Queasy About The LIBOR Scandal

I've got misgivings about the mortgage refinance I'm mulling this summer, and this LIBOR (1) scandal is playing an increasing role in that sense of unease. The adjustable rate mortgage I'm considering is supposed to be locked in for seven years, then allowed to float, based entirely on what the LIBOR rate happens to be then. Hearing that greedy British bankers have been moving the rate up and down, every day, as it happens to please their trading positions, does NOT make me feel more comfortable.

So, I'm supposed to pony up more and more cash if some callow banker in the City decides he needs a third vacation home in France, plus a new Mercedes? Really? Really!:

On a listserv I subscribe to, a seemingly knowledgeable participant (2) said the victims of the scam include investors who owned floating rate notes, LIBOR-linked CDs, or pay-fixed-receive-floating interest rate swaps; or anyone who traded LIBOR contracts on a U.S. futures exchange and lost money. And let's face it: that doesn't sound much like widows and pensioners, does it?

What's more, the LIBOR scam wasn't about pushing LIBOR systematically up or down. Sometimes it was pushed up, sometimes it was pushed down, depending on whatever happened to be good for the Barclays trading desk on any given day. So even if you are a widow or a pensioner with a CD linked to the LIBOR rate, it's not really clear if you were ever hurt.

Nonetheless, it's a big deal, and I think the Economist pretty much nails it here:

The attempts to rig LIBOR [...] not only betray a culture of casual dishonesty; they set the stage for lawsuits and more regulation right the way round the globe. This could well be global finance’s “tobacco moment”....Despite the risks of banker-bashing, a clean-up is in order, for the banking industry’s credibility is shot, and without trust neither the business nor the clients it serves can prosper.

Additionally:

That could end up costing the banks a lot of money. LIBOR is used to set an estimated $800 trillion-worth of financial instruments, affecting the price of everything from simple mortgages to interest-rate derivatives. If attempts to manipulate LIBOR were successful—and the regulators think that Barclays did manage it, on occasion—then this would be the biggest securities fraud in history, affecting investors and borrowers around the world. That opens the door to litigation not just by the direct customers of implicated banks, but by anyone with a financial interest in LIBOR. The lawsuits have already begun.

1 LIBOR is the London Interbank Offered Rate. It's basically the current interest rate banks charge each other to borrow money, and it changes on a daily basis. So if you have an adjustable rate mortgage, for example, your interest rate might be LIBOR + 3, or something like that.

2 How's that for a reliable source?