Libor has become the new focus in the chain of the recent Financial scandals, following in the footsteps of "sub-prime mortgages", "CDOs" and "credit default swaps".
The most popular questions being asked include the following.
How does Libor-fixing affect the man on the street and are there alternatives to Libor?
How much the Libor scandal will end up costing the banks and taxpayers? Does the Libor scandal looks like a cartel? What should have Risk Managers done to prevent it or was it determined in higher spheres where Risk Managers do not have any influence?
Was it the biggest securities fraud in history affecting almost all market participants around the world?
If a person/institution has a financial product linked to Libor can he/she sue the banks and which one?
How to change culture of banks without putting commissars with license to kill?
Has anyone have an opinion? Post your reply by commenting on this discussion.
Replies
The most obvious link to the man/woman in the street is related to LIBOR-based home equity lines of credit. Essentially, the banks which wrote these (generally) 2nd mortgage contracts are very likely to be in breach of contract. Particularly if a given bank, with a portfolio of LIBOR-based HELOCs participated in the rate-rigging. Whether the rate was rigged high or low is legally irrelevant. The legal issue is that the lender/borrower contract states a base upon which the actual charged rate is based. With the base rate (LIBOR) having been rigged, the the bank would be in violatio of the contract.
What we're discussing here is billions of $ in potential professional liability suits, or class action litigation, agains the banks. In the U.S. , I belieive Bofa is the largest issuer of such debt. Should consumer litigation prove successful, one can expect equivalent litigation from the holders of the RMBS bonds where the actual debt ended up.
The net effect of the manipulation was to artificially depress LIBOR rates. When you ask
How does Libor-fixing affect the man on the street and are there alternatives to Libor?
then in the UK where consumer lending rates were (still are?) directly linked to LIBOR, then mortgages and other consumer facilities would, if the logic follows, become immediately more expensive.
A banal but no less serious consequence and one that will do the 'recovery' (or 'Great Correction') no good at all