all about libor

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  • 1. LIBOR Scam 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
  • 2. 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.
  • 3. 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.
  • 4. IMPORTANCE OF LIBOR Nearly $800 trillion in financial instruments including corporate debt, mortgages, student loans, interest rate and other derivativesreference 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
  • 5. How Libor Scandal became apparent The scandal arose when it was discovered that banks had falsely inflated or deflated their ratesso 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. 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.
  • 6. 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
  • 7. 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 banks 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 2012Barclays 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.
  • 8. 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.
  • 9. 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.
  • 10. 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;
  • 11. How and why did Barclays manipulate LIBOR? Barclays is the only bank that has admitted to manipulating LIBOR. Intentionally misrepresented the rate at which Barclays could borrow money from other banks in the London inter bank market. Barclays LIBOR submitters intentionally under-reported or over-reported the banks cost of funds LIBOR submitters held constant the banks cost of funds when it actually either increased or decreased. 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.
  • 12. WHY? The motive for these misrepresentations varied over time. In the DOJs Statement of Facts, Barclays admitted to three different types of manipulations. 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 other unidentified LIBOR contributing banks to request LIBOR submissions that would be benefit specific derivatives trades of Barclays traders and/or their counterparts at other LIBORs influence extends beyond the realm of financial transactions. LIBOR has become the shorthand measure of stress in global money markets.
  • 13. 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.
  • 14. 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 worlds largest banks and sued the