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Published: July 10 , 2012 U FACEEDOK If TWITTER GOOGLE+ El .'

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Behind the Libor Scandal
A settlement between the Britishbank Barclays and regulators may be the first
in a series of cases against other banks that may have manipulated the Libor .

The Libor is a benchmark interest rate that affects how

consumers and companies borrow money across the world. The rate is set by
the Bntish Bankers Association (R B A ), an industry group in London.

How the Rate Is Set

o o o o o O

ffff o o o o tj fM
im ->

tiltJ
Banks Submit Figures
Each weekday leading banks ,

around the 'world each submit a

figure to the B .B . A. based on the rate
at which they estimate they could
T
a
^ j
British Bankers Association
The E .B.A. throws out the
highest and lowest 25 percent
of submissions and averages
the remaining rates. This is
1
The Libor
It is calculated for 10 different
currencies and 15 borrowing
periods . There are 18 banks
tliat submit rates for the U S .
borrow funds from other banks. the Libor. dollar Libor.

What Is Affected by the Rate

n
TTMT $
1
$
Derivatives Loans What Barclays Did
The Libor is often used to To calculate interest rates ,

price financial instruments some lenders use the Libor I

" Between 2 DOB and 2 DQ7 ,
employees in Barclays trading
like swaps transactions as a base and add
units convinced employees
and futures contracts . At additional interest based on
responsible for submitting
least an estimated S 350 the borrower. When the
Libor rates to alter the bank's
trillion in derivatives and Libor goes up . rates and
rates based on their
other financiai products payments on loans tied to it
derivatives trading positions to
are tied to it can rise as well .
bolster their own profits .

I 2 C ertain t rade rs at Bard ay s

coordinated with other banks
1 to after their rates as well

3
ifi
Later during the height of the
?
,

ft * financial crisis , Barclays

submitted artificially low rates
Mortgages Student Loans to give the impression that the
Of the mortgages in the About half of variable-rate bank could borrow money
United States that are private student loans are more cheaply and was
adjustable-rate, about 45 tied to the Libor . healthier than it was.
percent of prime mortgages
and 30 percent of subprime
have interest rates based
on the Libor.

Two Kinds of Manipulation

From 2005 to 2007 swaps traders often asked the Barclays employees .-. ho
submit the rates to provide figures that would benefit the traders , instead of
submitting the rates the bank would actually pay to borrow money.

SEPT. 13. 2036 DEC . 14. 20G6 JULY 29. 2007

"Hi Guys , We got a big position in 3m libor " For Monday we are very long 3m " Pis go for 5.36 libor again , very
for the next 3 days . Can we please keep cash here in NY and would like the important that the setting comes
the lib or fixing at 5.39 for the next few setting to be set as low as as high as possible . thanks .
"

days it would really help. We do not want

, possible . .. thanks Trader in New York to submitter
it to fix any higher than that. Tks a lot ." Trader in New York to submitter
Senior trader in Nevr York to submitter

Three- monrn
jbor rates
A JUNE 27 . 2012

RA - E BARCLAYS Last month. Barclays paid $ 450

SUBMITTED million to settle accusations that it
had tried to manipulate Libor
CALCULATED rates . Since then its submitted
,

AVERAGE rates have risen.

I 2036 2008 2010 2012

Period
cf chart
below

In 2008. Barclays submitted artificially low figures to deflect scrutiny about its health.

LEHMAN in October 2008 , a Bank of England official questioned

BROTHERS
BANKRUPTCY
why Barclays submissions were high compared with
other banks. After this the Barclays rates fell closer to
,

those of other banks . Barclays has released

RATE BARCLAYS documents saying that some bank executives believed
SUBMITTED the official had instructed them to lower its rates , but
v-i

CALCULA-EO
the official has denied any improper actions .
Three-month AVERAGE
Libor rates

_
LIG - SUBMITTED
ER LINES REPRESENT RATES
BY OTHER BANKS
2%

T T
July Aug. Sept. Oct. Nov. Dec . Jan. Feb . March
2003 2009

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Sources : U. S. Department of Justice: British Bankers' Association ; U. S. Commodity Futures Trading Commission : Finard.org: Federal Reserve Bank of Cleveland : Bloomberg ; settlement
documents

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