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Banking on Ethics
On February 28, 2012, the United States Department of
Justice announced a criminal investigation into abuse
of the LIBOR, an important interest rate regulated by the
British Bankers? Administration. Four months later, Londonbased Barclays Bank was fined more than $440 million by
United States and English financial regulatory agencies for
knowingly manipulating the LIBOR to its own advantage.
The political and economic uproar that followed the exposure of Barclays? actions led to several resignations (including that of Barclays? CEO Bob Diamond) and further
criminal investigations. Former governor of New York Eliot
Spitzer called the incident ?the mega-scandal of megascandals,? while journalist Robert Scheer christened it ?the
crime of the century.?
The LIBOR, short for ?London Interbank Offered Rate,?
is the interest rate banks pay when they borrow money
from each other. To calculate this rate, up to 20 influential British banks report their own proposed bank-to-bank
lending rates. The highest and lowest rates are trimmed
off, and the remaining rates are averaged, creating the
LIBOR. A low LIBOR often points to financial stability, while
a high LIBOR indicates that banks lack confidence in each
other?s economic health. What Barclays was fined for was
proposing artificially low bank-to-bank rates to make itself
appear more stable than it actually was. However, further
investigations indicated that Barclays colluded with other
banks??nd perhaps even the British government??o
impact the LIBOR itself. An unnaturally low LIBOR would
suggest greater economic stability than actually existed,
misleading investors and loan-seekers in a potentially
volatile market, and thus creating profit for the banks involved in the collusion.
The rate manipulation carried out by Barclays affects
not only London banks and business executives, but
also small businesses and individuals?? erhaps even
you yourself. Because it has historically been considered
trustworthy and economically accurate, the LIBOR is
used all around the world as an interest rate and financial
instrument benchmark. Everything from currency values
(including the United States dollar) to multimillion-dollar
corporate debts to home mortgages to individual student loans depend on the LIBOR. While it may not seem
like it, each of these is a product that is marketed and
sold. As loans and exchanges of varying types are banks?
primary sources of profit, banks compete to exchange
these products within a market. At the consumer level,
consider how many car and credit card commercials
you have seen advertising a low interest rate. Hundreds
of trillions of dollars worth of these financial products
have been sold based on the LIBOR?? rate that may
not in fact accurately reflect the world?s shaky economic
Journalists and economic analysts have been quick to
reject the ethicality of Barclays? actions. As information about
the LIBOR scandal broke, TIME contributor Christopher
Matthews wrote, ?[Barclays? alleged collusion] speaks to the
moral compass, or total lack thereof, of the world?s financial
professionals?the public and the government no longer
trust the industry to set its own standards for acceptable
behavior.? In a piece for The Nation, Robert Scheer said, ?The
modern-day robber barons pillage with a destructive abandon totally unfettered by law or conscience and on a scale
that is almost impossible to comprehend.? Dennis Kelleher,
president of nonprofit financial watchdog organization
Better Markets, Inc. was perhaps most condemnatory of all:
?What we probably need is to wipe out this entire generation of so-called banking leaders who apparently have no
ethics or integrity.?While the total sum of the LIBOR scandal?s
consequences are yet to be seen, Barclays? actions may go
down in history as a monumental failure in business ethics
and corporate social responsibility.
Sources: Christopher Matthews, ?LIBOR Scandal: The Crime of the Century?,? TIME, July 9, 2012, http://
business.time.com/2012/07/09/libor-scandal-the-crime-of-the-century (Accessed July 10, 2012);
Danny Guttridge, ?Understanding the LIBOR Scandal,? Kapitall Blog, July 9, 2012, http://wire.kapitall.com
/investment-idea/understanding-the-libor-scandal (Accessed July 10, 2012); ??The Mob Learned from Wall
Street?: Eliot Spitzer on the ?Cartel-style Corruption? behind Libor Scam,? Current, July 3, 2012, http://current
-corruption-behind-libor-scam (Accessed July 10, 2012).
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