International Interest Rate Scandal Rumbles Forward

An influential group of bankers comes up with the critical interest rate known as the LIBOR. The world uses it as a benchmark for how much to charge consumers on mortgages and other loans. For more on how the rate is set, Renee Montagne talks to Gillian Tett of the Financial Times.

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RENEE MONTAGNE, HOST:

The scandal involving the manipulation of international interest rates continues to rumble forward. Yesterday, U.S. Treasury Secretary Timothy Geithner defended himself against criticisms that he should have done more to address concerns over how the critical LIBOR rate is set.

STEVE INSKEEP, HOST:

LIBOR, you'll recall, stands for London Interbank Offered Rate. And it's that rate that banks all over the world use as a benchmark for how much to charge consumers on mortgages and other loans.

MONTAGNE: It's yet another obscure banking term that we're learning about in these hard economic times. To explain how an influential group of bankers in London comes up with this critical interest rate we turned to Gillian Tett of the Financial Times.

GILLIAN TETT: The banks are supposed to report on the best possible guess, if you like, of the price at which they would lend and borrow money in the markets for LIBOR. And I think for the most part banks do try and do their best possible guess of what the price would be. But it's a bit like going into a neighborhood and saying, OK, so what are these houses worth in this neighborhood? You can either go and look at what kind of deals have actually been struck by realtors and say, what was the price that people paid for their homes? Or you can go to the realtors and say, well, what do you think a house is worth? And everyone knows, you know, if you're making up a price on the basis of what you think it's worth, it might be true, it might not be true. But it does seem that at times of crisis, like in 2008, the banks were not always reporting accurate numbers. And even before that, it appears that some traders at some banks were quite deliberately rigging the numbers to try and get better financial deals for themselves.

MONTAGNE: So what would've been the difference if these bankers had reported a more accurate LIBOR number? I mean how have, say, Americans been hurt?

TETT: Well, specifically during 2008, the fact that banks were underreporting the level at which they were borrowing probably actually benefited Americans, because it meant that anybody who was trying to raise a home mortgage or a corporate loan was probably getting it cheaper than, or slightly cheaper than they would've done otherwise. But the crucial thing to understand is that before 2008 there were cases when banks were deliberately over-reporting the number, because particular traders were trying to get a particular number for a deal that would be beneficial for themselves. And in those circumstances it's possible that homeowners and companies actually lost out. And as a result, the potential for litigation now is very big.

MONTAGNE: Well, in fact, the city of Baltimore and a pension fund in Connecticut have sued. One small bank in Wisconsin has filed a suit against JPMorgan Chase and Bank of America and Citigroup, accusing them of colluding to set the rate artificially low. Where do you see this scandal headed?

TETT: So there are really two going on right now, or three things. One is a general erosion amongst the public in confidence in the financial sector. Secondly, you have specific scandals erupting from banks like Barclays, which could end up creating, you know, at best management upheaval, at worst very costly, damaging litigation. And then more broadly there's the fact that you could see a wave of lawsuits from disgruntled investors or investment groups going forward who are particularly unhappy about deals that have been linked to LIBOR in the past.

At the moment, regulators from both sides of the Atlantic are talking about whether it's possible to overhaul the LIBOR process and create a more credible, more trustworthy index. But unfortunately replacing LIBOR is going to be quite hard, precisely because it is so fundamental for the system.

MONTAGNE: Thank you very much for joining us.

TETT: OK. Thank you very much indeed.

MONTAGNE: Gillian Tett is the U.S. managing editor for the Financial Times. She spoke to us from New York.

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