Libor Scandal Critique - Essay Example

? Libor Scandal 17th June Overview The Libor scandal was revealed after investigations and subsequent reactions identified a number of deceitful activities linked to the Libor (London interbank Offered Rate). Libor rate is derived after large banks in Britain submit their interests in lending and borrowing rates amongst themselves; hence, it is the weighted average of all the rates submitted by the banks. The scandal broke out after it was detected that these banks were incorrectly stating their interest rates by either inflation or deflation, and this had to reap hugely from traders and to give them the impression that they were credit worth. Libor is a simpler mechanism of gauging the general health of the banking sector (Simko, 2013). In the United States, the Libor rate is used in bonds and loans market and any plan of altering it is an attempt to alter the United States bonds and loans market, which is a punishable offence in America. Key regulators of the industry such as the Bank of England and the Federal Reserve in New York, it was astonishingly revealed that they were aware of the scandal (Malloch & Mamorsky, 2013). Reactions: Loss Angeles Times and Business Week On June 10 2012, the Los Angeles Times reacting to the Libor Scandal strongly concluded with their title heading ‘Blame Barclays not Capitalism’ for the mess caused by the alteration of the Libor rate (Goldberg, 2012). The root cause of the scandal was Barclays bank and as a result, they had to pay hefty fines of about $450 million to both the United States and British regulators. Additionally, several senior officials at the bank led by the Chairman and the American-born Chief Executive Officer Bob Diamond resigned; the paper stated that it is improper to point out that the system is sinful, but rather to point out the sinfulness of the doer. People who are directly in charge of this mess must be made directly liable for such failures and that capitalism is not the free way for anybody to engage in corrupt and scandalous activities. Describing, the possibility of ignoring reactions to the scandal as a yawn, the paper firmly relayed to the authorities the need to stringently deal with the matter. They are completely accurate concerning the initial piece, maybe accurate about the subsequent and profoundly mystified about the third. The dishonesty that was exposed by the authorities was very shocking and that the ultra conservatives needed to exploit the public by weeping into public gallery. When the authorities ignore incessant warnings about the true health of the system, they merely choose to be on the sidelines yet the problem continues to spiral out of control. The society must constantly drive for more control, through several bodies and commissions and their agencies, they seem to coil under the weight pressure of such scandals. The system of relationship between the authorities and business is a network of personal interests complicated by the mutual rules and regulation governing such a relationship and underpinned by a culture of ‘too big to fail’. The authorities must use their discretions to punish those manipulating the system for profit fully, and this must be conducted without fear and favor. As a consequence the most important lesson the society should have learned from the Libor scandal is the perpetrators going out of business, but then again this might cause further pain for non- participants of the scandal such as their customers and shareholders. However, the real perpetrators such as the traders and the brokers should feel the full force of the law for their actions in manipulating the Libor rate; therefore, they must be charged with criminal offence. When people argue about the evils of capitalism, they fail to notice that the system cannot manipulate itself; it takes the people effort to do that. The writer of the post decries the weight that the system carries, he notes when a scandal breaks out, the system bears the blame yet people cause such scandals. On the other hand, the Business Week claims that the Libor scandal had the consequence of destroying the entire worlds’ financial structure; this is because several people relied on the Libor rate as the benchmark rate. The rate is standard for over 360 trillion of securities loans including students and bonds, and its manipulation might have enormous results. The paper reported that there are several lawsuits filed seeking compensation from the world’s top banks such as Bank of America, JP Morgan Chase, Barclays, and Citigroup amongst other banks. Predictably, the banks moved to court to counter the suit by application to the court for dismissal of the suit, and these banks faced an uphill task of winning back their clients back after the enormity of this scandal was revealed. Consequently, these banks are likely to face protracted cases in court by aggrieved parties from all over the world, and in fact, at least thirteen different suits have been filed in the United States and Britain. The paper further persuades the investors not to take lightly the importance of the issue ‘Investors should not minimize the importance of this matter’ (Gallu et al, 2012). The authorities must always have the interests of the wider public at heart, ‘the big picture” for example, the city of Baltimore claimed that they lost more than $6 billion after it had relied on the Libor rate. The Libor scandal calls into question the role of ethics in business and that the extent to which human beings may go to profit from irregularity. There are some reports that suggested that the traders were now openly engaging in irregularity without fear, as the report suggested that some of the traders even stated that ‘…I will move the curve down…’ this is a blatant show of dishonesty, Rules and authorities were set up to check the people who propagated profiteering more than the public goods. Barry’s Method The key decision maker in the Libor Scandal is the Chief Executive of the Barclays bank, which is at the center of attention regarding the scandal, he is faced with a dilemma; first, reporting the scandal that risks the life of the bank, as such would mean announcing corruption from such a big bank. Secondly, if he announces the scandal the bank might face very many lawsuits and fines, which still affect the health of the bank only this time to a much higher degree. This is a conflicting choice and the most important one must take precedence over others that are less important. He must consider the trust of all those people who use the rate all over the world over the bank health, and this might offer him an honorable exit. References Gallu, J., Mustoe, H., O'Donnell, S. & Farzad, R. (2012) The Libor Scandal Claims Its First CEO. Businessweek. Retrieved from: http://www.businessweek.com/articles/2012-07-03/the-libor-scandal-claims-its-first-ceo Goldberg, J. (2012) Blame Barclays, not capitalism. LA Times. Retrieved from: http://articles.latimes.com/2012/jul/10/opinion/la-oe-goldberg-libor-scandal-20120710 Malloch, T. R. & Mamorsky, J. D. (2013). The end of ethics and a way back: How to fix a fundamentally broken global financial system. Singapore: Wiley. Simko, S. P. (2013). Strategic fixed income investing: An insider's perspective on bond markets, analysis, and portfolio management. Hoboken, N.J: Wiley. Read More