Libor scandal

The Libor scandal was a series of manipulative behaviour, alleged by financial authorities to have been fraudulent, connected to the Libor (London Inter-bank Offered Rate) and also the resulting investigation and reaction. Libor is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered in 2012 that banks were inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were. Libor underpins approximately $350 trillion in derivatives. It was later administered by Intercontinental Exchange (ICE), which took over running the Libor in January 2014, though Libor was later phased out as a market benchmark. Some bank traders in the United States and Britain were convicted of fraud or conspiracy to defraud.[3]

The banks were supposed to submit the actual interest rates they are paying, or would expect to pay, for unsecured borrowing from other banks; in fact little inter-bank borrowing took place on this basis and instead estimates had to be submitted. Libor was supposed to be the total assessment of the health of the financial system because if the banks being polled feel confident about the state of things, they report a low number and if the member banks feel a low degree of confidence in the financial system, they report a higher interest rate number. In June 2012, multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the scandal.

Because Libor was used in US derivatives markets, an attempt to manipulate Libor could have been an attempt to manipulate US derivatives markets, and thus a violation of American law. Since mortgages, student loans, financial derivatives, and other financial products often rely on Libor as a reference rate, the manipulation of submissions used to calculate those rates could have significant effects on consumers and financial markets worldwide.

On 27 July 2012, the Financial Times published an article by a former trader which stated that Libor manipulation had been common since at least 1991.[4] Further reports on this have since come from the BBC[5][6] and Reuters.[7] On 28 November 2012, the Finance Committee of the Bundestag held a hearing to learn more about the issue.[8]

The British Bankers' Association (BBA) said on 25 September 2012 that it would transfer oversight of Libor to UK regulators, as proposed by Financial Services Authority managing director Martin Wheatley's independent review recommendations. Wheatley's review recommended that banks submitting rates to Libor must base them on actual inter-bank deposit market transactions and keep records of those transactions, that individual banks' LIBOR submissions be published after three months, and recommended criminal sanctions specifically for manipulation of benchmark interest rates. Financial institution customers may experience higher and more volatile borrowing and hedging costs after implementation of the recommended reforms. The UK government agreed to accept all of the Wheatley Review's recommendations and press for legislation implementing them.

Significant reforms, in line with the Wheatley Review, came into effect in 2013 and a new administrator took over in early 2014.[9] The UK controls Libor through laws made in the UK Parliament.[10][11] In particular, the Financial Services Act 2012 brings Libor under UK regulatory oversight and creates a criminal offence for knowingly or deliberately making false or misleading statements relating to benchmark-setting.[9][12]

As of November 2017, 13 traders had been charged by the UK Serious Fraud Office as part of their investigations into the Libor scandal. Of those, eight were acquitted in early 2016.[13][14][15] Four were found guilty (Tom Hayes, Alex Pabon, Jay Vijay Merchant and Jonathan James Mathew), and one pleaded guilty (Peter Charles Johnson).[16] The UK Serious Fraud Office closed its investigation into the rigging of Libor in October 2019 following a detailed review of the available evidence.[17] It is estimated that the seven-year investigation of the Libor scandal in the UK cost at least £60 million.[18]

BBC Radio 4 produced a programme, The Lowball Tapes, that questions whether the right people were convicted for rigging rates.[19] The programme also alleges that at the height of the 2008 financial crisis, the Bank of England was giving instructions to banks to rig Libor to a much greater extent than the traders ever did on their own account. This was subsequently published as a book.[20]

Following a series of related convictions of others in the United States for conspiracy for wire fraud and bank fraud, the US Court of Appeals for the Second Circuit in 2022 overturned the convictions of Matthew Connolly and Gavin Campbell Black on the grounds that the cases had not demonstrated that the Libor submissions were made with 'fraudulent intent'.[21] This led to other similar convictions in the United States being overturned.

In the United Kingdom, the Supreme Court on 23 July 2025 allowed the appeals of Tom Hayes (originally convicted of conspiracy to defraud in 2015) and Carlo Palombo (2019), saying their convictions were unsafe because "It was wrong for the judge [Judge Anthony Leonard] to direct the jury that, if the submitter took any account of the commercial interests of the bank or a trader, the rate submitted was for that reason not a genuine or honest answer to the question posed by the [LIBOR or EURIBOR] definitions as a matter of law".[22]

Early reports

WSJ study

On 16 April 2008, The Wall Street Journal released an article, and later study, suggesting that some banks might have understated borrowing costs they reported for the Libor during the 2008 credit crunch that may have misled others about the financial position of these banks.[24][25] In response, the BBA claimed that the Libor continued to be reliable even in times of financial crisis. Other authorities contradicted The Wall Street Journal article saying there was no evidence of manipulation. In its March 2008 Quarterly Review, the Bank for International Settlements stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings."[26] Further, in October 2008, the International Monetary Fund published its regular Global Financial Stability Review which also found that "Although the integrity of the U.S. dollar Libor-fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar Libor remains an accurate measure of a typical creditworthy bank's marginal cost of unsecured U.S. dollar term funding."

