Episode 384: The Little Lie That Rocked The Banks : Planet Money The most important interest rate in the world has been set by what amounts to an honor system among banks. Now it turns out at least one bank was fudging the numbers.
NPR logo

Episode 384: The Little Lie That Rocked The Banks

  • Download
  • <iframe src="https://www.npr.org/player/embed/156222428/156230641" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Episode 384: The Little Lie That Rocked The Banks

Episode 384: The Little Lie That Rocked The Banks

  • Download
  • <iframe src="https://www.npr.org/player/embed/156222428/156230641" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript


Hi, Mom.


KESTENBAUM: Do you have your iPhone there?


KESTENBAUM: Do you see where it says App Store?

UNIDENTIFIED WOMAN: App Store, yeah - hold on a minute. Let me find it. Here, it's App Store.

KESTENBAUM: Now go to search. Type in PLANET MONEY.

UNIDENTIFIED WOMAN: Oh, yeah, I have that.

KESTENBAUM: What do you mean you have that?

UNIDENTIFIED WOMAN: I already have got the app.

KESTENBAUM: You already downloaded the app?

UNIDENTIFIED WOMAN: Yeah, I did. I've got it right here - little green guy. I've already done it, yeah.


KESTENBAUM: The PLANET MONEY app - so easy to use, your mom's already got it. You can download it from the App Store.


KESTENBAUM: In France, inside of a vault inside a triple bell jar, sits a metal cylinder. It weighs about a kilogram. Actually, it weighs exactly a kilogram because this is the kilogram.


It's made of platinum and iridium. And every kilogram in the world is based on this cylinder. The kilogram is well-guarded. Opening the vault requires three keys. And there's a reason why there's all the security. If you mess with this kilogram, you are messing with the entire world.

KESTENBAUM: Because imagine that somehow someone got into the vault and for years has been shaving a little bit off of the kilogram or maybe adding a little bit. Everything could be slightly off. That kilogram of coffee I just bought, maybe I was getting shortchanged.

SMITH: Yeah, and all those people in all those Weight Watchers groups who thought they were losing weight - still fat. If the kilogram's wrong, you have no idea what's real anymore.

KESTENBAUM: Something very much like this is happening in the financial world. The benchmark number that's supposed to be trustworthy, that's referenced in trillions of dollars of loans and mortgages and financial instruments - that number, it's been manipulated.

SMITH: At least one bank has admitted that they were trying to make money by shaving little bits off of this number or adding little bits to it. And now everyone is asking what is real. Hello and welcome to PLANET MONEY. I'm Robert Smith.

KESTENBAUM: And I'm David Kestenbaum. It's Tuesday, July 3. Today on the show, a banking conspiracy, secret emails, faith in the financial system thrown into question - all over the most boring sounding thing you can imagine - the London Interbank Offered Rate.

SMITH: Also known as LIBOR. Barclays, one of the biggest banks in the world, has been trying to manipulate this rate. The bank is paying a $453 million fine. You may have heard about it last week. Their two top executives have resigned this week. And this is just the beginning. Other top banks are being investigated. There are hearings in the British Parliament. This is going to be big. And today, we'll tell you why.


OK GO: (Singing) So come and let it all out. Let it bleed. Did you get what you want? Did you get what you need?

SMITH: David, when I moved to New York, I could barely afford my apartment. And so the mortgage I got was an adjustable rate mortgage, right? Everyone was getting these back in the day. And at some point right before I signed the documents, I went, well, wait a minute. When my rate adjusts, how do I know how much I'll be paying?

KESTENBAUM: What's the interest rate, yeah.

SMITH: And I searched through these - that big document they give you. And it was right there - a word I hadn't really ever seen before - LIBOR. My rate was a few percentage points above whatever the LIBOR is. And in fact, I asked my mortgage broker. And he was like, oh, no, no, it's published every day in the Wall Street Journal. I'm like, OK, the LIBOR. There's some number in London that determines how much I pay every single month.

KESTENBAUM: Not just you, it's everywhere.

