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A new scandal in the banking industry is undermining its image, already tarnished by rogue trading at JPMorgan Chase and the 2008 subprime mortgage collapse. At the heart of the scandal: manipulation of Libor, the most widely used interest rate in the world. In congressional testimony Tuesday, Federal Reserve Chairman Ben Bernanke said he thought the Libor system was "structurally flawed." USA TODAY reporter John Waggoner explains the Libor scandal and what it means to you.


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Q: What is Libor?
A: It's the London interbank offer rate, an interest-rate benchmark for many other rates, from commercial loans to mortgages. Libor is also an important index for derivatives, which are complex agreements whose value derives from a benchmark.
Libor is the most widely used interest rate in the world. Estimates of how much is tied to Libor vary from $350 trillion to $800 trillion. To put that in perspective, $350 trillion would pay for all U.S. government spending for 96 years.
STORY: NY Fed told of interest rate manipulation in '07
STORY: Sorry, savers: Interest rates set record lows
Q: How is Libor calculated?
A: Once a day, major London banks tell Thomson Reuters the interest rate they would expect to pay on a loan from another bank. Thomson Reuters drops those rates in the highest and lowest 25% and averages the 50% in the middle.
There are actually 150 Libor rates, with maturities from overnight to one year, and in different currencies.
Libor is an important element in many interest rate swaps, a way of insuring floating-rate loans from a surge in interest rates.
Q: Wait, what? The interest rate they would expect to pay? Not the rate they actually pay?
A: Right. It's kind of an honor system. At the heart of the controversy: Some banks artificially inflated or deflated their rates, depending on what would benefit them most. Some may have deflated their rates to give the impression that they were more creditworthy than they actually were.
During the financial crisis of 2008, the rate was more of an estimate, since banks weren't lending to anyone.
Q: So who was hurt?
A: It depends. If Libor was artificially high when you took out a loan, then you paid more on the loan than you should have. Conversely, if Libor was artificially low, you may have paid less than you should have.
Naturally, those who figure they were ripped off are filing lawsuits.
The city of Baltimore, for example, is suing large banks involved in setting Libor, including JPMorgan Chase, Bank of America, Barclays, Citibank and Deutsche Bank.
Barclays agreed to settle charges of manipulation and pay U.S. and British regulators $450 million.
Both JPMorgan Chase and Citibank have said in the past few weeks that they, too, are under investigation.
Q: Did anyone besides the banks involved know about the rigging of Libor?
A: Yes. The New York Federal Reserve Bank did and sent a lengthy list of suggestions on how to change the process. The British Bankers Association, which oversees the process, was slow to respond, according to Bernanke. The Fed is looking into whether any U.S. banks were involved in rigging Libor.
Q: Will Libor be scrapped?
A: Possibly. Central bankers discuss in September whether Libor can be fixed, or whether something less vulnerable to abuse can be substituted.

Quoted from Tommy

I hate when they call stuff like that "a scandal".
No, being pregnant in your wedding dress is "a scandal"

They should call it what it is, blatant, unabashed theft, that is affecting us all.

Quoted from bumblethru

So all of the hoopala over obama's so called 'scolding' the banks was nothing more than smoke and mirrors!

Quoted from Tommy

The article says the rate manipulation was in 2007.

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The rotten heart of finance
A scandal over key interest rates is about to go global
Jul 7th 2012 | from the print edition


THE most memorable incidents in earth-changing events are sometimes the most banal. In the rapidly spreading scandal of LIBOR (the London inter-bank offered rate) it is the very everydayness with which bank traders set about manipulating the most important figure in finance. They joked, or offered small favours. “Coffees will be coming your way,” promised one trader in exchange for a fiddled number. “Dude. I owe you big time!… I'm opening a bottle of Bollinger,” wrote another. One trader posted diary notes to himself so that he wouldn't forget to fiddle the numbers the next week. “Ask for High 6M Fix,” he entered in his calendar, as he might have put “Buy milk”.