Breadth of scandal becomes apparent

By 4 July 2012, the breadth of the scandal was evident and became the topic of analysis on news and financial programs that attempted to explain the importance of the scandal.[45] Two days later, it was announced that the UK Serious Fraud Office had also opened a criminal investigation into manipulation of interest rates. The investigation was not limited to Barclays.[46][47] It has been reported since then that regulators in at least ten countries on three different continents are investigating the rigging of the Libor and other interest rates.[48][49] Around 20 major banks have been named in investigations and court cases.[50]

Civil lawsuits

Cartel operation

In court documents filed in Singapore, Royal Bank of Scotland (RBS) trader Tan Chi Min told colleagues that his bank could move global interest rates and that the Libor fixing process in London had become a cartel. Tan in his court affidavit stated that the Royal Bank of Scotland knew of the Libor rates manipulation and that it supported such actions. In instant messages, traders at RBS extensively discussed manipulating Libor rates. In a released transcript of a 21 August 2007 chat, Jezri Mohideen, who was the head of yen products in Singapore, asked to have the Libor fixed in a conversation with other traders:[57]

In another conversation on 27 March 2008, Tan asked that RBS raise its Libor submission and noted that an earlier lower figure that the bank had submitted had cost his team £200,000. In other released instant chats, Tan made it clear that the Libor fixing process had become a highly lucrative money making cartel. Tan in a conversation with traders at other banks, including Deutsche Bank's Mark Wong said on 19 August 2007:[57]

Reactions

The cost to colluding and suspect banks from litigation, penalties, and loss of confidence may drive down finance industry profits for years. The cost of litigation from the scandal may exceed that of asbestos lawsuits.[65]

United States

US experts such as former Assistant Secretary of the Treasury Paul Craig Roberts have argued that the Libor Scandal completes the picture of public and private financial institutions manipulating interest rates to prop up the prices of bonds and other fixed income instruments, and that "the motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion."[66] In that perspective they advocate stricter bank regulation, and a profound reform of the Federal Reserve System.

Former Citigroup chairman and CEO Sandy Weill, considered one of the driving forces behind the considerable financial deregulation and "mega-mergers" of the 1990s, surprised financial analysts in Europe and North America by calling for splitting up the

Fines

On 27 June 2012, Barclays Bank was fined $200 million by the Commodity Futures Trading Commission,[90] $160 million by the United States Department of Justice[91] and £59.5 million by the Financial Services Authority[92] for attempted manipulation of the Libor and Euribor rates.[93] The United States Department of Justice and Barclays officially agreed that "the manipulation of the submissions affected the fixed rates on some occasions".[94][95][96]

External links

Barclays Bank

Citigroup

Deutsche Bank

ICAP Europe Limited

Lloyds Bank

Rabobank

Royal Bank of Scotland

UBS

European Union

Government

Order Instituting Proceedings, In the matter of: Lloyds Banking Group PLC, United States, Commodity Futures Trading Commission, 28 July 2014.
Final Notice, Imposing financial penalty: Lloyds Bank PLC and Bank of Scotland PLC, United Kingdom, Financial Services Authority, 28 July 2014.

References

Explaining the Libor interest rate mess CNN, 10 July 2012, retrieved 16 July 2012^
The LIBOR Scandal Explained Accounting Degree, retrieved 17 July 2012^
Court of Appeal decision in R v Pabon [2018] Judiciary, 13 March 2018, retrieved 3 December 2025

Regulatory investigations

The Wall Street Journal reported in March 2011 that regulators were focusing on Bank of America Corp., Citigroup Inc. and UBS AG in their probe of Libor rate manipulation.[40] A year later, it was reported in February 2012 that the US Department of Justice was conducting a criminal investigation into Libor abuse.[41] Among the abuses being investigated were the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an unprecedented amount of insider knowledge into global instruments.[42] In court documents, a trader from the Royal Bank of Scotland claimed that it was common practice among senior employees at his bank to make requests to the bank's rate setters as to the appropriate Libor rate, and that the bank also made on occasions rate requests for some hedge funds.[43] One trader's messages from Barclays Bank indicated that for each basis point (0.01%) that Libor was moved, those involved could net, "about a couple of million dollars."[42]

The Canadian Competition Bureau was reported on 15 July 2012 to also be carrying out an investigation into price fixing by five banks of the yen denominated Libor rates. Court documents filed indicated that the Competition Bureau had been pursuing the matter since at least January 2011. The documents offered a detailed view of how and when the international banks allegedly colluded to fix the Libor rates. The information was based on a whistleblower who traded immunity from prosecution in exchange for turning on his fellow conspirators. In the court documents, a federal prosecutor for the bureau stated, "IRD (interest-rate derivatives) traders at the participant banks communicated with each other their desire to see a higher or lower yen LIBOR to aid their trading positions." The alleged participants were the Canadian branches of the Royal Bank of Scotland, HSBC, Deutsche Bank, JP Morgan Bank, and Citibank, as well as ICAP (Intercapital), an interdealer broker.[44]

