1. LIBOR stands for London interbank offered rate. In order to calculate the rate, various
banks submitted their rates. Members of the banking industry manipulate LIBOR
through two methods: manipulation of interest rates and low-balling. It is possible to
manipulate rates in a way that affects the whole system, either by submitting rates that
are too low or too high to avoid being considered outsiders or by adjusting a rate just
right in the middle. Low-balling manipulation allowed Barclay to provide lower rates
than the top bank, while still being regarded as a reasonable rate. One can conclude, to
take a more general approach, that firms, traders, and consumers all suffered from the
manipulation. Traders and financial institutions that followed the rules did suffer in a
way where they got no gain in profit or consumers, but they also didn't suffer because
they did not manipulate numbers to increase their profits or gain more consumers. In
many cases, consumers were overcharged on interest due to the set interest rates
provided by LIBOR. Banks and traders were the ones who benefited from the
manipulation; they gained higher profits as a result. Additionally, there may have been
some consumers who benefitted from the manipulation in the opposite effect as those
who paid less interest may have benefited.
2. Regulations, including the British Bankers Association (BBA), the Bank of England (BoE),
and the U.K. Financial Services Authority (FSA), are responsible for most of the
manipulation of LIBOR, as they created it and are responsible for monitoring the banks.
Moreover, these entities received reports of possible manipulations in 2008 and
received recommendations from NY Fed on improving LIBOR's "accuracy and credibility"
(Rose & Sesia, 2014, p. 3). Despite several recommendations aimed at improving the
accuracy of LIBOR, the BBA decided to retain the existing LIBOR setting process. Perhaps
some of the manipulations could have been prevented if the BBA had changed the
process once weaknesses were identified. Additionally, I consider Barclays management
to be the most responsible because leaders are responsible for everything that goes on
underneath them, even if they claim ignorance regarding the specifics. Perhaps the
derivative traders would be wiser if there was a stronger moral culture or more ethical
training on the Desk and would not ask the Desk to manipulate LIBOR rates to their
advantage.
3. It would be my responsibility to gather information and documents about my
competitors' cheating and submit them to the regulatory agency when I become aware
of it. As part of my review, I would also examine my company's policies and processes.
This is to ensure that anything my competitors are doing is not taking place within my
company. Furthermore, I would inform my staff of the situation and make them aware
that cheating is not tolerated at my company. It would be my first step to ensure that I
understand what the regulators are asking. In order to avoid any misinterpretations, it is
critical for me to make it clear that the regulators are asking me to cheat. If the
information is accurate, the regulators should be notified that there was a violation of
policies in place. Finally, I would document the situation and consult with my
management, seek the advice of an attorney and other regulators, and report the
request. Leadership requires speaking out when something is immoral or wrong. This is
the first thing you learn as you are growing up and it becomes a part of your life.
Whenever someone tells me to cheat or lie then I have trouble speaking or doing
whatever it may be because it is embedded within as I grew up. I have a volleyball team
that I lead but if I find out that someone is intentionally playing badly or making plans
with other teams then I report to my seniors and make sure they don’t play that game
because this is unfair to others who have given their 100% throughout the game. My
team recently was in a tournament, and I noticed that one player from another team is
also playing for a different team so I told my senior and make sure that the player did
not play for two teams as this would have been unfair to all 14 teams in the
tournament.
4. In the article, we are all aware that there are many ways to still manipulate LIBOR even
though it appears to be a good start with six revised reforms that could potentially fix
LIBOR. Instead of each bank submitting the rates, a program should be developed in the
computer where the data can be retrieved from banks and produced for LIBOR by
pulling data from a computer. In my opinion, the most beneficial change was the one in
which the rates submitted are embargoed for three months before publication. Since
there is no way to predict what trades will take place 3 months down the road rather
than the next day, this will prevent the kind of rate manipulation that Barclay's
derivative traders were practicing on daily trades and deals. However, this could simply
lead to new kinds of manipulation, especially those that target mid-term or long-term
maturities.
5. Subprime mortgage meltdown and the LIBOR scandal share some similarities. There
were similarities between the two situations in terms of the financial institutions'
interest in making profits and in ensuring their financial viability when they were not
profitable. Due to the LIBOR scandal, Barclays set higher interest rates to increase
profits, which contributed to the subprime mortgage market meltdown. In addition,
adjustable-rate mortgages, which are based on LIBOR rates, had a significant impact on
the meltdown that was occurring at this time. As a result of both incidents creating
panic and distrust in the financial market, regulators realized that they needed to
increase their oversight and reforms to prevent these scandals from happening in the
future. Despite the similarities between these two financial disasters, there were also a
few differences. Several different factors contributed to it, including mortgages that
were approved by high-risk lenders and mortgages that were beyond the means of the
lender. Banks knowingly manipulated LIBOR rates to achieve their monetary goals
during the LIBOR scandal. In addition, traders were requesting favors from one another
in setting the rates, because multiple banks had a hand in manipulating LIBOR. The
LIBOR scandal was also deeply involving senior management, with many of them
insisting their staff set the rates accordingly.
Reference
Amar Ranu Follow Team Manager - Investment Products & Research. (n.d.). S&L vs subprime
crisis. Share and Discover Knowledge on SlideShare. Retrieved November 6, 2022, from
https://www.slideshare.net/amarranu/sl-vs-subprime-final
Rose, C. S., & Sesia, A. (2014). Barclays and the LIBOR Scandal. Harvard Business School.
Waggoner, J. (2012, July 19). Who got hurt by Libor? the scandal explained. CNBC. Retrieved
November 6, 2022, from https://www.cnbc.com/id/48244741
Efforts to fix issue of LIBOR are somehow satisfactory . The perpetrator - banks have
been heavily fined and have been disclosed to the public . However the threat still
prevails , as this could reoccur in future in somewhat a different form . The ultimate
solution to this is transparency . The banks must have transparent reports and the
central bank should subject them to audit . There should also be a third regulatory body
supervising the work of the regulatory body regulating the banks . This would ensure
due diligence and prevent forced manipulation practiced in the banking sector .
Moreover this body shall allocate its executives in the large banks , involved in the rate
setting process , to monitor the actual financial position of the bank and restrict any
malpractice of falsifying the rates deliberately.
The efforts to fix the LIBOR, I think definitely adjusted the process for the better. The
original process where the BBA had sole control of the rate setting process with very
little to no government oversite was a recipe for failure. By keeping the BBA in place but
by moving some of the oversight and administration to the Financial Conduct Authority,
the UK government provided much needed checks and balances in the rate regulation
process. One of the key provisions that will ultimately help prevent the activities that
took place from 2005 – 2007 was the rate embargoing measures. By placing a three (3)
month delay on the rates, the traders have less direct impact and ability to game the
system on a daily basis and the time also gives the FCAadditional time to detect
improprieties.Where the measures fall short are around the data that will be used in rate
determination. In the new model, the regulation states that “Submitting banks should
use market data in determining the rates submitted” (Rose & Sesia, 2012). Although this
does provide protection against subjective data being submitted, I don’t think it went far
enough. If the LIBOR is truly a representation of the rates that major banks are paying
for money, then as part of setting rates, I think they should be required to submit either
the direct quotes and/or the actual transactions in support of the rates that they publish.
By requiring direct evidence to the actual rates, there would be less incentive and room
for rate manipulation.