What may still seem to many to be a parochial affair involving Barclays, a 300-year-old British bank, rigging an obscure number, is beginning to assume global significance. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.

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Over the past week damning evidence has emerged, in documents detailing a settlement between Barclays and regulators in America and Britain, that employees at the bank and at several other unnamed banks tried to rig the number time and again over a period of at least five years. And worse is likely to emerge. Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. “This is the banking industry's tobacco moment,” says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America's tobacco industry more than $200 billion in 1998. “It's that big,” he says.

As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged. The scandal also corrodes further what little remains of public trust in banks and those who run them.

Like many of the City's ways, LIBOR is something of an anachronism, a throwback to a time when many bankers within the Square Mile knew one another and when trust was more important than contract. For LIBOR, a borrowing rate is set daily by a panel of banks for ten currencies and for 15 maturities. The most important of these, three-month dollar LIBOR, is supposed to indicate what a bank would pay to borrow dollars for three months from other banks at 11am on the day it is set. The dollar rate is fixed each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow if they needed money. The top four and bottom four estimates are then discarded, and LIBOR is the average of those left. The submissions of all the participants are published, along with each day's LIBOR fix.

In theory, LIBOR is supposed to be a pretty honest number because it is assumed, for a start, that banks play by the rules and give truthful estimates. The market is also sufficiently small that most banks are presumed to know what the others are doing. In reality, the system is rotten. First, it is based on banks' estimates, rather than the actual prices at which banks have lent to or borrowed from one another. “There is no reporting of transactions, no one really knows what's going on in the market,” says a former senior trader closely involved in setting LIBOR at a large bank. “You have this vast overhang of financial instruments that hang their own fixes off a rate that doesn't actually exist.”

A second problem is that those involved in setting the rates have often had every incentive to lie, since their banks stood to profit or lose money depending on the level at which LIBOR was set each day. Worse still, transparency in the mechanism of setting rates may well have exacerbated the tendency to lie, rather than suppressed it. Banks that were weak would not have wanted to signal that fact widely in markets by submitting honest estimates of the high price they would have to pay to borrow, if they could borrow at all.

In the case of Barclays, two very different sorts of rate fiddling have emerged. The first sort, and the one that has raised the most ire, involved groups of derivatives traders at Barclays and several other unnamed banks trying to influence the final LIBOR fixing to increase profits (or reduce losses) on their derivative exposures. The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars. In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America's Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions. Risibly, Bob Diamond, its chief executive, who resigned on July 3rd as a result of the scandal (see article), retorted in a memo to staff that “on the majority of days, no requests were made at all” to manipulate the rate. This was rather like an adulterer saying that he was faithful on most days.

Barclays has tried its best to present these incidents as the actions of a few rogue traders. Yet the brazenness with which employees on various Barclays trading floors colluded, both with one another and with traders from other banks, suggests that this sort of behaviour was, if not widespread, at least widely tolerated. Traders happily put in writing requests that were either illegal or, at the very least, morally questionable. In one instance a trader would regularly shout out to colleagues that he was trying to manipulate the rate to a particular level, to check whether they had any conflicting requests.

The FSA has identified price-rigging dating back to 2005, yet some current and former traders say that problems go back much further than that. “Fifteen years ago the word was that LIBOR was being rigged,” says one industry veteran closely involved in the LIBOR process. “It was one of those well kept secrets, but the regulator was asleep, the Bank of England didn't care and…[the banks participating were] happy with the reference prices.” Says another: “Going back to the late 1980s, when I was a trader, you saw some pretty odd fixings…With traders, if you don't actually nail it down, they'll steal it.”

Galling as the revelations are of traders trying to manipulate rates for personal gain, the actual harm done would probably have paled in comparison with the subsequent misconduct of the banks. Traders acting at one bank, or even with the clubby co-operation of counterparts at rival banks, would have been able to move the final LIBOR rate by only one or two hundredths of a percentage point (or one to two basis points). For the decade or so before the financial crisis in 2007, LIBOR traded in a relatively tight band with alternative market measures of funding costs. Moreover, this was a period in which banks and the global economy were awash with money, and borrowing costs for banks and companies were low.