GILLIAN TETT: Well, the LIBOR is absolutely critical because although most Americans have never heard of it before, the reality is that it's the bedrock of the financial system. I mean, the majority of American mortgages, of American commercial loans are in some way pegged to LIBOR. And so the fact that LIBOR's been rigged is something that really cuts into the heart of modern finance and what it's all about.

KESTENBAUM: This is Gillian Tett. She's an editor at the Financial Times. And for years, she has been warning that there's something fishy going on with this rate, LIBOR.

SMITH: And now that I cover economics, I do know what LIBOR is. It's a global interest rate. It's calculated every day. And it's supposed to tell you how much interest that banks have to pay when they borrow from each other. You want to know this because, of course, then the banks go and lend to the rest of us. And their rate affects our rate.

KESTENBAUM: So you can imagine how this affects everything. Like, if the grocery store on my corner takes out a loan, and the interest rate on that loan has been subtly manipulated - if it's tied to LIBOR, and LIBOR is flawed, that means the corner store is paying too much or maybe paying too little on the mortgage, which means that could affect maybe the price they charge me for orange juice.

SMITH: That's at the most simple level. But imagine the most complex financial instruments, these derivatives you hear stuff about that have documents that run to thousands of pages. These too are based on LIBOR. The LIBOR is in those documents.

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

KESTENBAUM: I mean, if they were able to adjust LIBOR by, say, a hundredth of a percent, you'd say, eh, that's so small, right? But if there are trillions of dollars' worth of financial trades based on this - right? - then you're into - you know, even a small percentage of that is hundreds of millions of dollars.

TETT: Absolutely. I mean, you know, even a tiny percentage of $350 trillion worth of derivative contracts - a tiny proportion of that would be a very big number.

SMITH: So LIBOR is so fundamental to the financial system. It's tied up in these trillions of dollars worth of contracts. You would think that if one number had this kind of power, that it would be calculated - I don't know - by supercomputers, that there would be guards standing by, that the central banks of the world would make sure that this number - of all the numbers in the world - that this number was unimpeachable - that everyone would agree on exactly what this number is.

But it is not calculated this way. It's basically the result of a survey. There's a banking trade group, British Bankers' Association. They contact 18 banks around London. And they simply ask each bank, hey, if you were to borrow money right now, what kind of interest rate would you get?

KESTENBAUM: And we're not oversimplifying here. I mean, I have the actual question that gets asked here. Here it is. At what rate could you borrow funds, were you to do so by asking for them and then accepting interbank offers in a reasonable market size just prior to 11 a.m.? The banks don't have to show how they came up with the number. No regulator checks it. That's it. That's all there is to it.

SMITH: And for years, no one really thought about how - I don't know - fundamentally strange it is that this really important number is figured out in this way. But during the financial crisis, LIBOR starts to look a little bit funny because, as you remember, during the financial crisis, no one is lending to each other. And you would expect banks would demand a lot of interest from other banks. And you'd expect LIBOR to spike through the roof.

It does go up but not as much as everyone thought it would. And so the Wall Street Journal does an investigation. And they find, you know, all these banks are reporting strangely similar, strangely low numbers. People start to think maybe the banks weren't telling the truth.

KESTENBAUM: And then investigators here in the U.S. and in the U.K. got involved. And they do an investigation. They go after documents, and they went after emails. And they found some pretty revealing ones from Barclays Bank - people talking very openly about how they were going to basically lie and manipulate LIBOR.

SMITH: And it turns out this manipulation predated the financial crisis. Traders who were buying or selling these derivatives we told you about, they figured, hey, you know, I can make a little extra money if the LIBOR is just a wee bit higher today or just a wee bit lower.

KESTENBAUM: Here, so let's read one of the emails. Then we can translate it. This one is from - this is from 2005.

SMITH: OK, I'm going to be the trader at Barclays in their investment division. My job is to make money for the bank.

KESTENBAUM: OK, and I'm going to be the submitter. The submitter is the guy at Barclays whose job it is to submit that number that gets used in LIBOR. And my job is to be impartial. My job is not to be emailing back and forth with you.

