The scam of all scams

Have you heard of the Libor scandal? If not, you soon will.

So far it’s resulted in a $450 million settlement against the UK’s Barclays Bank and forced the resignation of its top executives, including CEO Robert Diamond. Barclays’ defense? That everyone else—referring to the financial elite, including JPMorgan Chase, Citigroup and Bank of America—was doing it.

“It” is manipulating the Libor, or London interbank offered rate, which is used in the UK and elsewhere to determine the borrowing rates for consumers and companies, including some $10 trillion in student loans, credit cards and mortgages. In addition, the rates are tied to as much as $700 trillion in derivatives, which banks buy and sell every day.

Libor is calculated by the financial information and news company Thomson Reuters for the British Bankers Association, based on daily submissions from BBA member banks. Submitters estimate what they think they would have to pay to borrow money, high and low submissions are thrown out, and the remainders are averaged to create the Libor.

Turns out bank officials for several years have been colluding to submit false figures designed to manipulate the interest rates so they can place bets with customers’ money that will pay off big for them because they have inside information on what the market is really predicting.

The scandal involves trillions of dollars that ordinary people would otherwise have received or saved on their lending and borrowing that instead have been going to the bankers. As one analyst put it, it’s “a rip-off of almost cosmic proportions” and makes Wall Street’s other abuses of trust “look like child’s play by comparison.”

The scandal so far has played out mostly in Europe, but it’s making its way across the pond. Let’s hope Congress is sufficiently disgusted to do something about it. If this doesn’t lead to tighter regulations, nothing will. First of all, though, we should follow Nobel laureate Joseph Stiglitz’s advice and throw some bankers in jail. Nothing else, he said, will stop the corruption.