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STEVE INSKEEP, HOST:

Now, here's the biggest economic scandal in the world right now. It's about an interest rate called LIBOR. That stands for the London Interbank Offered Rate. The big British bank Barclays admitted last week that it manipulated that rate, and the release of secret emails has rocked the banking industry. Robert Smith, of NPR's Planet Money team, explains how it affects the rest of us.

ROBERT SMITH, BYLINE: When I moved to New York City, I could barely afford my apartment. So I got one of those adjustable rate mortgages. And just before I signed the documents, I thought well, wait a minute. When my rate adjusts, how will I know how much I'll be paying?

So I searched through the fine print and it was right there, a word I'd never seen before, LIBOR. I would be paying a few percentage points above whatever LIBOR was.

And it turns out, I wasn't the only one.

GILLIAN TETT: Although most Americans have never heard of it before, the reality is that's it's the bedrock of the financial system.

SMITH: Gillian Tett is an editor with the Financial Times. And she explained to me what I never quite understood before I signed that mortgage; which is, LIBOR is a rate at which banks lend to each other. And more importantly, it's used as this global benchmark for lending. Banks look at it every day, to figure out what they should charge you for - not just adjustable rate mortgages, but car loans, commercial loans, credit cards. You cannot believe everywhere LIBOR sneaks in. A lot of those complicated financial investments by your pension fund, or your city government? LIBOR.

TETT: In fact - I mean, wait for this number - $350 trillion worth; that's $350 trillion worth - if you can imagine all those zeroes - of contracts in global markets have been struck with reference to LIBOR.

SMITH: So literally, hundreds of trillions of dollars around the world - all these deals, all these loans - all based on this rate, on this financial bedrock. Now we find out, this number might have been a lie - that at least one bank, for a while, was tampering with LIBOR for their own profit. We know this because federal regulators have released emails from Barclays Bank, from 2005 to 2009, that talk very casually about manipulation. And the emails are incredible.

There is a supposed to be a separation between the people at a bank who help set LIBOR, and the traders who bet money in the market. But the emails show that they routinely talked to each other. In this one, a trader says, "who's going to put my low fixings in? hehehe." He actually wrote the evil laugh right in the email.

TETT: It's a bit like somebody who's betting on the sporting match, you know, calling up the umpire and saying, can you make sure the score ends up like this? because it's going to be good for my deal.

SMITH: Traders offer to buy people champagne - Bollinger - or bring them coffee, in exchange for fixing the number; call each other Big Boy. In one of them, a trader thanks another banker for the manipulation and says, I'll put your name in a book, in golden letters. And the banker says, I would prefer not to be in any book - exclamation point. Barclays says it was just a few traders behaving badly. But the scandal is about to break much wider than that.

TETT: I mean, it is not going to stop at Barclays.

SMITH: You see, no bank can manipulate LIBOR alone. It's an average of a bunch of banks. Gary Gensler, the chair of the Commodity Futures Trading Commission, says the emails include contacts with other banks. He hasn't revealed which ones, but they have nicknames.

GARY GENSLER: Bank A, Bank B, Bank C, Bank D - because that's how we federal regulators do this. But it's safe to say it was at least four other banks - sometimes having this rate a little higher, sometimes a little lower, to benefit their profits.

SMITH: This scandal is still unfolding. No one is sure, exactly, how much the rate was changed, how much money was made or lost. But think of it - with trillions of dollars in investments based on a number that now seems dodgy, if you lost money on a deal, you'd be calling your lawyer right now. The City of Baltimore, and a pension fund in Connecticut, already have. They're among the first to sue, claiming the LIBOR manipulation cost them millions. Lots more on the way.

Robert Smith, NPR News.

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