LIBOR is the acronym for London Interbank Offered Rate. It is the interest rate established periodically by a committee of banks under the auspices of the Bank of England, the UK central bank, and is the estimated interest rate that top banks would charge each other for short term I.e. overnight loans. LIBOR is established for multiple currencies including UK, all of Europe, Japan and the U.S.
This is similar to the functioning of the U.S. Federal Reserve Open Markets Committee, which, similarly, is staffed by Fed officials and prominent bank heads, and set U.S. Treasury Note sales and purchases by the Fed, which effectively establish core interest rates in the U.S.
LIBOR and U.S. Treasuries are both used worldwide as a baseline risk-free interest rate over which interest rates are calculated for all forms of debt in the global credit markets including $350 trillion (yes, trillion) in derivative securities.
What has been discovered is that the bankers were setting LIBOR not based on its intended purpose, but in order to benefit their massive bets made by their institutions on derivatives related to interest rates and currency values. This went on for a period of years.
This scandal is so massive and so corrupt that it makes the last crisis look small. Putting it in perspective, U.S. GDP is about $13 trillion, China/Japan are tied for second at about $4 trillion; Germany and UK are $3-3.5 trillion. Derivatives outstanding at the beginning of the financial crisis were Bout $60 trillion, or equivalent to World GDP. Derivatives outstanding today are about $350 Trillion, or 6 years of world GDP.
Sandy Weill, who merged Citibank and Travelers into the first megabank, and singlehandedly drove the repeal of Glass Steagall, was quoted the other day as saying, as a result of the LIBOR scandal, that the banks need to be broken up as they will continue to take extraordinary risks at the expense of the taxpayers
and depositors. This is the equivalent of NapoleN calling for a end to militRy conquests.
The banks have become not only too big to fail but to big to regulate, as the elected representatives who regulate them need their money to run for office. And they will bankrupt the country – it can happen. This is why Romney is raising so much more money than Obama. This crisis has knocked the middle class of the country to its knees and these characters are moving in for the kill.