Spot the LIBOR Scandal

Source: Bloomberg

The above graph is courtesy of Bloomberg. The top half shows the spread between the UK 3 month LIBOR (Orange) and the OIS 3 month rate (white). The difference between the two rates is that LIBOR is artificially created by bankers, whereas the OIS rate is established by the market. The second half of the graph displays the spread between the two rates. Historically speaking the two rates track each other almost identically, as they should if bankers are submitting honest quotes. However, during the credit crunch the spread between these two rates widened to historical highs as LIBOR quickly decreased (meaning borrowing was cheaper) whereas the OIS rate only dropped to that level after the credit crunch was over. No graph shows the LIBOR scandal and its manipulation better than this one in my opinion.

What Happened durign the LIBOR Scandal

For my paper I want to tackle a subject that was recently in the news, and that was the LIBOR scandal. For my first proposal I want to look at the LIBOR scandal through the lens of the business involved.

The first thing I want to go into is a detailed description of what LIBOR is. LIBOR stands for the London Interbank Offered Rate and is an interest rate set by a group of the largest global banks. I think the history of LIBOR, and why it was created is important in understanding why it is such a big part of our society today and why the scandal itself is such a big deal.

The next issue I want to explore is how LIBOR is created and who is involved in the process. This examination of LIBOR is important in showing how it was open for corruption as well as the obvious conflict of interest created by the banks that set LIBOR. Furthermore, it is important to understand that LIBOR is just one cog that was manipulated and in fact there were many different rates and different types of LIBOR that were all manipulated during the scandal.

The next part of my paper which I want to delve into is what exactly happened, as in how was LIBOR actually manipulated by traders at Barclays (and other banks). This is the heart of the business portion of the scandal and focuses on the decisions which employees at Barclays made. It is interesting to examine 1.) how easy it was for them to manipulate the rate and 2.) how little they cared about what they were doing. Overall this section will be a bit more technical in describing how LIBOR was manipulated.

Finally, I want to retrospectively discuss why these bankers acted the way they did. What may not be known is that LIBOR was manipulated in two different ways at two different time periods. I plan on examining both of these environments within the bank and why the bankers acted the way they did. In the first scenario bankers were manipulating LIBOR to create profit, while in the second scenario, during the credit crunch, bankers were manipulating the rate so that the banks themselves would appear solvent. I believe it is important to retroactively go back and understand the reasons why the traders acted in the way they did to better understand the motives and how to stop it in the future.

Banks and Deferred Prosecution

After searching through a fair amount of blogs using key words including “ethics” and “banking,” I stumbled upon one called Nonprofit Update, and this blog in particular in which the author details the Barclays Libor manipulation case and it’s penalties. He documented this previously in his other blog, Attestation Update – A&A for CPAs. Continue reading