United States investigations

The United States Congress began investigating on 10 July 2012. Senate Banking Committee Chairman Tim Johnson (D., South Dakota) said he would question Treasury Secretary Timothy Geithner and Federal Reserve chairman Ben Bernanke about the scandal during scheduled hearings. Rep. Randy Neugebauer (R., Texas) of the House Financial Services Committee, wrote New York Federal Reserve (New York Fed) President William Dudley. He was seeking records of communications between the New York Fed and Barclays between August 2007 and November 2009 related to Libor-like rates.[53]

On 4 October 2012, Republican US Senators Chuck Grassley (Iowa) and Mark Kirk (Illinois) announced that they were investigating Treasury Secretary Tim Geithner for complicity with the rate manipulation scandal. They accused Geithner of knowledge of the rate-fixing, and inaction which contributed to litigation that "threatens to clog our courts with multi-billion dollar class action lawsuits" alleging that the manipulated rates harmed state, municipal and local governments. The senators said that an American-based interest rate index is a better alternative which they would take steps towards creating.[54]

Timothy Lee, a capital markets expert at the Federal Housing Finance Agency Office of Inspector General, said in a 3 November memo that Fannie Mae and Freddie Mac may have lost more than $3 billion because of the manipulation.[55]

Parliamentary investigation

Appearing before Parliament on 16 July, Jerry del Missier, a former senior Barclays executive, said that he had received instructions from Robert Diamond to lower rates after Diamond's discussions with bank regulators. He said that he had received information of a conversation between Diamond and Paul Tucker, deputy governor of the Bank of England, in which they had discussed the bank's financial position at the height of the 2008 financial crisis. It was his understanding that senior British government officials had instructed the bank to alter the rates. Del Missier's testimony followed statements from Diamond in which he denied that he had told his deputies to report false Libor rates. Speaking before Parliament the previous week, Tucker stated that he had shared concerns regarding Barclays Libor rates because the markets might view Barclays to be at risk if its Libor submissions continued to be higher than those of other international banks. In the midst of the Lehman Brothers collapse, there was concern the bank might need to be bailed out if the financial markets perceived it was a credit risk. Tucker told the committee, "I wanted to make sure that Barclays' day-to-day funding issues didn't push it over the cliff."[56]

Municipalities losses

The city of Baltimore and others in the US filed a class action lawsuit in April 2012 against Libor setting banks which alleged that the manipulation of Libor caused payments on their interest rate swaps to be smaller than they should have been.[61] Before the 2008 financial crisis, states and localities bought $500 billion in interest rate swaps to hedge their municipal bond sales. It is estimated that the manipulation of Libor cost municipalities at least $6 billion. These losses were in addition to $4 billion that localities had already paid to unwind backfiring interest rate swaps.[62]

Municipalities began using interest rate swaps to hedge their municipal bond sales in the late 1990s. At this time, investment bankers began offering local governments a way to save money on the sale of municipal bonds. The banks suggested instead of selling fixed interest rate bonds that local governments sell variable interest rate bonds which typically have interest rates as much as one percentage point lower than fixed interest rate bonds. For a municipal government this could mean saving as much as $1 million a year on the sale of a $100 million bond.[63]

To hedge costs on the sale of variable interest rate bonds, which can rise and fall with the market, local governments, such as Baltimore, purchased interest rate swaps which exchange a variable interest rate for a fixed interest rate.[64] In a swap deal, when the interest rate rises above the fixed interest rate, the swap seller pays the local government the increased cost on the bond, but when the interest rate falls under the fixed interest rate, the local government pays to the swap seller the decreased cost on the bond. The interest rate swap mechanism generally works well; however, between 2007 and 2010 the payments to local governments on their swaps artificially decreased but the cost on their bonds remained at actual market rates. This was because most interest rate swaps are linked to the Libor interest rate, while municipal bond rates are linked to the SIFMA Municipal Bond Index interest rate. During the 2008 financial crisis the two benchmark rates decoupled: the Libor rate decreased drastically from around 5.3% in 2007 to around 0.5% from 2009, while the SIFMA rate decreased to a lesser extent from around 3.5% in 2007 to below 2%. Municipalities continued to pay on their bonds at the actual market Sifma rate, but were liable to their interest rate swaps at the artificially lower Libor rate.[63]

Early reports

WSJ study

Breadth of scandal becomes apparent

Civil lawsuits

Cartel operation

Reactions

United States

Fines

See also

External links

References

Awareness of central banks

Regulatory investigations

United States investigations

Parliamentary investigation

Mortgage rate manipulation

Municipalities losses

Europe

Recommendations

Reforms

Australia