Ethics, Greed, & Psychology Within the Libor Scandal Essay

2577 Words Aug 26th, 2013 11 Pages
Ethics, Greed, & Psychology within the Libor Scandal Ethical dilemmas within the business environment have always garnered considerable attention and reaction from all global stakeholders. Issues such as fraud, insider trading, discrimination, bribery, and compensation are only some of the ethical problems that have disrupted the global financial system. In response to these ethical issues, stakeholders have undertaken various protective measures; for example, businesses have progressed corporate social responsibility and corporate governance while still fulfilling their fiduciary responsibilities to shareholders. Reactive measures guiding ethics within the business environment typically stem from two systems: law and …show more content…
Banks have been accused of manipulating the Libor in order to produce profitable results on derivative positions. Simply put, if one bank lends more with contracts referencing Libor than it borrows, then it will profit if Libor goes up, and vice-versa. Citigroup Inc. reported that it “would make $936 million in net interest revenue if interest rates would fall by 25 basis points a quarter over the next year and $1,935 if they were to fall one percent instantaneously” (Rauterberg & Vertsein, 2012). Subpoenaed documentation proves such accusations through explicit transcripts of conversations between various traders and Libor rate-setters. One rate-setter wrote, “Where would you like it (Libor)?” to which he then boasted, “Mate, yur getting bloody good at this Libor game. Think of me when yur on yur yacht in Monaco won't yu” (Durden, 2012). It also helped that banks’ seating arrangements helped facilitate this communication, where Royal Bank of Scotland’s rate-setters (money-market traders) sat on the same desks as derivatives traders whose profits depended on where Libor was set (Vaughan, Finch & Tan, 2012). Another indicated motive to manipulate Libor had to do with adjustable-rate mortgages. Brinham (2012) reported that through statistical analysis, the Libor consistently increased on the first day of each month between 2000 and 2009, resulting in advantageous rate resets across various banks’ financial