The Most Dishonest Number in the World: LIBOR

By William K. Black

The FDIC has sued 16 of the largest banks in the world plus the British Bankers Association (BBA) alleging that they engaged in fraud and collusion to manipulate the London Inter-bank Offered Rate (LIBOR).  BBA called LIBOR “The most important number in the world.”

LIBOR is actually many numbers that depend on the currency and term (maturity) of the loan.  The collusion involved manipulating most of these rates.  A vast number of loans and derivatives are priced off of these “numbers.”  Estimates of the notional dollar amount of deals affected by the collusion range from $300-550 trillion in deals manipulated at any given time.  The LIBOR frauds began no later than 2005 and continued through 2011.

The BBA and the banks claimed to the world that LIBOR was simply the prices (interest rates) set by the market for what it cost the world’s largest banks to borrow from each other.  The banks would report to the BBA those interest rates and, after excluding outliers, the average reported cost to borrow for X days in Y currency would be reported as the LIBOR “number.”

The system was not regulated.  The theory was that the banks self-regulated.  LIBOR was the City of London’s “crown jewel” and theoclassical economics predicted that the elite banks’ self-interest in their reputation and the value they gained from having LIBOR as the global standard would ensure that the banks would report honestly.  As my readers know, any discussion of the “banks’” interests is dangerously misleading.  The key question is the interests of the banks’ officers, particularly those that control the banks.  The “unfaithful agent” (bank officer) is the leading threat to the banks.  Theoclassical economists assumed away the “agency” problem.

The fact that the FDIC “only” sued 16 of the largest banks in the world does not indicate that the other elite banks were run honestly.  The other elite banks were not part of the group that set LIBOR so they could not join in the cartel.  The LIBOR conspiracy could only succeed and persist if none of 16 elite banks was controlled by honest officers and no regulator acted to end the collusion once they became aware of the collusion (which happened no later than April 16, 2008).  We ran a real world test of the ethics of the leaders of 16 of the world’s most elite banks.  The scorecard according to the U.S. government agency that investigated the matter (the FDIC) reports that each of the leaders failed.  Our twin emergencies are financial and ethical.

According to the FDIC investigation, the three largest banks in America (including the world’s two largest banks), the four largest banks in the U.K, the largest bank in German, the largest bank in Japan (plus one of the handful of surviving “main banks”), the third largest bank in France, the two largest Swiss banks, the second largest bank in Canada, and the second largest bank in the Netherlands conspired together to manipulate LIBOR and not only lied about it but also covered up the cartel and the fraud scheme it used.  The 15 surviving banks’ total assets were nearly twice as large as the U.S. GDP as of September 30, 2013.

Here are the data on the banks sued by the FDIC

Bank ($ billions, IFRS, as of 9/30/13)
Bank of America Corp 3063^
Barclays PLC 2275
Citigroup Inc 2693^
Credit Suisse Group AG 1643^
Deutsche Bank AG 2420
HSBC Holdings PLC 2723
JPMorgan Chase & Co 3678^
The Royal Bank of Scotland Group PLC 1829
UBS AG 1160
Rabobank 908
Lloyds Banking Group PLC 1409
Societe Generale 1698
Norinchukin Bank 846
Royal Bank of Canada 825
Bank of Tokyo-Mitsubishi UFJ 2469
Total: 29639
Source: SNL Financial

^Data for banks that follow U.S. generally accepted accounting principles (GAAP) (yes; that includes Credit Suisse) adjusted to the International Financial Reporting System (IFRS) basis to make data comparable.  (The difference is how financial derivative positions are measured.)

*I excluded one of the banks the FDIC sued, WestLB AG, because the (infamous) German Landesbank was sold as part of a German bailout during the crisis.  It had over $400 billion in total assets before its collapse during the crisis.


