In the UK (media included) we are very good at drumming up a drama. If something or someone is deemed to have gone wrong, boy do we know how to go to town on it. (We at Portfolio Adviser are guilty of it ourselves, sometimes.)
This can be seen in the regulators comments, press coverage and general conversations that have surrounded Barclays’ transgressions relating to Libor reporting and the subsequent effect this could have had on rate-setting.
So far we do not know the level to which this massaging of data might have occurred. Is Barclays alone in the way it has acted (doubtful) or have other banks with global and systemic importance been in on the act (more likely).
From what Andrew Tyrie, chairman of the Treasury Select Committee has said about this not being “the end of the story”, we can assume more banks are due to be penalised and are probably trying to settle with regulators as I type.
This does not, however, mean the banks were acting as a cartel to systematically drive Libor lower.
Negligible impact
In most of the email exchanges revealed in the Barclays case, derivatives traders asked submitters to keep Libor rates as low as possible.
If the banks were not acting in concert and merely out to do their own bidding for their own gain then actually the impact was probably negligible.
In the calculation of Libor 16 banks submit their data on the cost and price of lending to each other between 11am and 11.15am every morning. The British Bankers’ Association then tops and tails any outliers and takes an average of the rest.
If the banks were subtracting a basis point here, adding a basis point there and were not acting together to drive Libor in one direction or another then the manipulations would probably cancel each other out.
The more worrying outcome would be if the banks were working together to gradually push Libor lower, for example, particularly for the derivative-based products they offer where returns are linked to Libor.
Victimless crime?
In the grand scheme of wrongdoings where does this latest banking scandal sit? There will probably be no one victim that loses a material amount because of this. Wealth managers I have spoken to who invest in Libor-based derivatives expect any loss incurred to have been miniscule. In that way it will not be a scandal that requires vast redress.
The longer-term consequences will centre much more on the fact that once again banks have fallen in our estimations.
Then again, who ever said capitalism was about decency? The true aim of a business is to make money and while Barclays shareholders will doubt CEO Bob Diamond’s credentials to do that when they see the plunge in the bank’s share price today, his track record has until now been fairly clean.
Whether the banks can recover from this latest bout of sleaze is yet to be seen, but the material impact on you and your investors (thankfully) is likely to be nil.
What are your views on the Libor scandal and do you expect you or your clients have suffered? Use the comments box below…
