem, because Libor is essential to the $500-trillion worldwide derivatives market.
“When banks loan out money or make investments, they try to find a way to estimate the chances that money will be paid back, or the chances their investment will succeed. Even when they think they know how credit-worthy a borrower is or how solid an investment seems, they still often take out various kinds of insurance on the loan or the investment. The Libor underpins the cost of that insurance. Banks are in the business of one thing: making money. So if you run a bank, and you know that someone is manipulating Libor, that opens the possibility that your bank’s major financial decisions may be based on faulty information and your entire operation is open to question.
“Over the weekend we also learned that the Department of Justice is pursuing a wide-ranging civil and criminal investigation of numerous financial institutions, including Barclays. The Commodity Futures Trading Commission, together with the Bank of England, forced Barclay’s to pay a $450 million fine. The portion of that fine that Barclays paid to the CFTC is about the size of the CFTC’s entire annual budget, but it’s still pocket change for a bank of worth more than $30 billion.
“There may still be criminal charges filed against Barclays employees. This scandal is so far-reaching, one anonymous government official was quoted as saying, “it’s hard to imagine a bigger case than Libor.” When all is said and done, will we finally see real accountability? Will the people—not just the individual employees but also the bank executives and the regulators—who knew that a pillar of our financial system was built on lies and manipulation be held accountable?”
Kucinich Explains “LIBOR”
“Late last month, Barclay’s Bank, a multinational bank and financial institution based in the United Kingdom, admitted to regulators that it tried to manipulate something called “Libor” before and during the financial crisis in 2008. “Libor” is an acronym for London Interbank Offered Rate. It is a rate used as a benchmark for the cost of lending throughout the financial system, and it is also used as a reference rate for a wide range of financial products like car loans, adjustable-rate mortgages, student loans and credit cards.
“The Libor is not based on an objective measure of the interest for bank-to-bank loans. It is the average of a daily poll of the Association’s member banks, who give an estimate of the interest rate they think they would pay if they sought to borrow from another bank.
“It is supposed to be the way the financial system assesses the overall health of the financial system, because if the banks being polled feel confident about the state of things, they report a low number, because they assume that if they had to borrow from another bank, their cost of borrowing would be low. If member banks feel a low degree of confidence in the financial system, they report a higher interest rate. And from that the Libor is calculated, affecting the interest rate on financial products around the globe.
“What has emerged from the Barclay’s Bank inquiry is evidence that banks may have in fact been deliberately manipulating Libor rates for years. The evidence so far is that one arm of a bank responding to the Libor poll would change their number based on what another arm of the same bank wanted—and that other arm could consist of the bank’s traders who make their money on whether the rate goes up or down. This means that millions of consumers, investors and businesses have been paying the wrong interest rate. Or rather, they haven’t been paying an interest rate that is set according to some legitimate benchmark. Instead they are paying a rate based on a gentlemen’s agreement at financial institutions, a method that practically incentivizes those banks to game the system to maximize their profits.
“And remember, the British Bankers Association, the group that is responsible for setting the rate, is not a government agency. It is just a trade group of big banks– Bank of America, JPMorgan Chase and Deutsche Bank and others–whose decisions on such a crucial number are not based on honest accounting or rules or regulatory oversight, but on a gentlemen’s agreement of honesty.
“We don’t know just how deep this scandal goes. But the fact is that if a fundamental component of our financial system has been or is being manipulated, we have the right to know about it. Banks are not above the law and they should not be allowed to operate in secrecy, especially when they have a history of taxpayer bailout and when we are forced to rely on them to provide capital for economic growth.”