How Libor Affects Main Street

Thursday, July 12, 2012

The Libor manipulation scandal has dominated the news with stories of a culture of corporate greed and bankers who don't know right from wrong. The top brass at Barclays have all resigned and politicians continue to be outraged at yet another corporate banking scandal. Because of the Libor's influence in loan industries and markets around the world, however, repercussions go far beyond the halls of investment banks. 

Last week on The Takeaway, New York Times reporter Mark Scott said, "for example, on someone's adjustable mortgage, a bank might charge them Libor plus an additional amount of interest. So yes, it definitely affects people on main street." Individuals and municipalities across the country have potentially lost millions at the hands of those few London traders, money that could have been used to prop up faltering economies and retain jobs.

George Maragos is the comptroller for Nassau County, Long Island. He estimates his county lost $13 million over 5 years as a result of the phony rates, and is considering the best course of legal action to recuperate the funds. "We looked back on our exposure to the Libor rate, and we estimated that we may have overpaid on our interest rates," Maragos says. Libor, short for London Interbank Offered Rate, is used to set interest rates around the world. 

"The difference that has been alleged can be as much as 40 basis points, which is .4 percent. It doesn't sound like much, but when you're dealing with large numbers — in our case, we had $600 million of outstanding bonds — .4 percent over a five-year period of overpayment results in $13 million overpayment," Maragos says. While $13 million isn't much compared to the county's $3 billion annual budget, the comptroller says the lost cash could have cost the jobs of 24 government workers. 

As the vice president of the Association of Mortgage Professionals, John Councilman has seen the detrimental effects of Libor-rigging on individual home mortgages. 

"The Libor is used as a hedging tool for people who have fixed-rate mortgages, especially if they believe that interest rates are going to be increasing," Councilman says. "They have these swaps and derivatives that are based on the Libor, so if the Libor is artificially low, the person who's using the hedging is going to actually be influenced to raise those [fixed-rate] mortgages slightly to cover that hedging cost." Since there are more fixed-rate mortgages than adjustable-rate mortgages, the effects of the rate manipulation are on a much wider scale. 

"It is a strange thing when you have someone who is able to set the index, essentially, [that] is going to determine how much they make," Councilman says. "That's something that normally is not allowed. Everything that we find in the mortgage industry is that you shouldn't have an index that can be influenced by someone who has the right to make a profit from it.

"Any time you raise interest rates, the effect trickles through the economy."

Guests:

John Councilman and George Maragos

Produced by:

Robert Balint, Joe Hernandez and Rebecca Klein

Comments [1]

Arlen

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Mar. 07 2013 01:38 AM

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