Jeff Horwich: Returning to the LIBOR scandal for a moment: More shoes could drop this week as the investigation continues here in the U.S. The Federal Reserve has released documents showing it saw red flags years ago.
Here’s Marketplace’s New York bureau chief Heidi Moore.
Heidi Moore: The Federal Reserve suspected something was fishy with the LIBOR interest rate all the way back in 2007.
Joe Gagnon was a Fed official when a Barclays employee said banks were fibbing about how much it cost them to borrow.
Joe Gagnon: So we looked into it. We couldn’t rule out there was actual lying about the rate, but what we heard was that there could be sort of a collective agreement of many banks to cover for each other.
Gagnon explains that during the financial crisis, the banks that set LIBOR may have reported low interest rates to appear more healthy than they were.
Gagnon: They don’t want to report they’re being charged a high rate because that says that well, somebody out there doubts them.
Thomas Lys is a professor at Northwestern’s Kellogg School. He says that the corners banks cut amounted to maybe a few cents on every dollar of every loan.
Thomas Lys: If you multiply it by the trillions and trillions of contracts that use LIBOR, it amounts to a gigantic sum.
And now, a scandal that could cost the banks billions in lawsuits.
In New York, I’m Heidi Moore for Marketplace.
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