In Iowa last week, the owner of an investment firm in a small town confessed to running a Ponzi scheme for 10 years or more. Instead of having more than a hundred million dollars in a bank account that belonged to his clients, he had less than $10 million. He had intercepted actual bank statements, then cut and pasted to create the inflated version he sent on to his clients.
That is one type of financial scam, at one end of the spectrum.
Now comes one at the other the end: Some of the world’s largest banks have been guilty of adjusting downward the Libor rate, the London Interbank Offered Rate, the interest rate that banks use when they loan money to one another for very short periods and which for very large loans may be used as the critical interest rate benchmark.
For lenders, that interest rate determines what their money earns.
For borrowers, it determines what their money costs.
How do we know that a lower actual Libor rate was used in 2008 and during troubled financial times?
Because Barclays, a large British bank, has admitted that is what was going on and that it contributed to the false calculation, it is paying a hefty fine.
In 2008, when the financial markets were coming apart largely because of the gambling that was based on inflated mortgages, a lower than actual Libor interest rate was a sign that all was well, or almost well in the financial world.
Had the Libor rate been higher – as it should have been – that would have signaled that there was worrisome uncertainty, perhaps fear, among lenders about the strength of the promise to repay loans.
Because of Barclays’ cooperation in the investigation, it appears that the British government knew what was going on and that some financial institutions in this country did, too.
The lawsuits by those who lost money because of the too low rate are just beginning. Large municipalities in this country, which bank hundreds of millions in tax revenues before expenses need to be paid, are claiming that their deposits should have earned more than they did. That could be a million dollars. And, healthy banks that were lending to other banks at the end of the day, were shorted, too.
Turmoil based on what was done at that time with Libor is growing, and will be in the news for some time. The largest financial institutions have done it again.