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How bank-rate rigging hits the real world
The Canary Wharf headquarters of Barclays Bank, which have been fined millions of dollars for manipulating the LIBOR inter-bank lending rate, in London, England.
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Swimmers at the Nassau County Aquatic Center in East Meadow, N.Y.
Kai Ryssdal: We're gonna talk a bit later in the show about metaphors that are sometimes used to help describe dense economic terms. But we'll being our lesson in linguistics today gently with the humble acronym LIBOR -- the London Interbank Offered Rate. It's a key interest rate which -- as you may have heard -- has been rigged by at least one big bank, Barclays, for its own profit. Among the trillions of dollars tied to this now-questionable rate that's set in London are loans to local governments over here. American cities say fake LIBOR rates left holes in their budgets. Big ones.
Our New York bureau chief Heidi Moore went out to the suburbs to show how a global scandal hits home.
Heidi Moore: To see the human impact of rigged interest rates, don't go hunting on Wall Street -- take a commuter train 20 miles east to Long Island. Who would have thought that the LIBOR scandal could cast a black cloud over some kids splashing around at the Nassau County Aquatics Center?
Matthew Bortas: My camp comes here every Monday, Wednesday and Thursday. It's a really fun pool.
And popular -- in one of the hottest summers on record. Still, New York's Nassau County has been forced to cut staff and raise fees for swimming lessons. I visited County Parks Commissioner Carnell Foskey at the pool. He says residents are afraid there will be even more cutbacks.
Carnell Foskey: The issue I get the most is that, are you going to stay open? They're so worried, they read the paper. Are you going to close early?
Local officials think that the LIBOR interest-rate scandal made a bad budget situation worse. Nassau County's been trying to dig itself out of a financial hole for over five years. Now the county blames some of its shortfall on Wall Street banks. They allegedly defrauded Nassau by lying about the true value of LIBOR.
George Maragos is a former Wall Street executive who now oversees the county's finances.
George Maragos: We've had to cut programs for some of the needy, we've had to lay off people, which may not have been necessary and in retrospect now we regret.
LIBOR wasn't just the benchmark bank rate for mortgages and credit cards. Local governments used it, too. Nassau County made deals with Wall Street using LIBOR to control interest payments on its municipal bonds.
Maragos says the arrangement was a popular form of financial insurance.
Maragos: And you pay a fee for that insurance. And what we found with LIBOR -- because it was manipulated -- counties like us have been overpaying for that insurance.
By millions of dollars. Now, Maragos is taking on his former industry. The idea of suing banks to get that money back came to him by accident, in front of his TV on the Fourth of July.
Maragos: I guess there was nothing else to watch. I was flipping through the channels, as most people sitting at home.
He immediately recognized the face of Bob Diamond, the ousted head of Barclays bank. Diamond was dodging questions about LIBOR rates in front of the British Parliament.
Maragos: And as a banker, when people tend to be evasive, you have a sixth sense, you know.
His sense was that bankers had swindled his own county. As soon as Maragos got back into the office, he shared his hunch with his deputy, Gabriel Marques. Marques pored over stories of traders who had rigged the LIBOR interest rate. One had even set himself calendar reminders to fabricate it.
Gabriel Marques: The way they did it was so brazen. I mean, this was straight up just lying.
Marques wasn't expecting to find much when he started crunching the numbers.
Marques: You know, we'll probably have a couple thousand bucks here and there that we can go after. But when we got to $13 million, we were like, this is serious. This is real!
How real? His boss, Maragos, tallies up the human cost of that $13 milllion. For each year that the rate was allegedly rigged...
Maragos: We would have been able to retain 24 people. Twenty-four families would have had a breadwinner still working. We could have had a few more cops on the street. We could have been able to fund a few more social programs.
Andrew Malekoff can vouch for that. He runs the North Shore Child and Family Guidance Center from an office that's lined with books.
Andrew Malekoff: This is actually a book that I wrote, "Group Work with Adolescents."
Nassau County's budget woes have cut into his agency's services to troubled kids.
Malekoff: When we lose county funding, we lose matching state funding. That $13 million could go a long way to restoring the cuts that were made.
Nassau County officials are hunting for even more potential LIBOR losses to recover as they decide whether to file their own lawsuit or join one that's already been launched by the city Baltimore. It will be an uphill battle to prove they were defrauded. Marques, who's been looking at the math, has no doubt that the scandal may be one of the biggest in Wall Street history.
Marques: So many people and so many trillions of dollars were connected to LIBOR that I wouldn't be surprised if we see companies go bankrupt because of this scandal.
Right now, it's an open question whether counties like Nassau will be able to recover the money they need for public services.
In Nassau County, I'm Heidi Moore for Marketplace.
While it is heart-wrenching to hear about lost jobs, and under-funded budgets, how does this have anything to do with LIBOR and any contracts between Nassau and it's banks? Saying it is complicated, doesn't relieve you as a news organization from challenging your sources and finding out and explaining their claims. "He crunched the numbers" and came up with $13 million? On what contracts, entered into with whom? Given the few basis points LIBOR is alleged to have been manipulated since the financial crisis by a number of the banks that contribute to the rate setting, Nassua Country would have had to have had some large financial contracts or investments out there to add up to a $13 million loss per year. It doesn't add up - but hey, who's gonna argue with bashing the banks, right? I'm not condoning any manipulation that was done by Barclays or any of them, I just think a little more balanced reporting, would make your program seem like more of a source of financial intelligence, rather than as a place for sensationalist, unsubstantiated claims to be made - even if the claims are against institutions that are clearly outside popular favor today. Real people who have done no manipulation nor committed fraud, and have families, and bills, and under-funded budgets, work for many of those financial institutions too.
This can get very complicated when you include everyone who benefited form lower LIBOR interest rates, such as homeowners with mortgages, credit card holders with lower rates, businesses borrowing at lower rates, etc. Lawyers would love to sue anyone who benefited in order to get pay-offs for those who may have been hurt. How about all those holding CDs or municipal bonds from Nassau County who should have received higher interest rates for loaning to the county. Think of the number of class action suits! Here come the lawyers who are probably the only ones who will come out ahead in the end. Be careful what you wish for.
