You might have heard that across the pond major London banks are embroiled in something called the Libor scandal. However, you might not be sure what that is, or whether it should matter at all to you. Fortunately, MSNBC has The Rachel Maddow Show guest host Ezra Klein—previously seen explaining the European debt crisis in two minutes—to lay the whole thing out and explain what it means for the United States.
"Once you find out how this scandal worked, you're going to be kind of shocked that we ever permitted the financial system to function in this way," Ezra said on Tuesday's The Rachel Maddow Show. And then, in under three minutes, he laid out why.
As he said on the show, Libor is an acronym for something called the London Interbank Offered Rate. That's the rate of interest that the biggest banks in London pay when borrowing money from each other. Like with a lot of other loans, a low interest rate means that lenders are confident they'll get back their money, paid in full, in a timely fashion. If interest rates are high, that means lenders have low confidence in the borrowers' ability to pay their loans back.
When banks "are charging high rates to lend to one another, it's really bad," Ezra explained. "It means things have gone so nuts in the financial system that even banks aren't a safe bet to pay back anymore."
In the wake of the financial crisis, used Libor as one metric for evaluating the health of the banks and figuring out if the needed to be more heavily regulated. Allegedly, the banks tried to avoid additional regulation by manipulating Libor so it stayed artificially low, and made them look healthier than they really were.
Ezra again: "Here, though, is the crazy thing about Libor: It was totally up to the banks. We just trusted whatever they said. And they were lying. And it seems that a lot of them were lying, that it was an open secret among them that you just lied about Libor."
Indeed, as the Economist reports, "As many as 20 big banks have been named in various investigations or lawsuits alleging that Libor was rigged." In at least one bank, Barclay's, traders would routinely conspire to manipulate the Libor rate, all to increase their profit margin on specific deals. Says the Economist, "In one instance a trader would regularly shout out to colleagues that he was trying to manipulate the rate to a particular level, to check whether they had any conflicting requests."
Here's why that matters to you, courtesy of the Washington Post's Dylan Matthews: "$360 trillion in assets worldwide are indexed to Libor, and much of those assets are consumer debt instruments like mortgages, car loans and credit card loans." So there's a better than good chance that when traders lied about Libor, they were directly influencing what you owe on your mortgage. And it's not just individual consumers; numerous American cities and states, already strapped for cash, now say that Libor manipulation has cost them millions of dollars.
So not only does Libor matter, but it's crucially important. It's a massive banking scandal with global implications, and we're still figuring out exactly what those implications are.