The scandal arose when it was discovered in 2012 that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were.
The Libor is supposed to be the total assessment of the health of the financial system because if the banks being polled feel confident about the state of things, they report a low number and if the member banks feel a low degree of confidence in the financial system, they report a higher interest rate number.
[12] The British Bankers' Association (BBA) said on 25 September 2012 that it would transfer oversight of Libor to UK regulators, as predicted by bank analysts,[13] proposed by Financial Services Authority managing director Martin Wheatley's independent review recommendations.
[20][21] In particular, the Financial Services Act 2012 brings Libor under UK regulatory oversight and creates a criminal offence for knowingly or deliberately making false or misleading statements relating to benchmark-setting.
[45][46] In one 2008 document, a Barclays employee told a New York Fed analyst, "We know that we're not posting an honest Libor, and yet we are doing it, because if we didn't do it, it draws unwanted attention on ourselves.
"[44] The documents show that in early 2008, a memo written by then New York Fed President Tim Geithner to Bank of England chief Mervyn King looked into ways to "fix" Libor.
In October 2008, several months after Geithner's memo to King, a Barclays employee told a New York Fed representative that Libor rates were still "absolute rubbish.
"[44] The Wall Street Journal reported in March 2011 that regulators were focusing on Bank of America Corp., Citigroup Inc. and UBS AG in their probe of Libor rate manipulation.
[50] Among the abuses being investigated were the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an unprecedented amount of insider knowledge into global instruments.
[52] One trader's messages from Barclays Bank indicated that for each basis point (0.01%) that Libor was moved, those involved could net, "about a couple of million dollars.
"[51] The Canadian Competition Bureau was reported on 15 July 2012 to also be carrying out an investigation into price fixing by five banks of the yen denominated Libor rates.
In the court documents, a federal prosecutor for the bureau stated, "IRD (interest-rate derivatives) traders at the participant banks communicated with each other their desire to see a higher or lower yen LIBOR to aid their trading positions."
[62] On 4 October 2012, Republican US Senators Chuck Grassley (Iowa) and Mark Kirk (Illinois) announced that they were investigating Treasury Secretary Tim Geithner for complicity with the rate manipulation scandal.
They accused Geithner of knowledge of the rate-fixing, and inaction which contributed to litigation that "threatens to clog our courts with multi-billion dollar class action lawsuits" alleging that the manipulated rates harmed state, municipal and local governments.
[63] Timothy Lee, a capital markets expert at the Federal Housing Finance Agency Office of Inspector General, said in a 3 November memo that Fannie Mae and Freddie Mac may have lost more than $3 billion because of the manipulation.
In other released instant chats, Tan made it clear that the Libor fixing process had become a highly lucrative money making cartel.
An email referenced in the lawsuit from the Barclay's settlement, showed a trader asking for a higher Libor rate because "We're getting killed on our three-month resets.
[68] The five lead plaintiffs included a pensioner whose home was repossessed after her subprime mortgage was securitised into Libor-based collateralised debt obligations, sold by banks to investors, and foreclosed.
[70] Before the 2007–2008 financial crisis, states and localities bought $500 billion in interest rate swaps to hedge their municipal bond sales.
[74] US experts such as former Assistant Secretary of the Treasury Paul Craig Roberts have argued that the Libor Scandal completes the picture of public and private financial institutions manipulating interest rates to prop up the prices of bonds and other fixed income instruments, and that "the motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial.
"[76] Mainland European scholars discussed the necessity of far-reaching banking reforms in light of the current crisis of confidence, recommending the adoption of binding regulations that would go further than the Dodd–Frank Act: notably in France where SFAF and World Pensions Council (WPC) banking experts have argued that, beyond national legislations, such rules should be adopted and implemented within the broader context of separation of powers in European Union law, to put an end to anti-competitive practices akin to exclusive dealing and limit conflicts of interest.
[77][78] This perspective gained ground after the unraveling of the Libor scandal, with mainstream opinion leaders such as the Financial Times' called for the adoption of an EU-wide "Glass–Steagall II.
[82] Furthermore, knowingly or deliberately making false or misleading statements in relation to benchmark-setting had been made a criminal offence in UK law under the Financial Services Act 2012.
[18][82] Since the beginning of July 2013, each individual submission from the banks is embargoed for three months to reduce the motivation to submit a false rate to portray a flattering picture of creditworthiness.
[18][83] As of July 2013, a new code of conduct, introduced by a new interim oversight committee, built on this by outlining the systems and controls firms need to have in place around Libor.
[103] The investigations revealed that UBS traders had colluded with other panel banks and had made over 2,000 written requests for movements in rates from at least January 2005 to at least June 2010 to benefit their trading positions.
[105][106] US Assistant Attorney General Lanny Breuer described the conduct of UBS's as "simply astonishing" and declared the US would seek, as a criminal matter, the extradition of traders Thomas Alexander William Hayes and Roger Darin.
[108] In December 2013 the European Commission announced fines for six financial institutions participating in one or more bilateral cartels relating to Libor submissions for Japanese yen from 2007 to 2010.
UBS received full immunity for revealing the existence of the cartels (due to Leniency policy) and thereby avoided a fine of around €2.5 billion for its participation in multiple infringements.
[112] Commenting on the fine, Britain's Financial Conduct Authority director Georgina Philippou said "This case stands out for the seriousness and duration of the breaches ... One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market.