The global banking world has drawn severe criticism in recent years for its conscious role in the proliferation of toxic loans – a practice widely considered one of the main causes of the Great Recession of 2008. Now, more than a dozen of the world’s largest banks are being investigated for two new scandals involving the rigging of key interest rate benchmarks known as Libor and ISDAfix. While potentially generating fortunes for brokers and dealers, these two cases of financial manipulation may have cost bank customers billions of dollars.

Illegal banking or zero-sum game?

The investigations come after a series of controversial hearings regarding Wall Street’s role in the 2008 recession. Some of the latest evidence against Wall Street came in January when a Taiwanese bank filed a lawsuit against Morgan Stanley, a global financial services firm. The case forced the disclosure of hundreds of internal documents, revealing deals such as the sale of mortgage-backed securities known to be defective by bankers. Possessing inside knowledge of the declining housing market, Morgan Stanley traders bet against the very loan packages they created and marketed to customers.

While such reports have sparked widespread indignation around the world, the bankers responsible for the toxic securities have gone largely unpunished. According to Glenn Greenwald in Business Insider, “One of the greatest and most shameful failings of the Obama administration [has been] the lack of even a single arrest or prosecution of any senior Wall Street banker for the systemic fraud that precipitated the 2008 financial crisis — a crisis from which millions of people around the world are still suffering.”

However, commentators more apologetic to the cutthroat behavior of big finance claim nefarious business practices are not necessarily criminal. In the Economist, Matthew C. Klein writes, “To most people, it is immoral if not illegal to sell things that you believe to be defective… But to those with a background working in the industry… many financial transactions are nothing more than zero-sum bets. Whoever wins does so at the other’s expense… None of these actions could reasonably be called criminal, or even immoral, when everyone involved understands what is going on and has accurate information.”

While this zero-sum mentality has been used by defendants, attorneys, and even President Obama as a legal justification for the questionable practices of Wall Street, recent scandals in the banking world may pose evidence that can’t be dismissed by zero-sum arguments.


One of the scandals is the manipulation of Libor, for which Barclays, UBS, and the Royal Bank of Scotland have been fined a total of $2.5 billion in an ongoing investigation involving 16 banks.

Libor, or The London Interbank Offered Rate, is the average rate at which banks can borrow money from each other. The Libor figures control the prices of a $350 trillion market of financial products including credit cards, mortgages, retirement plans, and interest rate swaps.

According to documents revealed in court, interdealer brokers and Libor submitters have been easily influenced by traders anxious for an advantage on upcoming deals. Between 2005 and 2009, traders would commonly ask Libor submitters either to falsely lower or to falsely increase rates depending on the transactions they were making. The Christian Science Monitor reported one such exchange, in which a trader from Barclays was quoted as saying, “We have another big fixing tomorrow and with the market move I was hoping we could set the 1M and 3M LIBORS as high as possible.” A Libor submitter in London responded to the trader’s request, saying “Done for you big boy.”

The high pressure on brokers trying to win business from traders is a big incentive to curry favor in extraordinary ways. According to the Wall Street Journal, gifts of expensive dinners, ski trips, strip clubs, and prostitutes are particularly common in London where there is no regulation on the amount of money brokers can lavish on traders. “Some brokers appear to see entertainment as part of explicit favors-for-business exchanges. An electronic-chat transcript unearthed during the Libor investigation showed a broker dangling lunch for an entire trading desk as an incentive for a trader to participate in transactions.” According to the same article, “One former ICAP derivatives broker says the morning after treating a trader to a night out, ‘there would be a line of trades for me. I didn’t even have to ask.’” In this culture of quid pro quo, the rigging of Libor emerged as a powerful means to profit both brokers and traders.

Such profits, however, have been at the expense of investors, retirees, taxpayers, and regular bank customers. Due to artificially lowered interest rates, investments and pension funds fall in value. In response to perceived losses, the city of Baltimore has filed a lawsuit against the banks, claiming a rise in budget deficits and the forced closure of fire stations, schools and recreation centers. A report by a coalition of urban advocacy transit groups claimed the rigging of Libor cost the transit systems of thirteen cities $92.6 million. Speaking to the Fiscal Times, Peter Shapiro, the managing director of the Swap Financial Group, estimated governments could have lost more than $1 billion.


While governments and companies may have lost billions due to the manipulation of Libor, the loss is ballooned by the potential damage of a newer scandal involving the rigging of interest rate swaps.

ICAP, a major London-based firm, is now being investigated by the US Commodity Futures Trading Commission for falsely reporting the benchmark known as ISDAfix, which provides the standard rates in the $379 trillion market for interest rate swaps. Fifteen other banks, including Bank of America, JP Morgan Chase and UBS, have been issued subpoenas for their role in submitting the bids and offers used by ICAP to create the benchmark.

Interest rate swaps refer to transactions that provide customers with greater security on loans. This is valuable if a city or company has a loan with a variable and unpredictable interest rate, which can be “swapped” for a fixed and more secure rate.

Every morning, ICAP receives bids for interest rate swaps across various currencies. Then, at 11 a.m., a group of around 20 ICAP brokers publish the ISDAfix prices on a screen known as 19901, whose results are followed by around 6,000 firms.

Since the rates are entered manually – and since ICAP brokers are paid by the size of the trades they represent – the incentive for number fudging is enormous.

According to Bloomberg, brokers in ICAP’s Jersey City location – nicknamed “Treasure Island” – earned up to $7 million a year. The current investigation aims to uncover whether these profits resulted from delaying data on the 19901 screen.

In an interview with Bloomberg, a former ICAP broker said he witnessed price manipulation first hand. “ICAP enters the prices manually onto the screen. That allows dealers to tell the brokers to delay putting trades into the system instead of in real time.” According to Bloomberg, “Publishing stale prices can boost profits for banks dramatically. On a $500 million swap that matures in 20 years, for example, a delay that prevents the instrument from moving one basis point (0.01 percent) equals $1 million in profit for the dealer.”

At the same time, the slight change of interest could soak up millions of dollars from the cities and companies paying higher interest on their loans without knowing it. Further, since Libor affects the price of interest rate swaps, customers could be the victims of a double manipulation. According to Matt Taibbi in Rolling Stone, “If the allegations prove to be right, that will mean that swap customers have been paying for two different layers of price-fixing corruption. If you can imagine paying 20 bucks for a crappy PB&J because some evil cabal of agribusiness companies colluded to fix the prices of both peanuts and peanut butter, you come close to grasping the lunacy of financial markets where both interest rates and interest-rate swaps are being manipulated at the same time, often by the same banks.”

Describing the end result of both the Libor and ISDAfix scandals, Taibbi goes on to affirm, “It’s not just stealing by reaching a hand into your pocket and taking out money, but stealing in which banks can hit a few keystrokes and magically make whatever’s in your pocket worth less. This is corruption at the molecular level of the economy, Space Age stealing – and it’s only just coming into view.”

While recent prosecutions of global banks such as Citigroup and Bank of America have offered no more than a “too big to fail” outcome, mounting outrage over the scandals of Libor and ISDAfix may push lawmakers to develop an adequate regulatory framework in which the people that could benefit from rigging rates are not the ones who manage them.