SMITH: And yet this is how the email reads. Go ahead.

KESTENBAUM: (Reading) Hi, all, just as an FYI, I'll be in noon-ish on Monday.

SMITH: And remember. I'm the trader who's not supposed to be talking to him. And I say (reading) noon-ish? Who's going to put my low fixings in, he he he.

That's an actual evil laugh spelled out there - H-E-H-E-H-E.

KESTENBAUM: And then the submitter lists off two names and says these guys, quote, "will be here if you have any requests for the fixings."

SMITH: So the traders basically saying, I got a deal. I got a bet I am making with our money here at Barclays. And it's going to pay off if we can keep the LIBOR low. Someone here has to keep LIBOR low.

TETT: It's a bit like somebody who's betting on the NHL or betting on, you know, another sporting match, you know, calling up the umpire and saying - or calling up one of the games - people playing in the game and saying, can you make sure the score ends up like this because it's going to be good for my deal.

KESTENBAUM: All right, let's read another one. How about this one?

SMITH: So this one happens in 2006. I will be the trader.

(Reading) What do you think you'll go for three months?

KESTENBAUM: (Reading) I'm going to go 90 although 91 is what I should be posting.

SMITH: (Reading) When I retire and write a book about this business, your name will be written in golden letters.

KESTENBAUM: (Reading) I would prefer not to be in any book - exclamation point.

SMITH: (Laughter) How does that translate into English?

TETT: What it basically means is that they knew perfectly well that they were posting wrong numbers in the markets. I mean, you know, what you have upfront is somebody saying, well, you know, we know where the price should be. But we ain't going to report it as it - it's going to be that.

KESTENBAUM: So the person submitting the number for LIBOR says, I know I should be submitting 91 - whatever that corresponds to. But I'm actually going to submit 90 to help you.

TETT: Absolutely, they were reducing the rate when they made their submissions.

SMITH: And it's amazing because they're using actual numbers. It's not even just, oh, you know, I'm dying out here, man. I could use any help if you know what I mean. It's an actual discussion of what number are you going to put in. I would like this number. Are you going to put this number?

TETT: Well, two things are important about this exchange. One is it shows the degree to which this manipulation was widespread and accepted because - guess what? - they're putting it into emails and text messages like it wasn't any big deal. And second, it also shows the degree to which they were very specific about what they were doing. This was not some random let's kind of make the number a bit lower. It's like, I need a number that's lower. Give it to me now.

KESTENBAUM: Don't they know these emails are recorded, and their phone lines are recorded?

TETT: Well, that's the interesting thing. I mean, in theory, bankers always know that their emails and phone lines are recorded. In practice though, if something is so widespread that it's part of the fabric of everyday life, then people kind of forget to worry about it. And this is classic silo mentality - classic tunnel vision. You know, you had people in a ghetto where the rules of the ghetto were so well-enshrined - in terms of this idea that kind of you manipulated LIBOR, so why should we worry about it? - that they completely forgot how it might look one day to the outside world.

KESTENBAUM: I mean, there's this one here that says, dude, I owe you big time. Come over one day after work, and I'm opening a bottle of Bollinger. What's Bollinger?

TETT: Champagne. It's called Bolly in the London slang in the markets - but Bollinger champagne. So Bolly is the ultimate kind of, you know, celebratory trader drink. It's like, hey, dude, come on over and open a bottle of Bolly is kind of what they would have said.

SMITH: Is it expensive?

TETT: Yeah.

SMITH: So far, these are just emails between people at the same bank - at Barclays. But there are other emails that suggest that this goes far beyond this. This goes to other banks.

KESTENBAUM: Because it's actually hard for one bank to affect LIBOR. Remember, LIBOR is an average. In fact, this system is set up to try and prevent one bank being able to manipulate the average. The folks who calculate LIBOR, they get these numbers from 18 banks. And they throw out the top four, and they throw out the bottom four. Then they average the rest. So it's hard for just one bank putting in a wrong number to really throw things off.

