Governance and Ethics – Current Event – LIBOR Scandal

Recently there has been an ongoing investigation into the practices of big banks and the manipulation of inner bank lending rates known as LIBOR (London inter-bank offer rate.)  The LIBOR rate is set by using benchmark interest rates for twenty different banks, where the first and last four rates are dropped then the remaining twelve rates are averaged to set the standard.  The LIBOR rate is the driving rate behind more than ten trillion in loans and three hundred fifty trillion in derivatives.

The most disturbing part to this whole situation is this is not the first time such scandals have cropped up.  Adding to that, some sources are saying the LIBOR manipulation has been going on for over fifteen years. These recent findings only help fuel the fire and discontent that individuals have towards banks and the financial institutions in the light of the recent bailouts, and could possibly get worse if talks of additional bailouts come to fruition depending on certain outcomes from the scandal. One positive from previous scandals is that some of the victims did receive rather large payouts. That is not necessarily the case with the current LIBOR situation. The problem is that the rates are connected to so many different financial instruments the implications can be far reaching and much greater than anticipated and are not fully realized by all parties affected, at least at the moment.  On that same note some of the rates that hurt companies/ individuals also helped others, which is a point that could be argued by the banks if this ever makes it to litigation.  No matter if the rate manipulation helped or hurt individuals not involved the banks that manipulated the numbers did so for their own gain and now it seems at their own peril, knowing full well that trillions of financial instruments were tied to the LIBOR rates.

What needs to be done in the wake of the recent scandal?  We all know that our governments love knee jerk reactions and as our wonderful dictator and his minions once said “don’t let a crisis go to waste.”  I’m sure we will see some sort of regulations that will not even come close to solving the problems.  One solution noted in the article by the Economist is that banks need to tie the rate to the actual lending data when available.  Another solution is that banks need to set better governance and ethical standards.  Clearly this is lapse of ethical standards, and in the past few years this seems to be a systemic problem, or at least we are only now aware of what has been going on for years and years.