Issue of the week: Libor scandal rocks banking

last updated 8 January 2015

It’s a crime that has stunned even the most jaded Wall Street observers “to the point of near-speechlessness,” said Matt Taibbi in RollingStone.com. Barclays, Britain’s second-largest bank, has admitted that it routinely rigged the London InterBank Offered Rate (Libor), the benchmark interest rate set daily by the world’s biggest banks. Libor determines the price of an estimated $800 trillion of financial instruments; if you’ve ever taken out an adjustable-rate mortgage or a student loan, it has affected you. Barclays has been fined $450 million, and its once-golden American CEO, Bob Diamond, has resigned. But this scandal is just beginning and may soon engulf at least a dozen other major banks. Barclays admitted that between 2005 and 2009, its traders colluded with colleagues and with counterparts at other banks to report false rates, both to increase profits and to mask balance sheet weaknesses; it claims regulators at least tacitly approved the practice. Investigations in the U.S. and Europe could ensnare top bankers at Citigroup, JPMorgan Chase, UBS, and HSBC. “This could well be global finance’s ‘tobacco moment,’” said The Economist.

Few scandals have “shone such an unsparing light on the rotten heart of the financial system,” said the Financial Times in an editorial. Investigators have exposed “nothing less than a long-running confidence trick played on the public.” What’s perhaps most shocking is the “casual way in which this con was perpetrated,” with traders openly offering gifts of champagne in exchange for help in rigging rates. It’s now clear that banking’s “culture of recklessness” cannot be fixed with a few regulatory “rule tweaks.” There needs to be a wholesale change of culture, or else the industry will lose the last shred of the public’s trust for good.

It’s too late for that, said Matthew Yglesias in Slate.com. The banks simply have no credibility left. The Libor scandal lays bare a basic truth: No matter what rules we erect, modern banks will “lie when there’s money to be made” and “ruthlessly exploit” loopholes in the pursuit of profits. “Banks have once again made a mockery of the role that society entrusts to them,” said Joe Nocera in The New York Times. So far Americans are reacting with a shrug, perhaps because we’re suffering from “bank-scandal fatigue.” But with just about every big bank under investigation “for playing games with Libor,” we may yet “finally summon the will to change banking once and for all.”