“Clean in principle”

Yet a second sort of LIBOR-rigging has also emerged in the Barclays settlement. Barclays and, apparently, many other banks submitted dishonestly low estimates of bank borrowing costs over at least two years, including during the depths of the financial crisis. In terms of the scale of manipulation, this appears to have been far more egregious—at least in terms of the numbers. Almost all the banks in the LIBOR panels were submitting rates that may have been 30-40 basis points too low on average. That could create the biggest liabilities for the banks involved (although there is also a twist in this part of the story involving the regulators).

As the financial crisis began in the middle of 2007, credit markets for banks started to freeze up. Banks began to suffer losses on their holdings of toxic securities relating to American subprime mortgages. With unexploded bombs littering the banking system, banks were reluctant to lend to one another, leading to shortages of funding system-wide. This only intensified in late 2007 when Northern Rock, a British mortgage lender, experienced a bank run that started in the money markets. It soon had to be taken over by the state. In these febrile market conditions, with almost no interbank lending taking place, there were little real data to use as a basis when submitting LIBOR. Barclays maintains that it tried to post honest assessments in its LIBOR submissions, but found that it was constantly above the submissions of rival banks, including some that were unmistakably weaker.

At the time, questions were asked about the financial health of Barclays because its LIBOR submissions were higher. Back then, Barclays insiders said they were posting numbers that were honest while others were fiddling theirs, citing examples of banks that were trying to get funding in money markets at rates that were 30 basis points higher than those they were submitting for LIBOR.


This version of events has turned out to be only partly true. In its settlement with regulators, Barclays owned up to massaging down its own LIBOR submissions so that they were more or less in line with those of their rivals. It instructed its money-markets team to submit numbers that were high enough to be in the top four, and thus discarded from the calculation, but not so high as to draw attention to the bank (see chart 1). “I would sort of express us maybe as not clean, but clean in principle,” one Barclays manager apparently said in a call to the FSA at the time.

Confounding the issue is the question of whether Barclays had, or thought it had, the tacit support of both its regulator and the Bank of England (BoE). In notes taken by Mr Diamond, then the head of the investment-banking division of Barclays, of a call with Paul Tucker, then a senior official at the BoE, Mr Diamond recorded what was interpreted by some in the bank as a nudge and a wink from the central bank to fudge the numbers (see article). The next day the Barclays submissions to LIBOR were lower. This could be a crucial part of the bank's defence.


The allegation by Barclays that some banks seemed to be fiddling their data would appear to be supported by the data themselves. Over the period of the financial crisis, the estimates of its borrowing costs submitted by Barclays were generally among the top four in the LIBOR panel (see chart 2). Those consistently among the lowest four were some of the soundest banks in the world, with rock solid balance-sheets, such as JPMorgan Chase and HSBC. However, among banks regularly submitting much lower borrowing costs than Barclays were banks that subsequently lost the confidence of markets and had to be bailed out. In Britain these included Royal Bank of Scotland (RBS) and HBOS.

The tobacco moment

Regulators around the world have woken up, however belatedly, to the possibility that these vital markets may have been rigged by a large number of banks. The list of institutions that have said they are either co-operating with investigations or being questioned includes many of the world's biggest banks. Among those that have disclosed their involvement are Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, RBS and UBS.

Court documents filed by Canada's Competition Bureau have also aired allegations by traders at one unnamed bank, which has applied for immunity, that it had tried to influence some LIBOR rates in co-operation with some employees of Citigroup, Deutsche Bank, HSBC, ICAP, JPMorgan Chase and RBS. It is not clear whether employees of these banks actually co-operated or, if they did, whether they succeeded in manipulating rates.

