Tuesday, July 10, 2012 -
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LIBOR (the London interbank offered rate) is the rate of interest that banks charge to lend money to each other, in essence it is the wholesale money lending rate. The LIBOR rate is set daily by the British Bankers’ Association (BBA) working with a small group of large banks to set the rate. The wholesale markets allow banks who need money to be more fluid in the marketplace to borrow from those with surplus amounts. The banks with surplus amounts of money are keen to lend so that they can generate interest on the loans which it would not otherwise receive.
The rates are based on a question each bank is asked, ‘If your bank needed to borrow cash from your fellow banker friends, how much would they charge you for it?” Once the rates are submitted, the four highest and four lowest rates are ignored, and those left are averaged and used to calculate the LIBOR rate which is published before midday UK time every weekday.
Mortgages are paid at LIBOR+, so in order to make more money, driving the LIBOR up is the key.
For those of you with suspicious minds, you may have noted that in order for LIBOR manipulation to work, it would have to involve a large number of banks, and there are now even claims of some form of governmental collusion. To really effect the rate, everyone needs to be lying. There are as many as 20 banks surveyed for the most liquid LIBOR rates – if the overall figures were wrong then everyone would have been altering the rate at which they claimed they could borrow. For the fix to work, it would, on some level, have to involve at least half a dozen banks and probably more. This then brings up the question of coordination.
Barclays (and perhaps others?) spoke of inflated numbers so that the interest on loans would be increased and yes, they make “free money”. So what, you may ask – what has this go to do with shipping? Well it’s all about debt – and shipping uses a lot of it.
Shipping floats not just on water, but on billions upon billions of dollars of debt, and with it, interest payments calculated against borrowing rates. The rates banks pay to borrow money affect how much they charge customers for loans and mortgages. When costs for the banks go up, the price customers pay also goes up, which brings us back to LIBOR.
The illegal manipulation of the rates has cost the shipping industry billions of dollars in needless interest payments to their lenders. Any upward adjustment of the overnight rate even by 250 basis points (1/4 %) would see the shipping industry pay out an additional $125million in manipulated interest to its lending banks for every $50Billion in debt.
Think for a moment of the levels of lending and debt needed to buy vessels, the latest Ensco drillship order was $645m, and even more traditional half decent second hand vessels can run into the tens of millions. Every single shipping company that holds debt based on LIBOR has incurred needless cost because of debt basis manipulation. Usually, as an industry we think we are good at spotting the bad guys, but when institutional fraud on this scale becomes apparent it is hard to fully appreciate the true scale of the damage.
So when does a banker become the monetary equivalent of a pirate? It would seem that when they suck more illicit money out of ship owners and lessors than all the Somali pirates combined…which is exactly what has happened to the entire borrowing world. Perhaps, whilst on the lookout for skiffs and AK47’s to spotlight the bad guys, perhaps we need to be equally wary of those who control the debt.