Consider the ethical and political implications of what the FDIC investigation has confirmed.  The entire barrel of apples is rotten.  Every CEO failed the ethical test, and the ethical bar that they failed to surmount was set exceptionally low.  That can only happen when a “Gresham’s” dynamic has been allowed to persist for years because of the three “de’s” (deregulation, desupervision, and de facto decriminalization).  Such a dynamic can cause “bad ethics to drive good ethics out of the markets.”  No one should be able to view the facts the FDIC cites without a sense of horror combined with an urgent commitment to transform the industry that has done so much financial and ethical harm to our nations.  The twin emergencies are global.

Crony Capitalism and Politics

There are two possibilities:  the Obama administration knew for six years that the world’s largest banks were endemically led by frauds or the administration learned of that fact recently when it learned of the results of the FDIC investigation.  The LIBOR scandal became public knowledge with the Wall Street Journal’s April 16, 2008 expose, so the Bush administration also knew it was dealing with elite frauds.  If the Obama administration has long known that fraud was endemic among the leaders of the world’s largest banks, then its policies toward those CEO and the banks they control have been reprehensible and harmful.

If the administration has just learned from the FDIC investigation about the true nature of the CEOs that it has refused to hold accountable and allowed to retain and even massively increase their wealth through leading control frauds then we can doubtless expect a series of emergency actions transforming the administration’s finance industry policies.  The FDIC lawsuit provides a “natural experiment” that allows us to test which of the possibilities was correct.

Let’s review the bidding.  The U.S. government, through the FDIC, has found after a lengthy investigation that the leaders of 16 of the world’s largest banks conspired together to form a cartel to manipulate the LIBOR “numbers” and to defraud the public about the scam.  This should have led the criminal justice authorities to prosecute large numbers of senior officers of these banks – but none of them have been prosecuted.  It obviously poses a grave threat to the “safety and soundness” of the entire financial system.  The endemic frauds led by elite CEOs demonstrate such a pervasive failure of integrity and ethics by the leaders of the finance industry that there is a moral crisis of tragic proportions.  So here are some questions (along with the usual who, when, where details) I request that the media formally ask the administration:

  1. Did the FDIC brief the administration before it brought its LIBOR suit?
  2. Why didn’t Attorney General Holder and the FDIC leadership conduct a news conference announcing the suit and emphasizing its implications?
  3. Why didn’t the FDIC’s “home page” or press release site even note the suit?
  4. Did the suit cause the administration to transform its finance industry policies?
  5. When will the President address the Nation about fixing the twin emergencies?


13 responses to “The Most Dishonest Number in the World: LIBOR

  1. There was disgraceful behaviour in relation to the manipulation of some LIBOR rates, and it is difficult to believe that it started only in 2005 or that it was confined to a small number of episodes.

    Further than that, the facts, as far as my awareness goes, do not justify conclusions such as those presented as beyond doubt above. I have yet to see any convincing evidence that bank customers lost any significant money as a result of LIBOR manipulation (but I will not be surprised if a few did). The whole affair has, as far as damage to third-parties is concerned, been hugely over-blown.

    There is no link above to the FDIC allegations, but an allegation is still only an allegation. Even an allegation made conscientiously does not – in a just legal order – always survive the test of forensic scrutiny.

  2. Thank you, Bill Black.

  3. Bill, I suspect the answer to the question of “when” is when the general public finally understand what is going on and mount a credible grass roots movement to bring about change. OWS was on track but lacked leadership and a clear “ask” message, and was quickly discredited through select reporting. Big media is too owned by the respective parties, both of which serve the same master, so I don’t see them carrying this torch without the public push.

  4. Good questions.

    I suppose it is obvious that by manipulating the rate the banks would profit somehow, else there would be no motive to do it, but it is not clear to me how they profited, or that the “manipulated” rate was any different from what the real rate would be. I hear the reporting was sometimes higher and sometimes lower than it should have been. I would expect, then, to see wildly volatile spreads between LIBOR and the CB interest rate targets, and I don’t recall any such thing. I had a LIBOR-based variable rate mortgage from 2004 to 2009, and it followed the Fed’s target rate quite closely. I’d be interested to hear details about how the LIBOR rate deviated from what it should have been, and the mechanics of how the banks profited by manipulating it.

