Why Americans should care about LIBOR and Barclays

Marketplace Contributor Jul 3, 2012

Why Americans should care about LIBOR and Barclays

Marketplace Contributor Jul 3, 2012

Tess Vigeland: This month marks two years since the passage of the Dodd-Frank financial reform law. But there is a fresh reminder that we still have a long way to go before confidence is restored to banking and financial markets.

Today — one day after the chairman of Barclays Bank stepped down — the CEO and the chief operating officer of the British bank resigned. It all comes after the bank admitted to U.S. and British regulators that it engaged in a type of price fixing on a key global interest rate.

Our New York bureau chief Heidi Moore joins us to explain. Hello.

Heidi Moore: Hi.

Vigeland: So let’s briefly review what exactly happened here. Talk to us about the LIBOR.

Moore: Sure. It’s a little ‘LIBOR-ious’ to think about, but it’s actually not so hard. So LIBOR is an interest rate, and it’s set in London. What it tells us is about the health of the banking system. All the banks in London get together everyday and they tell us what other banks are charging them to lend, so it’s just like the interest rate on your credit card. If you have a low interest rate, then your credit is great and everyone trusts you. And if you have a high interest rate, things aren’t looking so good. So the allegation here is that Barclays tried to rig the interest rate to make itself look like it had a lower lending rate than it really did, which would mean that Barclays was doing really well and it was flush with money and everybody wanted to lend money to it.

Vigeland: Why are American mortgages, student loan rates — why are they tied to something in London?

Moore: Well there are no more country borders, right? It’s an international world of finance. So when you have an adjustable-rate mortgage or a student loan or a car loan here in the U.S., it’s actually being chopped up and sold to investors in the rest of the world. And those investors — the same way that they use Celsius and metric — like to use LIBOR. So it’s really a global rate that reflects a global financial system.

Vigeland: But who died and made LIBOR the king?

Moore: Well, you know, the rest of the world is bigger than the U.S. in many ways, so we do have to play by their rules. But it also really helps you get credit because if you have more investors who are willing to buy your loans overseas, it means that there’s more money coming here into the U.S. So we shouldn’t be too bitter about LIBOR.

Vigeland: Well, you know Heidi, you and I have spoken over the years since the financial crisis about all of these issues that keep popping up within the banking system. And you know, here we are two years out of Dodd-Frank, and people still question: Why should I trust, why should I put my money into a system that seems to be rigged against me?

Moore: Yeah, this is a major trust issue for banks. Leaving aside the actual technicalities of some interest rate that you may or may not care about, this really is about people in the market getting together to fix things to their advantage, and it’s a very wide investigation. It’s not just Barclays — this involves every American bank and most of the European ones, so Bank of America, Citigroup. All of those are being investigated; we don’t know the results yet. And it really makes us wonder: Can we trust people in finance to do their jobs in a way that we can trust?

Vigeland: And what’s the answer?

Moore: That answer’s up in the air, I’m sorry to say.

Vigeland: Yeah. Well, at the very least, the CEO and the chairman of Barclays are gone. I’m curious: Why is it that British bank executives quit while ours just linger on and on and on?

Moore: Their lawmakers are much meaner. I think that’s part of it. Our Congress goes pretty soft on corporate executives, but in England, they don’t have those reservations — they will come out swinging. And they really take this kind of thing seriously. In fact, in the Barclays case, there might be some evidence that the lawmakers and the regulators influenced Barclays to try to play by their rules. So it’s going to be a really interesting hearing tomorrow.

Vigeland: All right. Our New York bureau chief Heidi Moore. Thank you so much.

Moore: Thank you.

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