Continental Europe is focusing on cartel effects rather than digging into the internal culture of banks. Separate investigations, by the European Commission and the Swiss authorities, focus on the possible effects of inter-bank rate manipulation on end users. Last October European Commission officials raided the offices of banks and other companies involved in trading derivatives based on EURIBOR (the euro inter-bank offered rate). The Swiss competition commission launched an investigation in February, prompted by an “application for leniency” by UBS, into possible adverse effects on Swiss clients and companies of alleged manipulation of LIBOR and TIBOR (the Tokyo inter-bank offered rate) by the two Swiss and ten other international banks and “other financial intermediaries”.

The regulatory machinery will grind slowly. Investigators are unlikely to produce new evidence against other banks for a few months yet. Slower still will be the progress of civil claims. Actions representing a huge variety of plaintiffs have been launched. Among the claimants are investors in savings rates or bonds linked to LIBOR, those buying derivatives priced off it, and those who dealt directly with banks involved in setting LIBOR.

Deciding a figure for the potential liability facing banks is tough, partly because the cases will be testing new areas of the law such as whether, for instance, an Australian firm that took out an interest-rate swap with a local bank should be able to sue a British or American bank involved in setting LIBOR, even if the firm had no direct dealings with the bank. The extent of the banks' liability may well depend on whether regulators press them to pay compensation or, conversely, offer banks some protection because of worries that the sums involved may be so large as to need yet more bail-outs, according to one senior London lawyer.

A particular worry for banks is that they face an asymmetric risk because they stand in the middle of many transactions. For each of their clients who may have lost out if LIBOR was manipulated, another will probably have gained. Yet banks will be sued only by those who have lost, and will be unable to claim back the unjust gains made by some of their other customers. Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.

The revelations also raise difficult questions for regulators. Mr Tucker's involvement in the Barclays affair may harm his prospects of being appointed governor of the Bank of England, although he may well have a benign explanation for his comments (he is due to appear before parliament soon).

Another issue is the conflict central banks face, in times of systemic banking crises, between maintaining financial stability and allowing markets to operate transparently. Whether the BoE instructed Barclays to lower its submissions or not, regulators had a pretty clear motive for wanting lower LIBOR: British banks, in effect, were being shut out of the markets. The two hardest-hit banks, RBS and HBOS, were both far too big to fail, and higher LIBOR rates would have made the regulators' job of supporting them more difficult.

This highlights a deeper question: what is the right level of involvement in influencing or regulating market interest rates, in a crisis, by those responsible for financial stability? Central banks get a slew of sensitive information from banks which they rightly do not want to make public. Data on deposit outflows at banks could trigger unnecessary runs, for example. Yet LIBOR is a measure of market rates, not those picked by policymakers.

Reform club

Two big changes are needed. The first is to base the rate on actual lending data where possible. Some markets are thinly traded, though, and so some hypothetical or expected rates may need to be used to create a complete set of benchmarks. So a second big change is needed. Because banks have an incentive to influence LIBOR, a new system needs to explicitly promote truth-telling and reduce the possibilities for co-ordination of quotes.

Ideas for how to do this are starting to appear. Rosa Abrantes-Metz of NYU's Stern School of Business was one of a group of academics who, in 2009, raised the alarm that something fishy was going on with LIBOR. One simple change, she proposes, would be significantly to raise the number of banks in the panel. The theoretical changes needed to repair LIBOR are not difficult, but there are practical challenges to reform. The thousands of contracts that use it as a point of reference may need to be changed. Moreover, the real obstacle to change is not a lack of good ideas, but a lack of will by the banks involved to overturn a system that has served most of them rather well. With lawsuits and prosecutions gathering pace, those involved in setting the key rate in finance need to get moving. Adding a calendar note to “Fix LIBOR” just won't do.

