Rate rigging in London affects U.S. consumers
The Justice Department says five big banks have agreed to plead guilty to manipulating foreign exchange markets: Barclays, Citibgroup, JPMorgan Chase, Royal Bank of Scotland and UBS. UBS also pleaded guilty to skewing a benchmark rate called LIBOR.
LIBOR, the London Interbank Offered Rate, is what big banks charge each other for loans. Lots of consumer loans with variable interest rates are based on it, such as adjustable-rate mortgages, private student loans and car loans.
“There are important amounts of borrowing for car loans and for credit cards that are absolutely tied to a variable rate, and that variable rate is often LIBOR,” says Simon Johnson, a professor of global economics and management at MIT’s Sloan School of Management.
Adjustable-rate mortgages are also tied to the LIBOR, and its manipulation has unsettled the mortgage market.
“It undermined the whole credibility of an index for mortgages that supposedly was above board in terms of how it adjusted – either lowered or raised your payment,” says Guy Cecala, publisher of Inside Mortgage Finance.
Consumers were also affected by the currency manipulation, although more indirectly. U.S. companies with business aboard might have lost out because of the skewed currency market.
“And when that happens, they have to pass on the costs somewhere, and they may well pass them onto consumers,” says Hillary Sale, a professor of law and management at Washington University in Saint Louis.
So the next time you yawn at someone manipulating a market far away that you’ve never heard of, just remember, you could be the one who pays.
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