WHAT IS LIBOR? First of all we have to know, what is libor.

The word libor stands for The London Interbank Offered Rate. It is the average cost of borrowing for banks and is used to price debt stock. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. DEFINATION: The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is usually abbreviated to Libor ( laibor) or LIBOR, or more officially to BBA Libor (for British Bankers' Association Libor) or the trademark bbalibor. It is the primary benchmark, along with the Euribor, for short term interest rates around the world. Source: Wikipedia WHY IT IS USED? Forward rate agreements Interest rate futures, e.g. Eurodollar futures Interest rate swaps Swaptions Overnight indexed swaps Interest rate options, Interest rate cap and floor

WHAT IS LIBOR SCANDAL? The Libor scandal is a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) which the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were. Source: Wikipedia HOW THE SCANDAL HAPPENED: Libor is used in calculating interest rates for many loans. But Libor is derived from a poll of many banks, and the highest and lowest numbers are eliminated as outliers. In other words, it's rigged so that it can't be manipulated by a single bank, and it wasn't. Many, many financial institutions were involved in this, and many, many lawsuits and criminal investigations are on their way. But one bank is way too aggressive than others, it is the Barclays Bank. From 2005 to 2007, swaps traders often asked the Barclays employees who submit the rates to provide figures that would benefit the traders, instead of submitting the rates the bank would actually pay to

borrow money. Barclays settled charges that it manipulated the Libor rate, and a similar rate called Euribor, for its own benefit by submitting falsified numbers as far back as 2005. According to the Financial Services Authority, Barclays derivatives traders routinely asked for submitters to help them profit from their trades by sending in numbers that were either higher or lower than they should have been. The regulators report says Barclays submitted inaccurate rates on numerous occasions between Janua Barclays could have benefitted from this misconduct to the detriment of other market participants. Where Barclays acted in concert with other banks, the risk of manipulation increased materially, according to the FSA. At times, the Barclays traders also tried to influence the submissions of other banks, and passed along requests from their counterparts to Barclays submitters. And the rate was submitted affected the libor rate all over the world. Then, during the financial crisis Barclays higher submissions for Dollar Libor indicated that the bank had a liquidity problem whether other banks were wary of lending it money the bank began sending in lowball numbers meant to ease concerns about its cost of borrowing. At the height of the financial crisis, Libor was viewed by the markets as a key barometer of UK banks financial health, so by maupulating the libor they can look well in the crisis. Were Other Banks Involved? Barclays are not alone in this, Britains chancellor of the Exchequer George Osborne said in a statement released last week. The FSA is continuing to investigate the conduct of a number of other banks in relation to Libor The investigations concern a number of institutions both based in the UK and overseas. Regulators in the U.K., U.S. and Asia are reportedly investigating potential rate-rigging by more than a dozen other financial giants. Some of the banks whose names have come up in connection to the investigation include Bank of America, Citigroup, HSBC, the Royal Bank of Scotland and UBS. Who are affected in libor scandal? The rate-rigging scandal at London-based Barclays bank will eventually hit home consumers -at least in theory. Everything from adjustable-rate mortgages to private student loans and variable-rate credit cards is linked to the Libor rate, which Barclays -- and other major banks still under investigation -- allegedly tried to influence. The Libor rate is also the rate that some lenders link to some adjustable-rate products. Of course 800 trillion mortgage all over the world.

So we can understand that, it happened mainly for benefits of some individuals through the libor rate, manipulating by some large bank especially by Barclays by lowering the libor rate.

Source: http://www.huffingtonpost.com/2012/07/03/barclays-libor-scandal-rate-fixing-loanpayments_n_1646876.html http://www.nytimes.com/interactive/2012/07/10/business/dealbook/behind-the-liborscandal.html http://blogs.smartmoney.com/advice/2012/07/06/yes-the-libor-scandal-affects-you/ http://www.thefiscaltimes.com/Articles/2012/07/06/Libor-gate-Explained-Why-BarclaysScandal-Matters.aspx#pageNaN