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Explainer: Why the LIBOR scandal is a bigger deal than JPMorgan
Posted by Dylan Matthews on July 5, 2012 at 11:10 am
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Last week, Barclay’s admitted to rigging the London InterBank Offered Rate (LIBOR) and agreed to pay U.S. and British regulators $450 million dollars in penalties to settle the case. Then the heads began to roll: On Tuesday, its CEO, Bob Diamond, and COO Jerry del Missier resigned, and yesterday Diamond told a British parliamentary inquiry that regulators in Washington and London alike were complicit in his manipulations.
This is a big deal. Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay’s making money by hurting you.
In the simplest terms, LIBOR is the average interest rate which banks in London are charging each other for borrowing. It’s calculated by Thomson Reuters — the parent company of the Reuters news agency — for the British Banking Association (BBA), a trade association of banks and financial services companies. The actual process of determining the rates is dead simple, and in fact conducted by only two people. Donald MacKenzie, a sociology professor at the University of Edinburgh, described the process in the London Review of Books:
The calculation of Libor is coordinated by just two people, who work in an unremarkable open-plan office in London’s Docklands. I watched the process, which seemed utterly routine, a couple of years ago. Just after 11 a.m. on every weekday that’s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money. They do this electronically, but sometimes the co-ordinators make a phone call to a bank that hasn’t sent in its estimates, and if the latter seem implausible – typos, for example, are fairly common – they’re checked, also with a quick call: ‘Hi there, is the Kiwi chap [provider of the estimates for borrowing New Zealand dollars] about? … Bit of a spread on the two month. Everyone else is coming in a good bit under that.’

A simple computer program discards the lowest quarter and highest quarter of the estimates, and calculates the average of the remainder. The result is that day’s Libor. The calculation is repeated for each of ten currencies and 15 loan durations (from overnight to 12 months), so 150 Libors are published daily: overnight sterling Libor, one-week euro Libor, one-month yen Libor, three-month US dollar Libor and so on.
So why does everyone care about a handful of numbers that a couple guys in an office crunch every day before lunch? The simple answer is that $360 trillion in assets worldwide are indexed to LIBOR, and much of those assets are consumer debt instruments like mortgages, car loans and credit card loans.
In the United States, the two biggest indices for adjustable rate mortgages and other consumer debt are the prime rate (that is, the rate banks charge favored or “prime” consumers) and LIBOR, with the latter particularly popular for subprime loans. A study from Mark Schweitzer and Guhan Venkatu at the Cleveland Fed looked at survey data in Ohio and found that by 2008, almost 60 percent of prime adjustable rate mortgages, and nearly 100 percent of subprime ones, were indexed to LIBOR:

That means that when LIBOR rises, so do the prices ordinary consumers pay to, say, get a mortgage. Which means a bank that mucks with the LIBOR rate isn’t just playing around with esoteric derivatives that will only affect other traders: They’re playing with the real economy that most of us participate in every day.
So how did the manipulations by Barclay’s affect this rate? First, from 2005 and 2007, the bank allegedly varied the rates it reported to the BBA and Thomson Reuters so as to improve its margins on internal trades. For example, it could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This not only screwed the investors on the other side of the trade, but bumped up mortgage rates – however infinitesimally – for consumers even when the risk of the loans hadn’t changed at all.
Second, in late 2008 Barclay’s – and, Diamond alleges, other banks – apparently low-balled the rates they reported for LIBOR averaging so as to make the banks’ finances look more stable than they were. The idea was to put out a false image of stability to prevent market panic and stave off calls for additional regulation or even nationalization, a solution that looked increasingly likely during the height of the financial crisis. The direct effect for consumers here was to make loans cheaper, but the indirect effect, or the intended one at least, was to lessen chances of government action against the banks. So the banks manipulating LIBOR weren’t just messing with peoples’ finances – they were trying to mess with the peoples’ laws.
The LIBOR scandal, then, is something more insidious than the multibillion-dollar failed trade that got JPMorgan into so much hot water. Unlike the assets JPMorgan was trading on, the LIBOR rate has real consequences for average consumers, and its manipulation could hurt your typical mortgage-holder, however minimally.
Further, at least some LIBOR manipulation was an attempt to manipulate government policy by changing the very data that regulators use to make decisions. If the LIBOR games prevented governments from pursuing policies that could have made the financial system more stable, the main victims, again, are ordinary consumers.

