LAPAVITSAS: I think one of the most interesting things to hit the news this week is the Libor manipulation case and the fine that has been imposed on the large British bank RBS for manipulating the Libor.
I think we need to talk a little bit about this so that people understand the significance of it, because it hasn’t really been widely appreciated by the public.
Now, the Libor is not a real interest rate. It’s a benchmark. It’s a benchmark that is set privately by the banks and in secret. There’s a committee of banks that does that. On the basis of the Libor, a whole host of other interest rates that are charged to people for their mortgages, to businesses, and so on are determined.
Now, the case and the fine imposed on RBS has discovered, has found that actually RBS has been colluding with brokers and others to manipulate the Libor. This is a criminal dimension. And they’ve been charged. The British government—.
JAY: Hang on one sec. Just for people that haven’t followed this story at all, just a little more on why this matters so much.
LAPAVITSAS: This matters enormously for a number of reasons. As I said to you, as I said, this is not a real interest rate; this is a benchmark. If the banks determine the benchmark in an untruthful way, then they can influence a whole host of other prices, and they can influence the receipts they make from people to whom they’ve lent money and from the various transactions they make in the derivatives markets. For the banks, the ability to manipulate the Libor is a key mechanism to make extra profits, basically. And they’ve got this ability to do it because they set the Libor privately and in a special committee, which they run themselves.
Now, the British government is making out that this is a criminal act, which it is, of course, because collusion with the aim of making extra profits is criminal. The point is, however—and this is something that the British government wishes to keep quiet—it isn’t simply criminality here. It looks as if the entire game is rigged from beginning to end. In other words, it isn’t simply collusion and illegality. The game is rotten.
And it is rotten for two reasons, I would argue. First, the banks have got an incentive to present falsely low rates, because they in this way appear to be stronger than their competitors. And the banks have got an incentive to manipulate the rate sometimes up, sometimes down, because they make different payments in this way on their derivatives portfolio. The banks, then, have got clear incentives to manipulate it, and they signal their incentives to each other.
So this committee doesn’t work. It doesn’t work systematically in the public interest; it works in the interest of banks. This is becoming increasingly clear, and this is going to be big news, I think, in the months to come, because, of course, there are more banks that would be hit—that will be charged fines in the months ahead.
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