The LIBOR Scandal! Fuhgeddaboudit!

Matt Koppenheffer, The Motley Fool
Updated

The Barclays (NYS: BCS) LIBOR scandal looks like a big deal. It smells like a big deal. But what if it's really not a big deal at all?

Sure, LIBOR affects trillions of dollars of loans and hundreds of trillions more in swaps and other derivatives, but, as one commenter on a recent article put it, "if 1 guy from 1 bank put in one basis point lower than he actually should have ... it should have a negligible effect on LIBOR."

It's certainly a point to ponder. Should we care if Barclays really never had the ability to move the needle?


Or we could get even more cynical and consider that if many (most? all?) of the LIBOR-submitting banks were gaming the system, then all of their attempts to fudge in their own favor would just end up canceling out and leaving us with a middle ground that's pretty darn representative of real borrowing costs.

There may be a Barclays trader calling in a fix for three-month LIBOR because of a derivative about to settle, but somebody's on the other side of that trade. Perhaps it's a punter at Citigroup (NYS: C) on the other side and he's calling down to his money market desk for a fix in the other direction.

And then of course, there's the issue of banks feigning strength. One of the reasons that Barclays fudged its LIBOR submissions was to signal to the market that it had access to the same low rates that other banks were claiming they could access -- the bank even went as far as roping in the Bank of England on this issue.

Barclays contends that it was only forced to fake its low submissions because the other banks were putting in unrealistically low bids. But if that really were the case, would we have wanted it otherwise? Would we have wanted Bank of America (NYS: BAC) , Citigroup, Deutsche Bank (NYS: DB) , and UBS (NYS: UBS) -- all of which were reeling at the time from the financial meltdown -- letting the entire world know that they couldn't access low-cost funds? Or, at least, that the major global banks didn't trust each other enough to lend at low rates?

In short, perhaps regulatory bodies and an overzealous media are whipping this LIBOR molehill into a scandalous mountain.

Or... maybe not
It might seem reasonable to question whether Barclays could, indeed, move LIBOR single-handedly. After all, there are 18 banks that submit bids for U.S. dollar LIBOR and a healthy number of the bids from those banks -- on the high and low end -- get chopped before the final calculation. Maybe it was hubris on Barclays' traders' part to think they were doing a darn thing with their fixed bids.

But does the success of those traders' fraud attempts matter? When one fellow tries to kill another but doesn't succeed, our response isn't, "You're in the clear just as long as you didn't finish the job!" No sir, that's attempted murder. And if you try to rob a bank but bungle the job in the process, well, that's attempted robbery.

Legally, even if they didn't actually achieve what they were attempting, they're still in hot water. But then there's also the question of ethics and morality.

Deeper down the rabbit hole we go
Strip away all of the legal matters here, though, and we get to what's really meaningful, and really scary, about this scandal. A second-grader could tell you that what these traders were doing was wrong, but the traders made basically no effort to hide any of it. Between emails, instant message exchanges, and calendar appointments (don't forget the fraud!), these LIBOR shenanigans were right out in the open.

There are only a couple of interpretations for this that leap to mind, and neither is particularly encouraging.

  • Bankers don't know right from wrong. A second-grader may be able to figure out that this was wrong, but perhaps a real sense of right and wrong is lost when one becomes a banker -- sort of like Alice giving up on the idea of normal reality while meandering around Wonderland. If they no longer believed this was wrong, why bother hiding it?

  • Bankers feel that they're above right and wrong. What's fraud to a Master of the Universe? When you're playing with denominations in the billions or trillions maybe you suddenly start to think that your bottom line is so important that wrong is OK as long as it makes you money.

Regardless which of those bitter pills you want to swallow, the bottom line is that this scandal suggests that in the world of banking -- a world which, as we saw in 2008 and 2009, can bring the entire global economy to its knees -- words like "wrong," "illegal," and "fraudulent" may not carry the same meaning that they do for the rest of us. Former Barclays CEO Bob Diamond wants us to believe that this is all the work of a few scurvy miscreants, but considering that Diamond Bob's forthrightness has been called into question by Parliament, I'm not sure we want to lean too heavily on that.

Is it anything new to think that bankers might cut corners or even take blatantly illegal actions in order to make a buck? Alas, it's not, but it's just one more reason that as new regulations continue to take shape in the wake of the last meltdown, regulators should be taking industry push-back with an Everest-sized grain of salt.

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At the time thisarticle was published The Motley Fool owns shares of Bank of America and Citigroup. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Fool contributor Matt Koppenheffer owns shares of Barclays and Bank of America, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

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