Consumers Lose in the LIBOR Scandal

Washington, DC: Officials in California, Connecticut, Florida, New York and Maryland are looking into possible legal action against some major US banks including JP Morgan Chase, alleging they manipulated the London Interbank Offered Rate (Libor), and that the Libor manipulation is responsible for higher borrowing costs and lower investment yields which have adversely affected public treasuries, as well as individual loan rates. It is possible that millions of consumers in the US may have been unfairly affected by the manipulated Libor rates, causing them to pay more for loans, or lose money on the investments, or both.

Libor affects the economic health of pension plans and city and state budgets, the profits and losses for derivative traders, and rates for mortgages, student loans, auto loans and small-business lending, according to a report in the Idaho Business Review.

Investigators for the US, UK and the European Union are alleging that that between 2005 and 2009, some of the participating banks manipulated the Libor rate. When Libor rates rose, consumer and business borrowing became more expensive. When Libor rates fell, investment yields were reduced. Not surprisingly, there were winners and losers with Libor manipulations, depending on the direction of the manipulation.

Joe Dear, head of the California Public Employee Retirement System, the largest public pension fund in the US, has been dogged by falling investment yields since 2008. Fund directors have called for prosecuting bank executives if it is shown that the Libor manipulations affected long-term investors such as pension funds.

In June, British investment bank Barclays agreed to pay $450 million to settle rate-manipulation charges filed by US and British officials. Barclays allegedly submitted bogus rates, in part to make itself appear financially sound during the 2008 global financial crisis. As many as 19 other banks in the US and Britian are suspected of doing the same thing.

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Published on Jul-26-12