Submitted By:• 2013B61 Yashh Berry • 2013B63 Tanya Varma • 2013B64 Varun Varshney • 2013B65 Vipul Garg • 2013B66 Viral Doshi • 2013B69 Siddharth Bhardwaj• 2013C01 Abhinav Sharma • 2013C02 Aditya Goel

LIBOR Scam

WHAT IS LIBOR ?

• The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks.

• Libor rates are calculated for ten currencies and fifteen borrowing periods ranging from overnight to one year and are published daily at 11:30 am (London time) by Thomson Reuters.

• Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the Libor.

HOW IS IT CALCULATED?

• Each LIBOR rate is calculated using the “trimmed mean” of the contributing banks’ submissions.

• Trimmed mean is calculated by discarding the top 25% and bottom 25% of the submitted interest rates and then taking an average of the remaining middle 50% (for example, if 18 banks submit rates for the 30-day U.S. dollar LIBOR rate, the top 4 and bottom 4 submissions are discarded before an average is taken of the middle 10 submissions)

• This calculation reduces the impact that any single contributing bank can have on the final officially published rate.

IMPORTANCE OF LIBOR

• Nearly $800 trillion in financial instruments—including corporate debt, mortgages, student loans, interest rate and other derivatives—reference LIBOR in some form or other.

• LIBOR is often used as the base for variable-rate loans.

• LIBOR has become the shorthand measure of stress in global money markets.

• LIBOR rates are also used in many derivatives transactions

How Libor Scandal became apparent

• On 27 July 2012, The Financial Times published an article by a former trader that Libor manipulation had been common since 1991. Reports on this have been flashed on BBC, News Agency Reuters and other financial programs.

• During the 2007-2012 global financial crisis the banks involved had artificially lowered rate submissions to make their bank look healthy.

• Two days later the UK Serious Fraud Office opened a criminal investigation into manipulation of interest rates. The investigation was not limited to Barclays; around 20 major banks have been named in investigations and court cases.

• The CFTC (in mid-2008), the SEC (in 2009) and the DOJ (in 2010) opened investigations into the manipulation of LIBOR.

• The scandal arose when it was discovered that banks had falsely inflated or deflated their rates—so as to make profits from Libor trading. • False presentation of rates as the banks wanted to give the impression that they were more credit worthy than they were in reality.

Early Reports of Libor Manipulation

• On 16th April 2008 – the Wall street Journal released a controversial article suggesting that some banks might have understated borrowing costs they reported for the Libor during 2008 credit crunch.

• Two years later in April 2010, a study by economist , Snider and Youle, corroborated the results of the Wall Street Journal. They argued that banks did this because they sought to make substantial profits on their large Libor interest-linked-Portfolios.ion of these banks

• In 2009 the Citigroup reported that it would make $936 million in net interest revenue if interest rates fall by .25% and that they would make $1935 million if the interest rates fall by 1%.

• The Governor and the deputy Governor of the Bank of England were aware that because of industry concerns the Libor rate was being under-reported

Early Reports of Libor Manipulation

• A trader from Royal Bank of Scotland claimed that it was a common practice among senior employees of the bank to make requests to the bank’s rate setters to appropriate Libor rate.

• The Federal Reserve Bank of New York first received indications of inaccurate LIBOR rates in the fall of 2007 as a part of its normal market intelligence gathering process.

• Canadian branches of Royal Bank of Scotland/HSBC/Deutsche Bank/JPMorgan Bank/Citibank were involved in this.

• On 27 June 2012—Barclay’s bank was the first to be fined $200 million by Commodity Futures Trading Commission/ $160 million by the U.S. Department of Justice – for attempting to manipulate Libor rates in 2007-12.

Did U.S. and U.K. regulators know about the manipulation of LIBOR at the time it was occurring,

and what has their response entailed?

YES!!!The Fed first received concrete information that LIBOR rates were being intentionally misreported on April 11, 2008 during a call with a Barclays employee, who explained that Barclays was under-reporting its rate to “avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks.

The manipulation of LIBOR continued through at least mid-2009, not just for the sake of avoiding the stigma associated with appearing weak during the financial crisis, but also for the then unknown motive of benefitting individual derivatives trades.

Who might have benefitted from and who might have been hurt by the manipulation of

LIBOR?

Categories of LIBOR manipulation :- Trading-based manipulation The immediate beneficiary of trading-based

manipulations was specific Barclays traders Reputation-based manipulation trading-based manipulations might have

affected numerous other financial contracts that referenced the rate of LIBOR, such as adjustable-rate mortgages.

The LIBOR scandal has had the immediate effect of undermining public confidence in financial markets.

• Barclays bank has had to pay nearly $453 million dollars in penalties to U.S. and U.K. regulators. Barclays received an estimated 30 percent discount on its penalties in exchange for cooperating fully with the authorities’ ongoing investigation;

Barclays is the only bank that has admitted to manipulating LIBOR.

How and why did Barclays manipulate LIBOR?

According to the statement of facts supplied by the DOJ, Barclays employees attempted and succeeded in manipulating published LIBOR rates during the mid-2005 to mid-2009 time period.

Intentionally misrepresented the rate at which Barclays could borrow money from other banks in the London interbank market.

