Libor Scandal



Earlier this year, the world's financial sectors were rocked by yet another scandal. This time it involved international interest rates influenced by the London Interbank Offered Rate, or Libor, when creating millions of financial contracts around the world. The Libor is determined by the British Bankers Association by polling the world's largest banks. These banks are supposed to provide the rate they pay on short term loans to other banks, and the resulting Libor rate is meant to serve as a fair benchmark for what consumers can expect to pay on everything from mortgages to student loans. During the recent financial crisis, large banks lowered their reported rates to lower the Libor, appear healthier financially, and to make financial contracts more appealing to consumers.

Several states have filed suit against big banks whose participation in the scandal caused billions of dollars in losses; the Justice Department is coordinating with these states and is launching its own investigation. Banks including Bank of America, JPMorgan Chase, and Citi are all subject to investigations related to the Libor scandal.

No one is sure exactly how high the losses resulting from the scandal may be since the manipulated Libor was used as a benchmark for trillions of dollars of transactions. However, experts speculate that the damage could be as far reaching as the mortgage crisis of 2008. At the moment it isn't clear what the best plan of action would be with the current Libor system; some argue for the complete discontinuation of the Libor while others lobby for Libor reform; however, it is clear that something needs to be changed to prevent future corruption.

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