Inside the LIBOR Scandal

Abstract

The recent financial crisis of 2008 - caused by uncontrolled speculation on derivatives and a strong financial deregulation started almost thirty years ago in the United States - has shown the fragility and the rotten inside the worldwide financial sector. In 2012, the Libor Scandal highlighted the fact that after this crisis, nothing has changed in the mentality and in the behavior of financial regulators. Libor is related to a huge number of financial contracts for trillions of dollars every year and it is defined as the London Inter-Bank Offered Rate, which is considered one of the most important rates in the financial markets. Besides the value of transactions, this rate has a huge worth since it is a sort of benchmark for the evaluation of mortgages, loans, inter-bank lending and at the same time represents a key indicator of trust and health inside the financial sector. This is the reason why, a manipulated settlement of the rate can lead investors to believe in wrong data and information generating several disruptive effects in the market. The problem is that this is what really happened in 2012; in fact, the major banks listed in the London Stock Exchange like Barclays, JP Morgan, Deutsche Bank and UBS manipulated the process by which the rate was used to be estimated. After the scandal, the English government decided to review the financial regulation regarding the Libor, changing the rules of the process for its determination and increasing the number of criminal sanctions in case of market manipulation. The aim of this work is to understand from a historical and ethnostatistic point of view, in which ways the banks involved have manipulated the rate and which were the incentives that pushed to this irresponsible behavior. Clearly, this scandal led to different negative impacts on the economy. First, the disguised interest rate pushed many private investors to invest in bad financial products even if they were guaranteed as profitable and safe, causing huge losses for the entire system. On the other hand, the “level of trust in finance” of the entire business community decreased dramatically, reaching the lowest level in the last ten years. In business, trust has a strong degree of interconnection with the reputation of the different actors involved and generally this level changes when we consider different sector of the economic system; in the next chapters it will be analyzed how possible is to increase or decrease this level in the financial sector. Considering the aim of the ethnostatistical approach, this work will also take into analysis the level of responsibility of the main banks involved and of the British government and the phenomenon of using the regulation for increasing the level of reputation in the economic sector. Finally, there will be a deep analysis of how often in the last years many banks and financial institutions have changed the real meaning of data in order to achieve goals, which were far from the promises of the application of an ethical and social view in their activities. In addition, the analysis presented in this work shows in a deep way, which are the limits and the possible adjustments that the governments have to put in action with the strict collaboration of the financial regulators, in order to reduce and prevent corruption and market manipulation.