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Lessons from the Libor scandal

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3rd Aug 2012
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A long-time campaigner against the injustices of the banking and accounting professions argues that the temptation to tamper with Libor rates is not new.

After Jeff Lampert was made bankrupt following the failure of his company Heritage plc, he became involved with cbba Solutions, a company that offers a bank interest charge auditing service. He also blogs on AccountingWEB as Mad Lemming.

Lampert explained that Heritage’s liabilities had included substantial interest charges from the company’s bank accounts, which had never been checked.

These charges were affected by frequent changes in base rate, and even more frequent changes in Libor, as well as different off-set arrangements for balances between various accounts.

“Libor” stands for the London Inter-Bank Offered Rate, the sterling rate for short term borrowings beween banks. The rate performs a similar function as the Bank of England’s base rate as a basis for lending, but the Libor rate changes daily, while the base rate is determined quarterly by the Bank of England’s monetary policy committee (MPC).

Administered by the British Bankers Association, Libor is meant to be an average of the rates members of its banking panel pay to borrow from each other for agreed periods between one day and one year. The banks then make Libor-based loans to third parties, such as property companies at this “average” rate plus a margin over that rate, which represents the lending bank’s profit. 

The average rate is calculated each day at about 11:00 am by the BBA from information provided by the panel banks on what the rates they are paying or would expect to pay for borrowings from each other. The BBA collects the information from the panel banks and discards the highest and lowest rates to reach an average of the remainder. That average is published as that day’s Libor rate, and all lending interest charges are based on that daily rate. It is that information that is now claimed to be false.

The major Libor rate for UK borrowings is 3-month Libor - the amount a bank expects to pay to borrow from another bank for three months.

With some $10 trillion of loans based on the daily Libor figures, the rate was widely considered until now to be “too big to fiddle”.

While surprised at the recent evidence of Libor rigging, Lampert has seen previous evidence of banking irregularities through his work with cbba Solutions, which has claimed a number of successes at negotiating settlements for clients such as Bristol Rovers FC and a number of Irish property companies, from which the auditor takes a 37.5% share.

Monitoring interest rates and their like is usually been seen as a treasury function, and has not really entered the consciousness of finance managers in smaller companies or those that do not transact a lot of international trade. But following recent events in the City of London, Lampert urged finance directors to take a more active interest in Libor charges - as they can be the source of potential overcharges, particularly before 2006, when cbba first uncovered discrepancies in Libor rates applied to its clients’ loans.

The Libor rate is calculated to five decimal places. So a borrower may be charged 0.63686% Libor plus 2% margin. This should be 2.63686%. But cbba uncovered cases where the borrower was actually been charged a rate such as 2.69445%. It does not look like much of an error, but on several millions of pounds the overcharge soon becomes material.

“The ‘overcharge’ may be ‘explained’ within the facility letter, but can still be challenged,” Lampert told AccountingWEB.

“The bank statement is the only invoice an SME will receive for interest charges. It is also an unusual invoice because it is invariably paid or taken out of the bank account before it is rendered.”

The practice of padding Libor rates on individual company loans has died down since 2006, but there may still be overcharges that pre-date 2006, he advised.

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