Student loans affected by LIBOR scandal

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The London Interbank Offered Rate scandal has rocked the financial world, sending bank stocks tumbling and damaging the already fragile reputation of big banks in the wake of the 2008 financial crisis.

The LIBOR benchmark, a financial metric set by the British Bankers Association every day based on the rate banks would charge each other for loans, has a wide reaching effect on loans and mortgages taken out at every level of the financial system, including student loans. In total, $800 trillion is affected by the LIBOR benchmark.

According to the New York Times, the LIBOR benchmark determines the rate for about 50 percent of the private variable-rate student loans, 45 percent of adjustable rate prime mortgages and 80 percent of subprime mortgages.

At the center of the scandal is Barclays Bank. The institution was fined $453 million for manipulating the rate in 2005 to 2009, and its CEO Bob Diamond and other top executives resigned last week under heavy fire.

The British government is investigating Barclays, as wells as Citigroup, UBS, HSBC and Royal Bank of Scotland.

The scandal was uncovered after a series of emails revealed that financial traders asked Barclays to set its LIBOR submission higher or lower depending on their interests for that day. Banks also submitted lower figures to appear healthier during the financial crisis, since the actual higher rates would have exposed a bank’s weakness.

The manipulation requests were very frank and made no attempt to hide the corruption. Here is an email sent by a trader to a Barclays employee in 2006, according to the New York Times.

"Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot."

The Associated Press reported this exchange between an investor and a banker regarding LIBOR fixing that highlights how easy it was to ask for manipulated submissions.

"If it comes in unchanged I'm a dead man," lamented an investor. The Barclays employee granted the wish and then received this message of gratitude.

"Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger."

What was supposed to be an optimal average of the rates banks would charge each other for loans became the plaything for investors to manipulate.