SMITH: You need friends in high places and other banks. And in fact, that's what the emails show. They show that traders at Barclays reached out to other traders at other banks asking for their help and telling them, hey, maybe your LIBOR guy can give us a little help too.

KESTENBAUM: Should we read an email on that?

SMITH: Yeah, yeah, yeah. OK, you know, I love to be the trader. (Reading) Dude - four U's in that - dude, what's up with your guy's 34.53m fix? Tell him to get it up.

KESTENBAUM: Yeah, the other trader at the other bank responds (reading) I'll talk to him right away.

SMITH: I would love to know the name of that other bank. Unfortunately, it is not listed in the emails that were released. So we called up the top regulator here in the United States that dug up a lot of this stuff. Gary Gensler is the chair of the Commodity Futures Trading Commission.

GARY GENSLER: It's called aiding and abetting. And they were trying to help out other banks. We say in the release last week 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 that they were trying to help out. Or they were also trying to have those other banks help them out.

SMITH: The scandal is getting bigger and bigger. It starts with a trader at Barclays who says, I can make a little extra money if I just get my friend over in the other division to bump LIBOR up, bump LIBOR down - just a little extra cash. Then in order to manipulate a entire market, you have to bring in friends and colleagues at other banks.

KESTENBAUM: But so far, this is just some guy at a bank trying to make a little extra money for himself and for the bank.

SMITH: Yeah, it's petty crime, as it were. But it gets bigger during the financial crisis because during the financial crisis, everyone wants to manipulate LIBOR for a specific reason - in order to keep everyone from freaking out.

KESTENBAUM: Because LIBOR - remember - it's a measure of how easy it is for the banks to borrow money. What interest rate do they have to pay if they want to borrow money? So they don't want this number to be too high because if it's high, it sounds like things are bad at the bank. No one wants to lend to them except at very high interest rates. So they all want LIBOR to be low. So everyone thinks, oh, it's OK. Everything's fine. The banks are fine. Don't worry.

SMITH: The investigation also looked at phone conversations inside Barclays. And we have a transcript - or at least a partial transcript - from late 2007. And this is when the banks were really starting to get wary of lending to each other. And this transcript's from a conversation with a supervisor at Barclays to the department manager who reports the LIBOR numbers.

KESTENBAUM: And the supervisor is basically saying look. We cannot submit a number that is higher than all the other banks, or we're going to look really bad. We can't be above the pack because if we are, it's going to, quote, "cause a shitstorm." Is that a technical term, shitstorm?

TETT: (Laughter) I think it conveys the meaning pretty clearly. I mean, the reality was that during the financial crisis, the banks were engaged in a struggle for survival. And anybody who is seen to be having a high LIBOR rate was basically being picked on by hedge funds and other people. So on one level, you can entirely sympathize with why Barclays did this because it didn't want to look as if it was weak. At the same time though, the reality is such this is, once again, contravening, you know, basic market principles.

KESTENBAUM: And according to the investigation, there was a time when people at Barclays called up the banking trade organization that puts together LIBOR and says, look, everyone's manipulating their rates. This is a real problem.

TETT: Well, in this case, you know, the fact that Barclays called up and said to the trade organization everyone else is manipulating LIBOR - this is a problem, what should we do? - was entirely understandable. It's a bit like a high school student saying, well, lots of other people are cheating on their exams. If I don't cheat, then I'm going to do much worse than everybody else. But am I ready to cheat? Should I cheat? Or should I be the one kid on the block who actually stands up their hand and says, I'm not going to cheat and get a worse mark as a result?

KESTENBAUM: That seems like a fundamental problem with this whole system of just calling up and asking them to sort of self-report a number instead of making it based on actual trades.

TETT: The self-reporting system is nuts - absolutely nuts.

KESTENBAUM: Here's what Barclays has said publicly about this whole thing. Barclays admits some of the numbers were fudged and that the company was wrong. But Barclays' CEO, Bob Diamond, said in the statement that it did not happen all the time. He said that the adjustments - that's what he called them, adjustments. They were small - a fraction of a percent. The day after he wrote that, he resigned.