Barclays’ LIBOR submitters intentionally under-reported or over-reported the bank’s cost of funds

LIBOR submitters held constant the bank’s cost of funds when it actually either increased or decreased.

The motive for these misrepresentations varied over time. In the DOJ’s Statement of Facts, Barclays admitted to three different types of manipulations.

LIBOR’s influence extends beyond the realm of financial transactions. LIBOR has become the shorthand measure of stress in global money markets.

Barclays’ Swaps traders - To manipulate the published LIBOR rate for the benefit of specific derivatives trades.

Submitted intentionally low LIBOR rates in order to avoid the stigma of appearing weak relative to other banks during the financial crisis.(banks were often compared against one another)

Barclays swaps traders communicated with swaps traders at otherunidentified LIBOR contributing banks to request LIBOR submissions that would be benefit specific derivatives trades of Barclays’ traders and/or their counterparts at other

WHY?

LIBOR Banks Sued in Civil Court• More than 40 suits have been filed related to LIBOR manipulation. LIBOR is used as a reference point for mortgages and other trades worth $300 trillion.

US Home Owners V/S Banks• Homeowners in the U.S sued big banks like Bank Of America, Citigroup, Barclays, UBS, JPMorgan Chase, Deutsche Bank and others of fraud. • The lawsuit includes 100,000 plaintiffs who have lost thousands of dollar each. • According to lawsuit, for at least 10 years between 2000 and 2009 the banks conspired to falsely increase the Libor on the first day of each month for the purpose of increasing the rates on home owners’ mortgages

Municipal Lost Billions• The city of Baltimore and others in the US filed a lawsuit which alleged that Libor caused payments on their interest rate swaps to be smaller than they should have been.• It is estimated that the manipulation of Libor cost municipalities at least $6 billion.

Other Lawsuits

• NCUA Lawsuit: The National Credit Union (NCA) Administration sued Credit Suisse Group AG, UBS AG, JPMorgan Chase & Co and 10 other international banks 13 for their involvement in the manipulation of LIBOR because of which the credit unions had to lose out on millions of dollars on interest income as a result of rate-rigging.

• Fannie Mae Lawsuit: On October 2013, The Federal National Mortgage Association (Fannie Mae) accused nine of the world’s largest banks and sued them of colluding to manipulate interest rates and seeking more than $800 million of damages. Fannie Mae filed the complaint in the U.S. District Court in Manhattan, where it accused the banks of conspiring for many years to suppress Libor including during the 2008 financial crisis.

• Fraddie Mac Lawsuit: UBS and Credit Suisse are among 15 banks to be hit with a lawsuit by the United States government-owned mortgage finance company Freddie Mac as a result of the Libor manipulation Freddie Mac is suing the banks, plus the British Bankers’ Association that was responsible for overseeing Libor, after it was found that Libor rates were artificially lowered by certain traders to maximize profits.

• Bershire Bank: New York-based Berkshire Bank filed a class-action suit against the 16 banks responsible for setting Libor - the widely used interest rate that is now known to have been manipulated by bankers for years. The Claim made by Berkshire Bank in a proposed class-action lawsuit was that it was cheated out of interest income on loans made in New York because of the rigging of the LIBOR rate.

Reactions to the Scam

Rift between regulators in Europe and US

The New York Federal Reserve, for example, knew Libor was "not reliable," he says, but it never followed up with the

Bank of England

Libor has been discredited and should be scrapped in favor of

a new rate based on real transaction data while

regulators in Britain favour a gradual shift.

British press exploding over the scam while in US parties trying

to tramp down rather than raise the anger.

Reactions to the Scam

Industry reaction (online survey of 103 respondents from 44 identifiable banks across the globe by LEPUS)

The majority of the respondents to the survey, 57%, believe

that the rigging of the LIBOR rate has been

pervasive in the banking industry

43%, believe that weak regulation of the way in which

LIBOR rates are set is the issue that lies at

the heart of the recent scandal

60% of respondents believe that

regulators were aware of rate

manipulation but tolerated the practice

and allowed it to continue to preserve

confidence in financial markets

Majority of them want the setting of

LIBOR mechanism to be revised

Implications of the scam

The banks being investigated for Libor manipulation could end up paying an approximate 35 billion in legal settlements, separate from any payments to regulators.

Banks would have to now base their submissions on market prices rather than some hazy estimate of borrowing costs. Libor would need to be set according to actual borrowing and lending done by banks,

Management of the LIBOR will likely be transferred to regulators to oversee the rate going forward. Currently, the LIBOR is managed by the British Bankers Association, a banking and financial services trade association

Implications of the scam

Proposed new regulations will also make banks and individuals more accountable for manipulation attempts, including criminal charges

Three new criminal offences were introduced under Part 7 of the Financial Services Act 2012

• making false or misleading statements• creating false or misleading impressions• making false or misleading statements or creating a false or misleading impression in relation to

specified benchmarks

Although LIBOR is currently stated to be the only relevant benchmark for the purposes of the new criminal offence under Part 7, it is likely to be only a matter of time before the criminal offence is extended to other benchmarks

The Wheatley Review•The government of the United Kingdom commissioned Martin Wheatley, a managing director at the Financial Services Authority (FSA).

Thank You

• Stay Away from scam’s