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LIBOR For Mortals: An Easy Explainer

Oli Scarff/Getty Images
The Canary Wharf headquarters of Barclays Bank in London, England.
by Heidi N. Moore Tuesday, July 3, 2012 - 03:40
FULL STORY
Call it the Barcapalypse (as some wags on Twitter did): In a 48-hour span between July 1 and July 3, Barclays bank lost most of its senior management team: the chairman, Marcus Agius, the CEO, Bob Diamond, and the chief operating officer, Jerry del Missier, resigned over a scandal in which the bank was accused of manipulating the LIBOR interest rate. Diamond is reported to have felt "hounded" by members of parliament who were going to drag him into a public enquiry and take up all his time, with no one left to run the bank.

That leaves England's most important bank with absolutely no one in the executive office. Things work differently in England, as you can see; you didn't see Jamie Dimon resigning to avoid facing Congress last month.

Barclays - nicknamed BarCap by Wall Street insiders - is known to most Americans mainly as the bank that bought Lehman Brothers. And LIBOR isn't known to most Americans at all. Yet this scandal is shaping up to be a big one. And one British bank and one international interest rate may have had a strong effect on average consumers here in the U.S.  The handy explainer below should explain who to be mad at, and why.**

I feel like we only ever get to talk when some obscure financial product goes horribly wrong.

It does seem that way, doesn't it? Like with JPMorgan and the credit-default swaps, and when European bonds were going nuts around the time of the Greek election? Luckily, this is a strong basis for a relationship. If we catch up every time Wall Street screws something up, we'll keep talking regularly for years.

So, catch me up. I've been reading about a LIBOR scandal in the papers. LIBOR is....?

It's actually not so difficult. LIBOR stands for London Interbank Offered Rate.  Let's take that one word at a time.

The London Interbank Offered Rate is an interest rate, set in London, by about 18 major banks including Bank of America, Barclays, JPMorgan, Deutsche Bank, HSBC and all the rest of the usual suspects.

Banks survive by borrowing from each other every single day. So these banks go to the British Bankers Association every morning and submit an offer, every morning, of how much interest they would have to pay to borrow from each other. That's why we call it the interbank interest rate.

To make sure that no one games the system, the BBA asks Thomson Reuters to eliminate the highest and the lowest offers, and pick a number around the middle. The LIBOR number is set by 11 a.m. every day for 10 currencies at least; but right now, the one we're concerned with is the U.S. dollar.

Side question: How many loans are based on LIBOR?

About $10 trillion worth. And then trillions more in derivatives.

Okay, but what does LIBOR really tell us?

LIBOR is a way to measure the health of the banking system. Banks have to judge on a daily basis whether the other banks they do business with are good for the money.

If LIBOR is high, it means that banks don't trust each other too much. It's just like when your bank raises your mortgage or credit-card rate -- they don't really think you're good for the money, and so they want you pay higher interest. Banks work the same way with each other.

But if LIBOR is low, that can also look bad. It was all the way back in 2007 that many people suspected that banks were fibbing about LIBOR to look more credit-worthy than they were. The Wall Street Journal's Carrick Mollenkamp -- who is now writing for Reuters -- explained it well:

Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates.

So, does LIBOR affect me?

Do you have any loans? Then LIBOR does affect you. Here in the U.S., banks have used LIBOR to set the borrowing rate for student loans, adjustable-rate mortages, and car loans.

So how did Barclays mess that system up?

Barclays tried to push down LIBOR to make itself look like it had really good credit. All the banks report LIBOR voluntarily, and the British Bankers' Association doesn't really call them out on any fibbing day-to-day - though, as we mentioned, everyone had their suspicions.

London's chief financial regulator, the Financial Services Authority, or FSA, alleges in this complaint that Barclays tried to manipulate LIBOR between 2005 and 2009 to make itself look as if it were flush with cash and getting great borrowing rates.

