To protect the bank
Source: /news
Truth and Consequences
• Following the financial crisis of 2007/8, the reputation of banks and bankers is at an all time low • The Libor scandal has further undermined trust in banks. Paul Tucker, the deputy governor of the Bank of England called the Libor market a "cesspit".
Why is it important?
• Libor is considered to be one of the most crucial interest rates in finance, upon which trillions of financial contracts rest, and the exposure of its rigging has shocked many beyond the world of finance. • Libor is used to set a range of financial transactions worth an estimated $300 trillion. $300 trillion is equivalent to approximately four and a half times global GDP
• 1,500 words • Report on current finance topic • • 30% of Module Mark Briefing in week 8
1.January 2013
• • 1 hour MCQs
•
20%
2.May 2013
• 2 hours
•
• •
50%
Three questions from six Specimen paper next semester
• Lawsuits have been launched by US municipalities, pension funds and hedge funds
Truth and Consequences – the world
• The consequences are also global.

$300,000,000,000,000
Libor in the News
How is Libor set?
• Every day a group of leading banks submit rates for 10 currencies and 15 lengths of loan ranging from overnight to 12 months. The most important is the three-month dollar Libor. The rates submitted are what the banks estimate they would pay other banks to borrow dollars for three months
• Submission on 11th March 2013 • Feedback on draft
Libor in the News
What is Libor?
• The Libor, or London Interbank Offered Rate, is a global benchmark interest rate used to set a range of financial deals. It is also a measure of trust in the financial system and the faith banks have in each other's financial health
/news/uk-18620314
So how was Libor rigged?
In two ways:
1. By traders for profit.
• • Since the rates submitted are estimates not actual transactions it's relatively easy to submit false figures. Traders at several banks conspired to influence the Libor by getting colleagues to submit rates that were either higher or lower than their actual estimate
Truth and Consequences – the money
• While those paying interest on loans would have benefited from artificially low Libor rates, savers and investors would have lost out. Because Libor is used to set a huge range of financial transactions, the potential losses are huge.
Traders for Profit “Coffees will be coming your way” “Dude. I owe you big time!...I’m opening a bottle of Bollinger” “Ask for High 6M Fix”
Reputational Damage
•2 July: Barclays chairman Marcus Agius resigns and the government launches two inquiries into Libor and banking standards
•3 July: Barclays chief executive Bob Diamond resigns
Truth and Consequences - Barclays
27 June: Barclays fined £290m by US and UK regulators for attempting to manipulate Libor rates •28 June: Barclays shares plunge 15%
So how was Libor rigged?
In two ways:
1. By traders for profit. 2. To protect the bank.
• At the height of the financial crisis in late 2007, many banks stopped lending to each other over concerns about their financial health with some banks submitting much higher rates than others.
Leeds University Business School
LUBS1035 Foundations of Finance
2012/13
John Smith
Lecture 8: Coursework Briefing
Module Objectives
Skills outcomes
On completion of this module you should be able to:
Your Coursework Assignment
You are a Financial Manager working for Barclays plc. The Bank has recently recruited a new Chairman, Sir David Walker, and he is keen to understand the implications of the recent Liborfixing scandal for Barclays Bank. You have been asked to provide a 1,500 word briefing paper on the Libor scandal for Sir David in the form of a report.
• Demonstrate problem solving, analytical and quantitative skills by applying current theory and appropriate analytical tools to simple financial problems; • Demonstrate written communication and critical thinking skills in the written parts of the summative assessment; and
•
Barclays was one of those submitting much higher rates, attracting some media attention. This prompted comment that Barclays was in trouble so Barclays began to submit much lower rates.