Those of us who day trade, invest, or do financial services for a living have most likely heard of the LIBOR (London Interbank Offered Rate). It is a measure of the cost of borrowing between banks that serves as a benchmark for over $350 trillion worth of financial products worldwide. “If you move it even a little bit, it can cause massive redistribution of resources because it’s so extensively used,” said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business and a former economist with the Federal Trade Commission. The LIBOR & TIBOR (Tokyo Interbank Offered Rate), are considered the two major benchmarks of international trading, considering that London, Tokyo, and New York are the three largest by-volume foreign exchange markets.
There is a Chicago mercantile exchange trading firm known as Eldorado, LLC that has filed a lawsuit against Citibank, Bank of America, JP Morgan, UBS & Citigroup, accusing the big banks of conspiring to manipulate the LIBOR rate. This case, Eldorado Trading Group LLC v. Bank of America Corp., 11-cv-3847, U.S. District Court, District of New Jersey (Newark), has been ongoing since July 2011 and has produced no definitive lawsuit as of yet.
The lawsuit claims employees of all the major banks in question not only initiated contact amongst themselves to establish trades they believed would change the rate, but subsequently put trades into motion that would result in company or individual benefits once the rate had been changed. The banks “had a substantial incentive to manipulate, and in fact did manipulate, Libor downward, in order to increase the income from its interest rate derivatives and similar instruments,” according to Eldorado`s complaint. “This manipulation resulted in billions of dollars in revenue.” Surprisingly, El Dorado does not have any press releases on its website offering reasoning & motivations behind the probe, which representatives of all the major banks involved continue to deny involvement in.
If you`ll remember, in 2011 UBS lost over $2 billion due to a rogue trader at their London office. With this scandal in the recent past, banks are very wary of people trying to falsely accuse them of fraud & insider trading. The climate is ripe for these kinds of investigations, and Eldorado is more than willing to collect.
In Tokyo, a similar probe targeted an ex-Citigroup trader& his partner of tampering with the TIBOR rate, which is similarly influential amongst international traders. Now, some UBS and CITI transactions have been suspended in Tokyo as a result of the alleged rate tampering. In the US, similar repercussions could take place once the repercussions of the El Dorado probe are revealed.
If interest rates are tampered with internationally, it could result in the loss of trust between banks & traders, and similar suspensions of trading operations, eliminating the idea of trust between consumers and the big banks they invest in. For Citigroup & UBS especially, the involvement in the TIBOR scandal combined with LIBOR allegations have resulted in a severe breach of consumer trust.
Whether suspensions & jail time of suspected employees will result is yet to be seen. Either way, even the suspicion of employee tampering with one of the world`s biggest economic benchmarks is detrimental to the trust between banks and their consumers.