SMITH: And we're left to wonder, all these manipulations, how much damage did it actually do? Years and years of this, did they ever actually succeed in changing the average number? Was anyone really harmed? Were there contracts you can point to where people lost actual money because of manipulations to the market?

TETT: That's a very good question because it's quite hard to calculate the overall loss or damage as a result of such manipulation. No doubt there are people in the markets tapping away on their calculators trying to work out what the impact might have been on any one given day. And one of the biggest problems is that precisely because so many financial contracts have been tied to this rate in the markets, what you've opened now is the potential for anybody who doesn't like the way a financial contract has moved that might be LIBOR-linked in recent years to start suing each other and saying, well, I struck this deal on the basis of that number. And it turned out not to be correct.

KESTENBAUM: The lawsuits have already begun. I have one here. This is a class action lawsuit, and it lists the city of Baltimore...

SMITH: Where you used to live.

KESTENBAUM: ...Where I used to live. The city of Baltimore invested money, and the interest rate Baltimore was getting paid on this investment was tied to LIBOR. So if LIBOR was manipulated, the lawsuit argues, Baltimore - the city of Baltimore was cheated out of some real money. I talked with Michael Hausfeld, one of the lawyers. He told me Baltimore is just one example.

MICHAEL HAUSFELD: There are other municipalities in the lawsuit, and other municipalities have contacted us to represent them. There are hundreds if not thousands of municipalities across the country that more likely that were affected by the manipulation.

KESTENBAUM: How did this - how badly did this hurt Baltimore? Is there a dollar figure you guys calculated? Are we talking millions of dollars or thousands of dollars?

HAUSFELD: For Baltimore alone, it's - you know, we presently estimate it's in the millions of dollars.

SMITH: Millions of dollars just for Baltimore - for Baltimore, a midsized city in a tiny state in the United States. And this is a global, global number. Trillions of dollars are based on this. If Baltimore feels like it's been cheated out of millions of dollars, how does Philadelphia feel? How does Los Angeles feel? How do people in Tokyo feel about this? This could snowball into the kind of lawsuit that, I guess, lawyers dream about at night.

KESTENBAUM: And so far, we only know what was going on inside one bank - inside Barclays. There are 18 banks that submit numbers that get used to calculate LIBOR. And a lot of these banks are under investigation. We made some calls today - JPMorgan Chase, Deutsche Bank. This is just the beginning.

TETT: At the end of the day, the key issue is reputational. And, you know, credit markets only work if they have credit - that word that comes from Latin meaning to believe, credere. And if finance doesn't have the trust of consumers and companies and ordinary voters or ordinary mortgage borrowers, for example, it's very hard to build an effective financial system. And that essentially is the big question that's come out of the LIBOR scandal. How much can we actually trust the banks today? And if we don't trust the banks and the way they set the rates, what else can we actually trust in terms of how finance works?

SMITH: I feel like I see this same story in various guises over and over again - from banks, from investment firms - where they say, listen, your money will be safe with us because we have all these internal rules. We have a culture that protects your money. Our reputation depends on it. You have to trust us.

KESTENBAUM: And then there's some investigation that turns up a bunch of emails...

SMITH: Always the emails.

KESTENBAUM: ...That say dude, referencing bottles of champagne. And you begin to wonder.


IVAN AND ALYOSHA: (Singing) So live a beautiful lie.

KESTENBAUM: As always, we'd like to know what you think of the show. Send us email - planetmoney@npr.org.

SMITH: You can reach us on Twitter or Facebook or pretty much any other social media you can think of. And do what David Kestenbaum's mother did. Download the iPhone app. It's better than Bollinger. I'm Robert Smith.

KESTENBAUM: And I'm David Kestenbaum. Thanks for listening.


IVAN AND ALYOSHA: (Singing) So tell me truth. Don't tell me lies. I've seen the truth inside your eyes. Life is so short. Everyone dies. So live a beautiful lie.

Copyright © 2012 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.