LIBOR Lesson: Need Legal Advice? Ask Your Bank


The response of various parties to the LIBOR scandal is highlighting what will happen in the future in many ways. It also demonstrates what will not happen in spite of what is being said.

First off, there will be many more lawsuits from all sides. This includes regulators suing banks, clients suing banks, and perhaps banks suing other banks. Once people sense there is an opportunity for cashing in on blame, it will be seized. (3)(6)(7) This adds up to banks having many lawyers on their staff; the ratio of lawyers to bankers will likely be multiple times in favour of the legal side of the equation.

Second, in response to the highly litigious environment, there will be more blame given to anyone related to the scandal in any way. Anyone who works with LIBOR even indirectly should consider the possibility of being fired, for good reason or not.(5) If someone can be scapegoated, they most certainly will. Since many of the people doing trading make large amounts of money – there will be more lawyers needed in employment or contract law.

Third, once scandals like this break out, more regulation is sure to follow. (1) This is described in the “regulation crush” (2) which will go on for some years. This also adds to the reason for more lawyers – to deal with the government in its many forms. (3)

Fourth, unique to the LIBOR scandal is the idea that this problem cannot be easily fixed, because LIBOR is now a part of a very large derivatives system. This is not being discussed for the most part because there are no ready substitutes for the calculation of the rate. (4) There are also no institutions that are unbiased enough to garner the trust and consistency needed to be worthy of calculating LIBOR.

Short of wiping out a very large amount of wealth in a short time, this issue may well drag on for many more years. Inevitably, due to the lack of solutions, the ensuing conflict may lead to legislation that either protects the banks while the system is purged, or legislation to guarantee a smooth transition to something new. The LIBOR scandal is not going away any time soon.

Sources:

1)                  http://www.reuters.com/article/2012/10/15/us-fed-libor-idUSBRE89E1LQ20121015

2)                  http://www.thetradenews.com/news/Asset_Classes/Derivatives/Industry_anticipates_shift_to_LIBOR_alternatives.aspx?l=tl

3)                  http://www.economist.com/node/21564565

4)                  http://www.bloomberg.com/news/2012-10-08/libor-now-set-by-six-banks-losing-status-as-a-benchmark.html

5)                  http://www.guardian.co.uk/business/2012/oct/15/rbs-suspends-trader-libor-investigation

6)                  http://money.cnn.com/2012/10/16/news/companies/libor-homeowners-mortgages/index.html

7)                  http://www.telegraph.co.uk/finance/libor-scandal/9614822/New-laws-will-criminalise-Libor-manipulation.html

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About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

One Response to LIBOR Lesson: Need Legal Advice? Ask Your Bank

  1. I came here looking for something else, but this entertained me regardless. Entertaining stuff!

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