As you follow the story of one of the biggest banking scams in the world, you might wonder whether Barclays' Libor rate-setting scandal affected the interest rate on your loans.
About $10 trillion in loans to consumers and small banks are tied to the Libor, including adjustable-rate mortgages, credit cards, auto and student loans. Many ARMs are indexed to the one-year Libor.
But it's unlikely your pocket was directly affected by this scandal, says Greg McBride, CFA, senior financial analyst for Bankrate.com.
"The heart of the issue is that any attempted manipulation undermines the integrity of financial markets," McBride says. "It's like murder. You don’t have to actually kill somebody for it to be a crime. Nearly trying could be a crime."
Barclays, one of the banks that provided daily rate information used to calculate the Libor, manipulated its rates submissions from 2005 to 2009, at least. Other banks are under investigation for submitting artificial rates for the LIBOR calculation.
Why the Libor matters to mortgage borrowers
Borrowers with ARM loans that are indexed to the Libor pay a margin plus the Libor. Say the margin on your loan is 2.5 percent and your loan resets today when the Libor is 1.07 percent. The rate on your loan will be 3.57 percent. The Libor wasn't always this low. In January 2007, the one-year Libor was about 5.4 percent.
When your ARM loan resets, if the Libor used to determine the interest rate on the loan is incorrect -- as a result of banks' manipulation -- you may be overcharged or undercharged for your loan.
As of 2008, nearly all subprime ARM loans and 60 percent of prime ARMs were tied to the Libor, according to research by the Federal Reserve Bank of Cleveland.
Who sets the US Libor?
Picture a couple of people in a fancy London office. Each day, they collect rate information from a panel of 16 banks and use the numbers to calculate the Libor for 10 currencies, for borrowing periods ranging from overnight to one year.
Now, picture the bank representatives on the other end of the line providing the rate information.
"For you ... anything. I am going to go 78 and 92.5 … if you did not want a low one I would have gone 93 at least." This is an email reply by a Barclays rate submitter to a trader who had asked the submitter to provide an artificially lower rate in 2006.
"Done ... for you big boy," another reply by a Barclays submitter to a similar request in 2007, shows the Commodities Futures Trading Commission, or CFTC, order against Barclays.
Barclays wasn't alone. Several other banks are under investigation.
Just how dirty is the Libor behind your loans?
A senior Barclays Treasury representative sort of answered that question in a conversation with a representative of the British Bankers Association.
"We're clean, but we're dirty-clean, rather than clean-clean," the Barclays representative told the BBA representative in 2008 in a surveillance call, according to the CFTC order.
The BBA representative answered: "No one's clean-clean."
Did the manipulation affect the rate on ARM loans?
It's unlikely Barclays' attempt to manipulate the Libor affected U.S. mortgage borrowers, McBride says.
That's because of the way the Libor is calculated.
Each day, the 16 banks surveyed provide the rate they would need to pay to borrow money on that particular day. Of the rates provided, the top and bottom four are discarded. The final numbers are based on the average of the eight remaining figures.
So what if the investigation finds that several banks were providing artificial rates?
McBride says that unless several banks were part of the manipulation scheme and agreed to bid on the same side, it is unlikely that the Libor indexed to ARM mortgages would be affected.
Say the Libor was affected. It's difficult to say whether borrowers were helped or hurt by the mess.
Depending on when a loan reset, a borrower could have been overcharged or undercharged for the interest. That's because during the financial crisis of 2008, when media started to question Barclays' financial stability, Barclays suppressed its rates and reported artificially lower rates to make it look like the bank was doing well.
In theory, if the Libor was affected by the manipulation, borrowers who had loans resetting during that period probably got cheaper rates than they should have.