LIBOR can affect the average homeowner and recent scandals are coming to light that the critics say will be worse than the entire foreclosure mess. Most Americans have never heard of LIBOR. As we plunge through the mess of foreclosures and home loans, LIBOR is becoming well known.
What exactly is LIBOR? LIBOR is the acronym for London Inter-Bank Offer Rate. Simply put, it’s the interest rate that banks charge each other for loans. LIBOR is fixed once a day by the London-based British Bankers Association (BBA) although the rate changes throughout the day.
The LIBOR interest rate set by these 16 international member banks (the BBA) is cast upon $360 trillion throughout the world. The LIBOR is important because the world’s most preferred borrowers borrow according to the LIBOR rating. The United States relies on LIBOR for a reference rate.
LIBOR can dilute the effects of Federal rate cuts and can restrict homeowners from getting loans.
We rarely think about where interest rates come from. Most of us think it’s just a competitive rate, but it’s all based on LIBOR. From mortgages, credit cards, savings accounts, adjustable-rate mortgages, student loans, car loans – all types of loans, we’re given an interest rate made by LIBOR. LIBOR’s also used to set rates on institutional investments that mutual funds, pension funds and government agencies can use to earn interest on short-term investments.
So, who are some of these banks who set LIBOR? Citigroup, JPMorgan Chase, Bank of America and Barclays are just a few names. We have to trust these banks are accurately reporting the interest rates they’d have to pay to borrow from each other. In other words – LIBOR depends on honesty and if the banks don’t tell the truth – LIBOR isn’t accurate which translates to trillions of dollars worth of loans and investments not being correct.
Banks lie? Why would the banks lie? They’d lie to make themselves seem stronger and better than they really are. If a bank seems healthier, they’ll pay less interest. Banks would lie about what it costs them to borrow in order to make more money. Major international banks do more than lend. They trade bonds, stocks and other investments to make a profit.
The traders working for the LIBOR-participating banks buy investments that increase in value when the rates fall and then can lie about their rates in an attempt to lower the LIBOR. This lying would result in manipulating the LIBOR. That, in turn means borrowers like us, could pay more interest than we should have. Cities that invest their pension plans may have earned less than they should have. People with adjustable rate mortgages (ARMs) could be paying more than they should. One former trader stated LIBOR manipulation has been common since 1991.
Last June, Barclays Bank revealed significant fraud and collusion by member banks and paid $450 million to settle accusations it lied in an attempt to manipulate LIBOR in order to make money and present itself as healthier than it was. Other banks participating in LIBOR are now under investigations and experts, along with some reliable ‘leaks’ are predicting more banks will have to settle just as Barclays did.
Last week, Freddie Mac filed a lawsuit (Federal Home Loan Mortgage Corp. v. Bank of America Corp. [BAC], 13-cv-00342, U.S. District Court, Eastern District of Virginia (Alexandria) against Bank of America Corp., UBS AG (UBSN), JPMorgan Chase & Co and a dozen other banks over alleged manipulation of the LIBOR over “substantial” LIBOR loss. Freddie’s complaint sited fraudulent and collusive conduct, violations of antitrust law and breach of contract with the banks’ using false and dishonest U.S. dollar LIBOR submissions that artificially increased the banks’ ability to charge higher underwriting fees to the detriment of Freddie Mac and other consumers.
Those are consumers are us – the homeowners, the students, people with car loans and other loans. Those consumers are us, the ones relying on their pensions to live on.
We’ll be hearing more on LIBOR in the coming days and weeks as this scandal unfolds.
Keith A. Gantenbein, Jr. is a Colorado a consumer advocate attorney, foreclosure defense and real estate attorney located in Denver and servicing all of Colorado. His foreclosure defense practice includes foreclosure prevention, foreclosure assistance, loan modifications, short sales, and all other foreclosure defense legal assistance. He also handles bankruptcies, mortgage negotiations, lender liability, real estate, civil litigation, debt defense, debt harassment, contracts and landlord/tenant. If you think you will be facing debt collection, foreclosure, or are in the foreclosure process, or have had a wrongful foreclosure, contact Keith Gantenbein at (303) 618-2122 for a one-hour consultation where he will discuss your situation and go over all your options with you.