  5. Well, perhaps it is not the “most dishonest number”, other numbers like inflation in Argentina may have a better claim.

    There is also the PRIME RATE in the USA, which may have been manipulated for two dozen years by the Fed to give banks big risk free profits with their smaller customers:
    «the spread between the Federal funds (and Treasury bill) rate and the prime rate widened from 1 1/2% to 3% in 1991. That was Greenspan’s gift to the banking sector to insure that major banks would not fail.

    You may recall at the time that rumors were rife — including some repeated on the floor of the House — that Citibank was about to go under. By doubling the margin between the prime and the funds rate — and essentially increasing the profitability fourfold after taking into consideration the costs of processing loans»

  6. «There is no link above to the FDIC allegations, but an allegation is still only an allegation.»

    Well, the case is based on the well documented confessions of some major banks, so that LIBOR was manipulated is no longer a mere allegation:

  7. financial matters

    In 2004 outstanding derivatives were at $300 trillion. Many of these were based on types of interest rate swaps that contained a LIBOR component. These could even be embedded in bonds such as ‘inverse floaters’ that was essentially regulatory arbitrage allowing more retail investors to partake of these products.

    Satyajit Das has an excellent treatment of this in ‘Traders, Guns and Money’

  8. Aren’t all these banks part of that Wolfsberg Group, the ones who set the standards for anti-money laundering?

  9. Pingback: Bill Black: The Most Dishonest Number in the World: LIBOR | naked capitalism

  10. I’m really sad to see BB resort to this level of ranting and to be sucked into the pseudo scandal around LIBOR.

    Since the crisis and the scandals broke, both the banks and those who were supposed regulate them have engaged in a massive “ballet” to deliver the message that “bad apples/agents” were to blame…. So as to avoid suggestions that the system itself was always unworkable, esp at the scale that emerged in the 90’s…

    The original UK fine was for poor managerial practice… It was not for fraud nor even conspiracy to defraud…and in the UK less than 10 cases have been brought against individuals ..and those have been in the less significantly currency panels.

    So I’ll put my money where my mouth is and wager the price of an excellent dinner for four that this piece of legal theatrics will not result in any conviction…not only because the evidence does not support it but because the intention of the players is to misdirect the watchers attention…

    Fixing the blame is always easier than fixing the problem and the problem is ongoing, worsening and calamitous.

    • financial matters

      I think a lot of pensioners and people who were trying to ‘insure/hedge’ their businesses would disagree. There is plenty of fraud in the derivatives business and this is a good place to start.

    • Were you asleep when the scandal broke a few years ago? It was never about “poor managerial practice.” Never. The size and breadth of the fraud was so extensive, it took years to unfurl.

      I don’t have the time or inclination to inundate with links and quotes, but the reference section of the wikipedia entry has enough to sink your teeth into:

      “This dwarfs by orders of magnitude any financial scam in the history of markets.[1][2]”
      Andrew Lo, MIT Professor of Finance

  11. A very poor title, but yes. This failure is what Obama will probably be remembered for. A deeply troubled administration that made a step toward health care equity but failed utterly to deal with pandemic control fraud. Banking is inherently entwined with moral hazard. That clique of amorality has captured the White House in the persons of the Secretaries of Treasury who advise the last three presidents to do the three de’s.

    Clinton deregulated. Bush improved on Clinton and the system crashed. Obama aggressively protected the guilty as policy, and Holder executed his protection.

    The title bothers me. LIBOR was out of whack for a short time. It is no longer. A proper title would be, “The manipulators of LIBOR – The most dishonest men in the world.” Or something like that.