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Published:July10,2012

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BehindtheLiborScandal
AsettlementbetweentheBritishbankBarclaysandregulatorsmaybethefirst inaseriesofcasesagainstotherbanksthatmayhavemanipulatedtheLibor.

TheLibor isabenchmarkinterestrate thataffectshow consumersandcompaniesborrowmoneyacrosstheworld.Therateissetby theBritishBankersAssociation(B.B.A.),anindustrygroupinLondon.

HowtheRateIsSet

BanksSubmitFigures

BritishBankersAssociation

TheLibor

Eachweekday,leadingbanks aroundtheworldeachsubmita figuretotheB.B.A.basedonthe rateatwhichtheyestimatethey couldborrowfundsfromotherbanks.

TheB.B.A.throwsoutthe highestandlowest25percent ofsubmissionsandaverages theremainingrates.Thisis theLibor.

Itiscalculatedfor10different currenciesand15borrowing periods.Thereare18banks thatsubmitratesfortheU.S. dollarLibor.

WhatIsAffectedbytheRate

Derivatives

Loans

WhatBarclaysDid

TheLiborisoftenusedto pricefinancialinstruments likeswapstransactions andfuturescontracts.At leastanestimated$350 trillioninderivativesand otherfinancialproducts aretiedtoit.

Tocalculateinterestrates, somelendersusetheLibor asabaseandaddadditional interestbasedonthe borrower.WhentheLibor goesup,ratesand paymentsonloanstiedtoit canriseaswell.

Between2005and2007, employeesinBarclaystrading unitsconvincedemployees responsibleforsubmitting Liborratestoalterthebank's ratesbasedontheir derivativestradingpositionsto bolstertheirownprofits. CertaintradersatBarclays

3
Mortgages StudentLoans

coordinatedwithotherbanks toaltertheirratesaswell. Later,duringtheheightofthe financialcrisis,Barclays submittedartificiallylowrates togivetheimpressionthatthe bankcouldborrowmoney morecheaplyandwas healthierthanitwas.

Ofthemortgagesinthe UnitedStatesthatare adjustablerate,about45 percentofprimemortgages and80percentofsubprime haveinterestratesbased ontheLibor.

Abouthalfofvariablerate privatestudentloansare tiedtotheLibor.

TwoKindsofManipulation
From2005to2007,swapstradersoftenaskedtheBarclaysemployeeswho submittheratestoprovidefiguresthatwouldbenefitthetraders,insteadof submittingtheratesthebankwouldactuallypaytoborrowmoney.
SEPT.13,2006 DEC.14,2006 JULY29,2007

"HiGuys,Wegotabigpositionin3mlibor forthenext3days.Canwepleasekeep theliborfixingat5.39forthenextfew days.Itwouldreallyhelp.Wedonotwant ittofixanyhigherthanthat.Tksalot."

SeniortraderinNewYorktosubmitter

ForMondayweareverylong3m cashhereinNYandwouldlikethe settingtobesetaslowas possible...thanks

TraderinNewYorktosubmitter

Plsgofor5.36liboragain,very importantthatthesettingcomes ashighaspossible...thanks.

TraderinNewYorktosubmitter

5% Threemonth Liborrates 4 RATEBARCLAYS SUBMITTED 3

JUNE27,2012

CALCULATED AVERAGE

Lastmonth,Barclayspaid$450 milliontosettleaccusationsthatit hadtriedtomanipulateLibor rates.Sincethen,itssubmitted rateshaverisen.

2006

2008

Period ofchart below

2010

2012

In2008,Barclayssubmittedartificiallylowfigurestodeflectscrutinyaboutitshealth.
LEHMAN BROTHERS BANKRUPTCY

RATEBARCLAYS SUBMITTED

Threemonth Liborrates

CALCULATED AVERAGE

InOctober2008,aBankofEnglandofficialquestioned whyBarclayssubmissionswerehighcomparedwith otherbanks.Afterthis,theBarclaysratesfellcloserto thoseofotherbanks.Barclayshasreleased documentssayingthatsomebankexecutivesbelieved theofficialhadinstructedthemtoloweritsrates,but theofficialhasdeniedanyimproperactions.

LIGHTERLINESREPRESENTRATES SUBMITTEDBYOTHERBANKS

2%

July 2008

Aug.

Sept.

Oct.

Nov.

Dec.

Jan. 2009

Feb.

March

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Sources:U.S.DepartmentofJusticeBritishBankers'AssociationU.S.CommodityFuturesTradingCommissionFinaid.orgFederalReserveBankof ClevelandBloombergsettlementdocuments