There was pressure. Other banks were submitting really low rates to the BBA, which made it look like they were finding it easy to borrow.

But during the crisis, Barclays was submitting consistently higher interest rates - in effect, telling the truth about high interest rates it was being charged- which made it look like Barclays was having trouble finding people to lend it money at a reasonable rate. Bob Diamond - who signs his name RED - said as much to the Bank of England, which was worried about Barclays' high lending rates. Other banks, at the same time, were reporting much lower rates to the BBA. Barclays thought the other banks were massaging their lower interest rate submissions to make themselves look good; in fact, the bank says it spent "nearly £100m to ensure that no stone has been left unturned" to clear its name in an internal investigation.

So Barclays turned it around and started fudging its rates too. Remember, low LIBOR means that banks trust each other more. So Barclays wanted to buff its image to look trustworthy, according to the FSA:

Barclays was identified in the media as having higher LIBOR submissions than other contributing banks at the outset of the financial crisis. Barclays believed that other banks were making LIBOR submissions that were too low and did not reflect market conditions. The media questioned whether Barclays’ submissions indicated that it had a liquidity problem. Senior management at high levels within Barclays expressed concerns over this negative publicity.

Did what Barclays did affect the price of my mortgage, though?

It might have. Reasonable minds can disagree. I asked a few people this question. Greg McBride, an analyst with BankRate.com, doubted that the LIBOR-toying really hurt anybody, because of the way LIBOR works: the extreme highs and extreme lows aren't reflected in the ultimate price. A market strategist I talked with said that yes, the LIBOR-fixing had an effect on how much we could trust banks, but really, one or two banks couldn't distort the whole market.

I also asked Guy Cecala, the editor of Inside Mortgage Finance magazine, this same question. His answer was: yes, it might have affected us, because the problem with LIBOR among banks during the financial crisis froze the consumer market for borrowing. Let's do a little time-traveling. Remember in 2008, when everyone was freaking out, Bear Stearns went under, Lehman Brothers and Morgan Stanley and Goldman Sachs were getting attacked every day, and a lot of people worried whether banks could survive?

Here's how Cecala put it in his conversation to me:

After 2008, interest rates were dropping pretty quickly and the concern at the time was that LIBOR wasn't moving, so that banks weren't passing on the benefit from government bailouts. They were borrowing at virtually nothing and signalling that they wouldn't lend to the world at anything like those low rates. it didn't smell right, what was going on.

And you remember that, right? How it was so hard to get or refinance a mortgage, and how credit-card companies backed away from many consumers? That was a ripple effect from banks refusing to lend.

Why are some U.S. mortgages connected to LIBOR at all?

It has to do with how banks make mortgages manageable.

Let's start with a visual: Picture your mortgage like a giant evergreen tree. Back in the old days, when you asked Main Street Bank for a mortgage, it held your entire mortgage on its books; it would throw that tree in the backyard. Soon, hundreds of thick, heavy mortgage trees would pile up in the tiny backyard of Main Street bank.  If you defaulted on your mortgage, your tree would start smoldering. Not only would Main Street bank lose a valuable tree, but the whole pile could catch fire.

So big Wall Street banks stepped in and told Main Street bank that it would be smarter to chop all of its mortgage trees into easily handled firewood. Then Main Street bank could keep some bundles of your mortgage-tree, and sell the rest to other who wanted firewood.

A lot of the people who wanted to buy those firewood-sized mortgage bundles were in Europe, and they were used to LIBOR, the same way they were used to Celsius and metric. So the U.S. banks started using LIBOR to set the interest rates on all adjustable mortgages to help them sell the firewood bundles of mortgage loans to investors in Europe.

So, the FSA believes Barclays convinced other banks to lower the rate just for Barclays? Aren't bankers Darwinian? Why would they help out a rival? What was the incentive?

Partly love, partly money, and partly love of money.

