Baltimore city is among several plaintiffs in a lawsuit against a slew of banks (including Bank of America, Citibank, and HSBC) accusing them of conspiring to rig interest rates, specifically, the London Interbank Offered Rate (Libor).
But the weird thing about the Libor is “it’s basically generated using the honor system.” According to an article in The Sun, “a panel of banks report daily to the British Bankers Association…what rate they would expect to pay if they borrowed from another bank.” After throwing out the outliers all the numbers are averaged together. My point is, what’s the difference between conspiracy and standard operating procedure when banks are shouting a bunch of arbitrary numbers at each other that represent their subjective expectations?
The lawsuit claims that banks were setting the rate arificially low, which means that investments tied to the Libor were returning less money to investors. But interest rates are a double-edged sword; if it’s true, then debtors were given a little artificial relief.
The city has only a rough estimate of how much they might have lost: anywhere from hundreds of thousands to millions of dollars. Anyway, enough to pay for a few amenities Baltimore will otherwise be going without.
But why would banks set the Libor low? According to the lawsuit, in order to appear more financially stable after the recession. But banks argue that a conspiracy would have required the institutions being honest with each other about their straits, and of course they would never do that, and anyway, the banks lose out in revenue from borrowers by setting the rate low.
Can’t wait to see how this goes.
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