Extra Credit #1

Have you ever heard of LIBOR? That's ok if you haven't it's not a broadly talked about topic. The media has constantly suppressed many scandals over the years but one that has shocked me most recently is the suppression of the LIBOR scared. The scandal happened around the 2008 financial market crash. There was so much going on during this timeframe that it is easy to become confused with what really happened. So what is LIBOR?

LIBOR stands for the London Interbank Offered Rate. Basically, this is a benchmark interest rate used for short-term loans, adjustable-rate mortgages, and student loans, and loans in general, use LIBOR as an interest rate. What this means is that a few panel banks decide what is their interest rate they offer loans to other banks for uncollateralized amounts of debt. The scandal in 2008 was that Barclay's a bank in London plead guilty to submitting false rates for their own advantage. Sometimes this means submitting false low numbers to appear better than they were or falsely high rates to make short-term profits on their derivatives contracts. Barclay's is not the only bank under investigation countless other banks, Goldman Sachs, JP Morgan, and many other highly known institutions. 

LIBOR affects trillions of dollars of financial transactions and the effect on the economy of manipulating these loans has been huge. This also indirectly affects the stock market because LIBOR is an index of interest rates overall, it has an inverse relationship with the stocks. 

So what does this mean for the economy? LIBOR was found to be an ineffective system by the IBA. Now it is being phased out and replaced by SOFR, Secured Overnight Financing Rate.  This rate is supposed to be more accurate for a variety of reasons. First, it is based on actual transactions rather than assumptions of future costs by a panel of bankers. Because it is based on actual transactions it will need to be adjusted more often than LIBOR. For example, for one-year rates, might need to be adjusted twice a year instead of once a year. The secured overnight financing rate is based on transaction data that underlines US debt backed by US treasuries. The expectation is that this will be a more secure rate less vulnerable to manipulation. 

Currently, the issue with LIBOR being phased out of use is that many financial instruments used by corporations around the world are filing lawsuits because LIBOR negatively affected them.