The FSA looked through a whole bunch of emails that these Barclays traders sent to their friends at other banks. The emails are really schmoopy and embarrassing and sickly sweet, with lots of "anything for you!!!!!!" and "thanks a million dude!" and "Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”

So basically, the traders were helping each other. They asked each other for favors, so it seemed personal.

Traders cut these kinds of deals on prices all the time, by the way. That's what traders do. They work for major financial institutions, but they basically function like rug salesmen at a souk in Morocco. Traders ask each other, "hey, can you price this higher," or "you're killing me on this low price, my boss is going to fire me; look, that's my blood on the desk already."

The difference is that traders aren't allowed to use those negotiations with things like LIBOR, which is very official and not designed to be messed with.

So you're telling me that these bankers - sorry, traders - basically tried to rig a $10 trillion market for a bottle of champagne and some compliments? Are you kidding me right now?

I am not kidding you. Sometimes souls are sold cheap on Wall Street.

Did they possibly have other motivations?

Probably. Greed, for one thing. This really could have helped them make money. And there's always an implied quid pro quo: "you help me make money now, I'll help you later." A trader who gives a friend a few points on an interest rate now could call in that favor later.

The banks like to use this excuse: when you look at the 2007-2009 period, things were really dire for banks during the financial crisis. Two banks -- Bear Stearns and Lehman Brothers -- actually did go under ultimately because no one would lend to them. The Federal Reserve and European Central Bank dropped interest rates, but LIBOR stayed high. Banks were borrowing cheaply from the Fed and charging each other much higher rates. So Barclays could have wanted to report lower rates to look more trustworthy.

The appearance of trustworthiness, ironically, could have been an incentive to Barclays to allegedly game the system.

Do banks still use LIBOR?

Interestingly, U.S. banks pulled back on using it after the financial crisis -- because it felt rigged to them.

So at least tell me there was a decent punishment for this.

Barclays paid a $450 million to three regulators in the U.S. and the U.K., and its chairman, Marcus Agius, resigned, yes. Its CEO, Bob Diamond, just quit, and so did its chief operating officer, Jerry Del Missier. Diamond also said he would not take a 2012 bonus because of the scandal. All these men have taken a big hit for their careers, but more importantly, they've created a problem that the U.K.'s most important bank is now without anyone to run it. It's also hard to imagine who could take on such a job.

These sound like fictional names. Bob Diamond? And Marcus Agius is his real name? Is he a time-traveling Roman centurion?

Maybe you're watching too much sci-fi? Actually, Agius is very British - Cambridge, old-school gentleman capitalist - and part Maltese. His middle names are Ambrose and Paul, if it helps.

Like a Roman general, he fell on his sword. His resignation letter reads, in part, "last week’s events – evidencing as they do unacceptable standards of behaviour within the bank – have dealt a devastating blow to Barclays reputation. As Chairman, I am the ultimate guardian of the bank’s reputation. Accordingly, the buck stops with me and I must acknowledge responsibility by standing aside."

As for Diamond, he's actually American, and his rise to the top of the clubby English banking system was rare. Diamond is from Massachusetts, grew up Irish-Catholic, and went to Colby College in Maine and the University of Connecticut business school - hardly the typical path for the Savile Row-suited brolly-carrying English banker. He spent years at Morgan Stanley and Credit Suisse and then came to Barclays in 1996, when its investment bank was trying to make headway into the U.S. He helped Barclays buy Lehman Brothers and became CEO in January 2011. His resignation is a surprise, if not a shock, and leaves the U.K.'s biggest bank with absolutely no one to run it for the time being.

Very noble. And the "Ambrose" thing helps, a little, actually. But to be realistic, there's no way that Marcus "Gladiator" Agius is really to blame for this whole thing, right?

Right. This is way bigger than him. The U.S. Justice Department, FSA and CFTC have been looking at this issue for years. And it's really unlikely that only one bank was tempted to mess with the rates. So you're going to hear a lot more about this, probably, and it's going to involve a lot of other major banks, probably. Barclays is probably just the first of many.