The LIBOR Olympics: Winning the Gold in the BBB Competition

Thursday, July 26, 2012 at 10am
By John Friedman

The LIBOR scandal has been brewing for a while now — five years by some measures.  But it was just a month ago, on June 27, 2012, that Barclays, a British-based bank, settled with US and UK regulators to the tune of nearly half a billion dollars (“nearly” here represents a round-up of tens of millions of dollars . . .  but, at scale, that is the rounded figure).

Briefly, the LIBOR scandal is the latest in a series of episodes of banks-behaving-badly, this time centering around the London InterBank Offered Rate, which is an interest rate, published each day by the British Bankers’ Association, based on objective, fact-based information various banks doing business with various banks in London submit to the BBA.  As it now appears unequivocally true, some folks — Barclays folks for sure, and probably others — were gaming that rate by submitting bad information.

So rather than have an objective standard setting the interest rate, instead we had a bunch of fellows figuring out what sort of interest rate would serve their particular interests, and doing their best to make sure that that’s where LIBOR ended up that day.

The problem with that, other than the basic you’re-not-supposed-to-do-that sort of problem, is that hundreds of trillions of dollars worth of loans have their interest rates somehow pegged to the changes in the LIBOR rate, with estimates ranging from $350 trillion all the way up to $800 trillion (this latter figure being right around where the Q word, as in quadrillion, starts coming into play) (in our lifetimes, you better believe we will become conversant in using the Q word).

To put that into perspective, U.S. GDP is on the order of $15 trillion — so the LIBOR scandal touches loans worth more than 20 years’ worth of U.S. GDP — more than 20 years of the total U.S. economy.  So when you mess with LIBOR, you’re messing with something totally, awesomely (in the old fashioned sense of the word), out-of-this-worldly HYUUUGE.

*  *  *

Now, as noted above, the L in LIBOR stands for London.  And as noted in every piece of most media over the past several weeks, and in probably every part of the media starting tomorrow, the 2012 Summer Olympics are starting up in London tomorrow.

Central Casting and Aaron Sorkin could not have together cobbled together a better plotline for both the financially aware and the financially unaware out there to, once again, be hit over the head by how badly the banks have been misbehaving.  

London, our eyes are upon you, in both your LIBOR’y-BBA’y’ness, and in your ability to throw the biggest sporting bash ever.  Because that is, after all, what the Olympics — and especially the summer Olympics — are all about, isn’t it?  Each one bigger and more grand than the last?

And this one just happens to come with a bow tied around it — a bow of BBB — Bankers Behaving Badly.

London is calling.

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