Did banks manipulate key index?

Stephen Beard Apr 17, 2008
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Did banks manipulate key index?

Stephen Beard Apr 17, 2008
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TESS VIGELAND: And now for your daily update on the worldwide credit crunch. Concern is growing that banks may hiding their distress by manipulating a key financial benchmark. It’s an interest rate called the LIBOR — for London Interbank Offered Rate. May sound like a problem for London to worry about. Trouble is the LIBOR is used as the basis of millions of financial transactions around the world, including mortgages and corporate loans here in the U.S.

From London, Stephen Beard reports on whether the index needs to add an “e” after the “i” in its name.


STEPHEN BEARD: Once hailed as a brilliant invention, LIBOR is now under a cloud, widely regarded with suspicion. It’s supposed to show what the banks pay when they borrow from each other. But, says David Lascelles, a banking analyst, it’s left to the banks to say what rates they’re paying.

DAVID LASCELLES: It’s a posted rate rather than a rate which actually reflects deals in the market. Which leaves possible room for manipulation.

And in the middle of a credit crunch the incentive to manipulate is overwhelming. No bank wants to look as if it’s desperate for cash. So there’s a temptation to report lower rates.

Peter Hahn of the Cass Business School:

PETER HAHN: Individual banks are very concerned that they not be seen as paying more than other banks for their money because they’re afraid if it seems like they pay much more than their peers the market will panic and run away from them.

Citigroup reckons the banks are paying at least a third of 1 percent more for their loans than the official LIBOR rate. If true, this could be bad news for thousands of Americans with mortgages tied to LIBOR, says David Lascelles.

LASCELLES: Well, it could force banks to reprice those mortgages up.

That could mean another $75 a month for a $300,000 mortgage. The impact on financial markets could be much bigger — $150 trillion-worth of complex securities are based on LIBOR. The British Bankers Association says it is now carrying out its annual review of the benchmark and will announce the outcome soon.

In London, this is Stephen Beard for Marketplace.

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