LIBOR scandal spreads to U.S. cities

Marketplace Contributor Jul 11, 2012

LIBOR scandal spreads to U.S. cities

Marketplace Contributor Jul 11, 2012

Kai Ryssdal: There’s a certain amount of dot-connecting that comes with covering the global economy. Explaining why something happening quite literally half a world away matters to you and me.

Today’s incarnation comes in the form of an acronym: LIBOR. The London Interbank Offered Rate. What banks charge each other to borrow.

It’s kind of the scandal do jour. The British bank Barclays has admitted it tried to manipulate the rate. Corporate heads rolled. Lawsuits ensued.

But here’s the thing. Once you unpack it, you learn LIBOR isn’t just about banks lending to banks. And it’s most definitely not just a Wall Street story. Our New York bureau chief Heidi Moore has the story.

Heidi Moore: Did you ever wonder what moves the interest rate on your adjustable mortgage or your student loan? It’s something called LIBOR. And Wall Street banks persuaded a lot of American cities to use LIBOR to control their borrowing costs.

Richmond, Calif., is one of them. Jeff Ritterman is a city council member there.

Jeff Ritterman: Our property tax comes in December but bills come due before then, so we have to have a way of smoothing out the income throughout the year, and this is done by various financial instruments and trades.

Like Richmond, other local governments wondered if they got the short end of the stick with Wall Street deals. Nassau County, in New York, claims that banks manipulated Libor and may have cheated the county out of $13 million. Baltimore is leading a lawsuit seeking compensation.

But it’s going to be hard for cities to prove their suspicions. Guy Lebas, with Janney Montgomery Scott, says there could be other reasons that they lost money.

Guy Lebas: But we can’t know effectively what percentage of that was subject to manipulation and what percentage of that was the financial world falling apart at the time.

Even if cities can’t prove LIBOR was rigged, they feel stung. Richmond, Calif., had to renegotiate its interest rate deals at a high cost. Ritterman says the episode made his fellow council members  feel out of their depth in doing business with Wall Street banks.

Ritterman: The big banks are profiting off of our ignorance. Who loses in the end? It’s people in cities like mine, a blue-collar city that’s suffered a lot from financial setbacks.

A lot of cities share that view, and as the investigation into the LIBOR scandal continues, you can expect them to file more lawsuits.

In New York, I’m Heidi Moore for Marketplace.

Ryssdal: Check out Heidi’s blog Easy Street — today it’s an explainer on Peregrine Financial.

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