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Libor Scandal
Rohit DhirSrijan Srivastava
B. S. Swaminathan
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Libor : An Overview
Lendsunsecured
funds to Bank 1 Lends unsecuredfunds to Bank 2
London Inter-bank Market
Publishes benchmark interest rate LIBOR
Each morning, global banks submit theirborrowing costs to BBA
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So what is there in a number..?
Confused ?
Ljun
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Effect of LIBOR in the World market
Used as a base rate forsetting interest rateson loans
DIRECTLY AFFETCS
Leads to
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Effect on Global Financial system
Variable interestrates =
LIBOR + spread
Affected byScandal !
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Comparison to other Financial scandals
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Comparison to other Financial scandals
Any idea about LIBOR scandal ??
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Comparison to other Financial scandals
$300 trillion !!!
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Who is responsible for the scanda
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Role of Barclays
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FSA breaches by Barclays
Principle 5 breached many times between 2005 and 2008
Again Principle 5 breached between 2007 and 2009
Breached Principle 3 between 2005 and 2010
Principle 2 breached
De
Sub
No
Faile
M
Man
Ski
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Libor during the Sub Prime crisis
Liquidity conditions worsened in London
Lending difficulty greater than overnight maturity
Frequency and average size of transactions reduced
Still the process remained the same
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Barclays Role during subprime crisis
Barclays ->Liquidity problem -> Negative publicity
Earlier, Barclays submissions were higher than the other banks
Drew more attention ,senior management signalled to reduce
Increased public scrutiny from Aug 2007
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Financial Instruments impacted
Interest rateswaps
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Financial Instruments impacted
Interest rateswaps
Company A Company Swaps Bank
Bank A Bank B
Fixed - 7% Fixed(10%
Variable LIBOR Variable L
Variable Fixed
5M
5M7%
L iborL ibor
8.5%
Libor 1%9.5%
8%
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Interest rate future is a financial derivative
It is almost 25-30 per cent of all derivatives
Underlying security, actually a debt obligation that moves in vinterest rates change
Interest RateFutures
Financial Instruments impacted
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Mortgage loan with the interest rate periodically adjusted
Transfer interest rate risk from lender to borrowers
Relatively less impacted
Interest RateFutures
Variable RateMortgages
Financial Instruments impacted
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Investigation Facts
Internal communication sent by Barclays submitters
Analysis of the Barclayss LIBOR submission consistent with D
External traders requests reached submitters through intern
Medium
1)Verbally 2) E-Mail 3) IM
Between 2005 to 2009 >=173 requests for US dollar Libor
US Libor EURO Libor Yen Libor
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Investigation Facts
Internal communication sent by Barclays submitters
Analysis of the Barclayss LIBOR submission consistent with D
External traders requests reached submitters through intern
Medium
1)Verbally 2) E-Mail 3) IM
Between 2006 to 2009>=58 requests for EURO Libor
US Libor EURO Libor Yen Libor
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Investigation Facts
Internal communication sent by Barclays submitters
Analysis of the Barclayss LIBOR submission consistent with D
External traders requests reached submitters through intern
Medium
1)Verbally 2) E-Mail 3) IM
Between 2006 to 2009>=26 requests for Yen Libor
US Libor EURO Libor Yen Libor
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Typical Example
Trader C: The big day[has] arrived My NYK are screaming
about an unchanged 3m Libor. As always, any help would be grappreciated. What do you think youll go for 3m?
Submitter: I am going 90 although 91 is what I should be pos
Trader C: [] when I retire and write a book about this businame will be written in golden letters [].
Submitter: I would prefer this [to] not be in any book!
US Libor EURO Libor Yen Libor
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Events that followed investigation
Barclays was found guilty for rigging the rate ,which was the bfor more than $360 trillion of securities
Fine Split
Barclays CEO Robert Diamond quits
59.5m 129m 103m
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Events that followed investigation
Barclays was guilty for fudging the rate ,which was the benchmore than $360 trillion of securities
Fine Split
Barclays CEO Robert Diamond quits
Total 292
59.5m 129m 103m
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Structural Weakness
Trimmed meantakes care of
outliers
Singlebank mis-
stated
Lideviunl
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Structural Weakness
Trimmed meantakes care ofoutliers
Singlebank mis-
stated
Impact on liboris amplified
Multiplebanks
mis-stated
Libdeviunli
Libdeviprob
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Future
Lots of lawsuits in pipeline
Greater trust related issues
More losses to the banks shareholders
Stiffer regulations
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Future
Lots and lots of lawsuits in pipeline
Greater trust related issues
More losses to the banks shareholders
Stiffer regulations
Investment Banking Retail Banking
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Future
Lots and lots of lawsuits in pipeline
Greater trust related issues
More losses to the banks shareholders
Stiffer regulations
Investment Banking Retail Banking
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If a fancy newdesign will ecorporate or ato conceal fmarket the scindebtedness...
top managemthe boardcongratulationbonus, or doethats not wha
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References
http://dealbook.nytimes.com/2012/07/13/barclays-informeyork-fed-of-problems-with-libor-in-2007/?hp&pagewanted=
http://www.independent.co.uk/news/business/news/barclashamed-by-290m-fine-for-market-fixing-7893782.html
http://www.quora.com/London-Inter-Bank-Offered-Rate/HoBarclays-rig-LIBOR-rates-And-why-was-it-detected-now
http://fsahandbook.info/FSA/html/handbook/PRIN/2/1
http://en.wikipedia.org/wiki/Adjustable-rate_mortgage
http://www.economist.com/blogs/schumpeter/2012/07/bacrisis
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endent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://www.independent.co.uk/news/business/news/barclays-shamed-by-290m-fine-for-market-fixing-7893782.htmlhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=printhttp://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?hp&pagewanted=print