Explore Our
“Off The Wall” Blog

Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.

The LIBOR Scandal and You

U.S. News and World Report Smarter Investor

What the rate-setting debacle means for you. Surprise! It’s not all bad.

We’ve all read a lot (probably too much), about the LIBOR scandal in the past couple of weeks. Despite a constant stream of stories, blog posts and articles, so far I’ve only seen a couple of pieces that have really helped me to understand true effects this circus will have on investors. Part of the cause for this confusion comes from the pervasive use of the term without explanation of the nature of what LIBOR really is, and where it comes from. Let me try to help smarter investors gain some perspective.

A Bit of History

LIBOR – or London Interbank Offered Rate – was conceived in 1984 by the BBA (British Bankers’ Association) “to develop a calculation that could be used as an impartial basis for calculating interest on syndicated loans.” The methodology of the calculation is basically a truncated average from a group of banks’ estimates as to what their borrowing costs would be if they were to seek loans in any of 10 currencies over any of 15 different time spans (ranging from overnight to a year or more). Banks answer the question, from the BBA’s website, “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” These estimates are collected each morning by Thomson Reuters, and the average is subsequently published to the markets. Banks and lenders then add a “spread” or additional cost to this base rate to formulate the interest rate charged on much of the world’s outstanding debt. Simply put, the LIBOR interest rates set the cost of borrowing.

The Average of an Estimated Expectation

By the above definition, it would seem obvious that LIBOR is really nothing more than a series of estimates. When viewed in this light, it almost feels ridiculous to be surprised or even outraged that there has been “manipulation” in these figures. Based on many of the revelations about the inner workings of the banking industry that have been published over the past 25 years or so (read Liar’s Poker or Michael Hudson’s The Monster, if you don’t know what I mean), it also seems naïve to think that large banks driven mostly by next quarter’s earnings would do anything other than maximize their profits at every turn. With that said, the really concerning part of this story is not that big banks were giving market numbers which were not 100 percent accurate, but rather that they were colluding to set interest rates and thereby create opportunities for profits from trading with this information.

How did this really affect you?

The outrage and anger about this situation is reasonable, and appropriate in some sense, given that those published rates are used as the basis for as much as $500 trillion of outstanding debt globally. LIBOR affects the rates charged on most every type of debt from government bonds to mortgages to student loans to credit cards. However, there is a positive effect here which is not being widely discussed: the ongoing collusion has actually reduced the effective rates on much of that debt.


Yes, a positive side effect of the collusion between the big banks has been to artificially reduce the interest rate upon which much of the world’s debt is based. The unsettling fact is that these banks have been making enough money from their other trading activities in the market to allow them to afford to make loans at lower rates than they otherwise might have done.

Now What?

So far, Barclays has paid $340 million in fines, and 16 other large institutions are under investigation in the U.S. and Europe. It remains to be seen what changes, if any, to the process for setting LIBOR rates will be enacted, and how that will affect interest rates going forward. However, it is clear that this type of collusion does perceptible damage to the markets’ view of the banking industry, and adds to the feeling that the regulators are not able to stamp out market manipulation. With that said, investors should know that the concept of LIBOR remains a great idea – collecting information about lending from the biggest lenders, and then base market interest rates off of that information. Hopefully, regulators in the U.S. and abroad can find some way to keep the best part of the process, while removing the deception.

As an investor, everything I’ve read and seen on this situation tells me to continue to stay away from the financial sector as an investment given the uncertainty not only of how this scandal will play out, but also how the changes to the LIBOR rate process are likely to negatively affect their profits in the future. Additionally, it should remind you to negotiate vigorously on the interest rate for every type of borrowing you do – or hire a competent advisor to help you with the process.

Timothy R. Lee, CFP®, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Tim and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth, and on their Facebook page.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for individuals. To determine which investment is appropriate, please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Stock investing involves risks, including loss of principal.

Read the article on U.S. News & World Report here! >>


Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.

A copy of the Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.

Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Stay up to date!

Subscribe to our “Off the Wall” Blog for articles and videos on all things wealth management, by all members of our Team. Unlike Facebook, we will never share your data with anyone.